Economy holds its breath: Will Debswana sneeze?
Mbongeni Mguni | Friday April 22, 2016 10:22
The last time the performance of rough diamonds globally was as poor as it was in 2015, Debswana initiated efficiency interventions known as “Operations Review” under which 1,278 jobs were to be slashed.
At one point in early 2009, production ceased across all Debswana mines, before the main operations were restarted gradually under a “new normal” or the policy of strictly producing to demand and thus, not maintaining stockpiles.
The “super production” years which saw Debswana’s output peak average above 30 million carats between 2006 and 2007, ended and the new normal began, gradually restoring the diamond giant to health between 2011 and 2014.
In 2015 the “lean, mean” Debswana received a challenge bigger than 2008, as global diamond pipeline pressures forced the group to cut production by three million carats and intensify cost-cutting measures while suffering a 37 percent drop in underlying profits.
The bad, old days are back and worse than ever and yet in mid-March, Debswana’s managing director, Balisi Bonyongo, seemed unruffled as he stood before a room full of captains of industry to brief on the group’s performance.
Outside of government, Debswana is the private sector’s chief market, spending P8 billion on procurement in 2014, with P6.6 billion of this on Botswana-based businesses.
Every room in the ear was listening.
“Anyone following the diamond industry will know that 2015 was a very difficult year, but despite the challenges, we have responded very quickly and decisively,” Bonyongo said.
“We took steps to support the profitability of the business and align production to demand. We used the operational flexibilities we introduced in the last three years, to reduce production and we also focussed on operational efficiency, thus bringing operating costs down quite significantly.”
The “flexibilities” relate to the tailings treatment plant at Jwaneng, a 37 million tonne mountain representing the residue of ore processed at the mine over the decades. With better technology today, Debswana is able to squeeze up to 900,000 carats annually from the dump and has in fact mined the tailings at varying degrees since November 2014.
The “flexibilities”, together with the Operational Review are the major difference from the 2009 crisis and the reason Bonyongo appeared unruffled before the captains of industry.
Seven years ago, the downturn in rough diamonds forced Debswana to suspend operations across the board and hive off a thousand jobs. This time around, the flexibility provided by the Jwaneng tailings plant allows Debswana to tweak its production down without major layoffs or stoppages of major operations.
Seven years ago, Debswana was still in its super-production era, and thus fell hard when the recession hit, being forced to dramatically restructure and revise policy. This time around, the leaner, meaner structure and fruits of the Operational Review stand it in better stead, despite the 2015 collapse having been deeper than the 2008.
Debswana was thus able to withstand the 2015 collapse, with no loss of jobs across its 5,000 plus workforce and the preservation of at least 5,000 others in contractors, suppliers and other business partners.
Bonyongo and his brains trust have already initiated a plan to ride out 2016 without the need to resort to retrenchments.
“To optimise revenue, we will maximise production at our core assets of Jwaneng and the Orapa Number 2 plant. Damtshaa Mine has been put on care and maintenance and we will scale down production at Orapa Number 1 plant.
“Our response has been measured.”
The 242 affected employees by the mothballing of Damtshaa Mine, the smallest of Debswana’s four mines, were successfully redeployed to other areas of Debswana, again avoiding job losses.
Job preservation appears high on Bonyongo’s agenda.
“We know that this market does crumble,” he told the captains of industry.
“We have many trained and experienced people running these operations and in difficult times, we have had to make a decision whether to keep or release.
“We took a decision to keep the 242 affected at Damtshaa. I was at the mines recently and I talked to many of those that were redeployed from Damtshaa, asking them whether they had been received well.
“They said they were happily accepted and were doing their jobs. Clearly, this decision cost us money, but it’s important because the upturn will come and we will need these great hands on deck.”
Jwaneng Mine, Debswana’s most efficient operation, is set to produce 12 of the 20 million carats targeted for this year and general manager there, Albert Milton, has said production is well on track.
The Mine is also planning a further three percent cut in operational expenditure through improvements in fuel efficiency, lifespan of haul truck tyres and other efficiencies in drilling and blasting operations.
“This year has started reasonably well and coming from a difficult year, we have to be optimistic,” said Milton, speaking at the Jwaneng Mine pit recently.
“We are highly honoured to carry the group and although it’s early days yet, so far so good.”
Will Debswana sneeze? For now, the evidence suggests Bonyongo and the brains trust have matters under control. Their confidence has been buoyed by the performance of the first three “sights” or auctions of De Beers diamonds this year, which have risen from US$545 million to US$617 million and US$660 million at the last one, held a week ago.
However, the real test of whether Debswana will sneeze, will come with the performance of the rough diamond auctions in the second quarter of the year. Traditionally, sales are always higher in the first quarter as diamond cutting and polishing centres replenish stocks from the holiday season and the Chinese New Year.
The second quarter always dips however, as the cutting and polishing firms assess their stocks and demand. Last year’s collapse was first spotted in the second quarter, after stable and even robust first quarter sales.
“It’s a Vuka world meaning it’s a very uncertain world, complex and volatile,” said Bonyongo.
“The first sights (auctions) are showing a positive trend, but it’s still very volatile and uncertain. We cannot let the trend lull us into believing stable recovery has come.”
Workers at Debswana are equally wary of the second quarter. Whatever its best intentions, the diamond giant’s ability to sustain all jobs will be severely tested should a dip occur in the second quarter.
“We will continue to evaluate our decisions and this may mean the principle (of retaining jobs) is no longer valid, but this depends on how we see the markets performing on an ongoing basis,” Bonyongo told the business leaders.
“We are watching the market and the current positive trend of sales and we will make a decision as the year goes. Right now, it’s a wait and see.”
And, it’s a wait and see on whether Debswana will sneeze.