Now or never for diamond deal of the century

Mbongeni Mguni | Friday August 31, 2018 12:08

The country’s current sales agreement with De Beers, expiring in September 2020, is arguably the best negotiated in the decades-long relationship between the two parties.

Unveiled in 2011, the agreement was the longest between the two partners and paved way for the relocation of the Diamond Trading Company from London to Gaborone, as well as the establishment of the Okavango Diamond Company (ODC), the government of Botswana’s independent diamond auction agency.

Both the relocation and the ODC brought diamond business worth billions of USD annually to Gaborone. The previous agreement established the Diamond Trading Company Botswana, a 45-million carat per annum operation sorting and valuing diamonds from De Beers’ mines around the world.

As government and De Beers’ negotiators knuckle down for a fresh round of talks on an agreement to take over when the current one expires in September 2020, analysts are wondering what more Botswana could possibly squeeze from the diamond giant.

“Unlike the last deal which brought about large-scale changes, it’s not easy to see where the more heavy concessions could be made by De Beers,” read a recent opinion by Albert Robinson, editor in chief of IDEX Online, a leading diamond industry publication.

But concessions there will be, going by the restrained determination evident in the limited commentary senior government officials have allowed themselves to make recently. Traditionally, the sales agreement negotiations are draped in high secrecy, with the two parties releasing a brief statement only at the conclusion.

Though limited, the commentary reveals that government plans to go big in the current negotiations, aiming for the golden prize of positioning Botswana as the global centre of diamond trade.

Analysts agree that the previous agreements all pointed at this ultimate goal, from the entrenchment of cutting and polishing activities to the relocation, but the prize has always been just out of reach.

Where previously government leveraged Debswana to secure concessions from De Beers, the declining resources at the various mines means the current agreement could be the last where the Debswana hand is played to its fullest extent. Jwaneng, the world’s richest mine, will have to spend billions more on Cut 9, which will extend its life to 2034, while more expenditure is required at Orapa’s Cut 3 to push its life beyond 2030.

Open pit operations have ceased at Letlhakane Mine and the operation recently recovered the first stones from its tailings dump. Going forward, Debswana’s own documents show mining will get more expensive and recover less, with possibilities that one or more of the mines could even go underground.

The weight Debswana will carry as leverage in future agreements will also be dented by De Beers’ burgeoning plans for cheaper “lab grown” diamonds, synthetics which within four years could account for one in every eight lab diamonds in the world market.

For Botswana, the deal being negotiated has to deliver the golden prize and the limited commentary suggests government is intimately aware of the strength of the bargaining chips on the table. In May, President Mokgweetsi Masisi told Bloomberg that government was aware that the new deal could differ from the previous one, “because the circumstances and operating environment had changed”.

However, he said, the overarching goal was greater processing of diamonds in Botswana, resulting in more economic diversity.

“The whole value proposition of beneficiation of diamonds revolves around jobs, the diversification of the economy. “Why take them far away?  Speaking to Mmegi last week, Minerals minister, Eric Molale was even clearer. “The initial plan was to make Gaborone an international diamond centre and we want to welcome diamonds from all over the world,” he said.

Molale, who was Botswana’s chief negotiator in the talks for the agreement ending in 2020, says the country is already talking to possible sources of additional supply.

“We were in Lesotho recently and we have made agreements that their diamonds come here for processing. We have also done the same with Zimbabwe.

“We are already working with the Canadians, South Africa and the Namibians. The new sales agreement will continue where the current leaves off, growing Botswana as a diamond centre, to have all the players in the industry doing business here.”

Molale revealed that in this push, Botswana has even engaged Russia, the world’s biggest producer of rough diamonds by volume and a country generally seen as a rival to the De Beers value chain.

“Russia is a major player and we are talking to them. We are both global leaders but what we want and wish is for them to play a major part in our industry. “It is key that we enlarge our processes for value addition. “These are the discussions we are having and that’s what the sales agreement will be looking at, to make sure that we aim for the bigger picture of being the largest diamond centre in the world,” Molale told Mmegi. Success in the search for the golden prize, however, involves overcoming the country’s poor competitiveness in the factors required to be a global diamond centre, a fact local policymakers are well acquainted with.

Competing centres in Asia offer far lower operating costs than Gaborone and for many analysts, Botswana’s dream of becoming the global centre for diamond trade is of the pipe variety.

“With a vast diamond-processing infrastructure already in place in a low cost centre such as India, as well as elsewhere in Asia, diamond polishing plants in Botswana have found it difficult to compete,” writes IDEX Online’s Robinson.

“There is no doubt that Botswana – an the other African producers – have every right to squeeze as much beneficiation out of their diamonds as possible, but as the saying goes, it’s better to be smart than to be right.”

Botswana’s negotiators will however recall how it once appeared impossible that the DTC would relocate to Gaborone or that Botswana would have its state-owned company independently selling Debswana’s produce.

For Masisi nothing is insurmountable.

“The very things that cause them to be processed elsewhere, we want to get to the underlying reasons for that, the attractions and bring them to Gaborone,” he told Bloomberg.

With a tenure that, unlike his predecessors, coincided with the start of the country’s biggest negotiations, the new president has clearly made the golden prize a priority.