'De Beers policy shift could be harmful'

MBONGENI MGUNI
Staff Writer | Thursday April 1, 2010 00:00

In an internal communication to sightholders and other stakeholders, De Beers recently announced its intention to focus on economic production, saying it would not mine 'when it does not make good economic sense to do so'. De Beers said rather than maintaining production or stockpiling rough diamonds, it would prefer leaving the gemstones in the ground to conserve mining costs and instead focus on new ways to drive retail demand.

'In the context of the new economic realities we now face, this means that our overall production levels will not be as large as they were in the years before the global recession,' said De Beers. 'The scale and profile of production will also vary from mine to mine, dependent upon the economics of each operation.'

Fears abound that the policy shift will mean restrained production at Debswana mines, necessitating further staff rationalisation, reducing supplies to cutting and polishing firms and cutting into government revenues which are primarily from royalties, taxes and revenues from the Debswana dividends.

In a recent commentary, diamond fundi Chaim Even-Zohar said the new policy marked a full circle turn for De Beers, from when it maintained buffer stocks and production quotas to support high rough prices. He said the new policy, while sensible from an operational point of view, would have an impact on downstream and supply/demand dynamics.

'It is hard to conceive that there are DTC clients who may get less than in the past year, but it is our understanding that in some situations, some sightholders will definitely get fewer goods.

'If the Russians continue to sell to their government and De Beers leaves the goods in the ground, we'll see a significant shift in supply and demand economics. The price elasticity at the consumer side will be severely tested.

'Will consumers be prepared to pay significantly more for polished, just to enable De Beers to attain its 'economic production' targets?, said Even-Zohar, explaining the anticipated shortage of diamonds and its effect on the diamond price.

He said De Beers' new policy could be seen in its US$4 billion (P27.1 billion) sales target for the 2010-2011 period, which is lower than had been anticipated. In its heyday prior to the onset of the recession in late 2008, production from Debswana alone hit P21 billion for 2008 and P20.5 billion for 2007.

Former Diamond Hub Coordinator Dr Akolang Tombale said while the move by De Beers could have an effect on Botswana, 'the dynamics would have to be understood first'.

'The relationship between De Beers and mines associated to it is a complex one,' Tombale said. 'There's an element referred to as entitlement for supply - or a type of quota - which basically says this mine is expected to supply this much, enabling De Beers to know what to put in place for its clients.

'If there's a problem with one mine, this could result in this entitlement for supply going down. The decision could have an affect on Botswana's mining industry, depending on other dynamics. We would have to know more about the decision to appreciate it.' 

Responding to Mmegi enquiries, De Beers Group Head of Media Relations, Lynette Gould, said under the new policy, production would increase over the 2009 levels of 24.6 million carats (17.8 million from Debswana), but would not return to 'historic highs' for the foreseeable future.

Debswana is this year expected to produce 20.6 million carats, up from last year but down from previous 'historic highs' of plus 30 million carats annually. Gould said the new policy would (certainly) have an impact on Botswana operations.

'It is likely that Damtshaa Mine will remain closed for the whole of this year,' she said. 'All other Debswana operations are fully operatioal. People affected by the closure of Damtshaa Mine were either redeployed elsewhere while around 100 took voluntary separation packages.

'On a more exciting note, it is anticipated that the Cut 8 project, which the Debswana board approved last November, will eventually result in approximately 1 000 new jobs either through direct employment with Debswana or indirectly through suppliers and outsourced partners, skills transfer and increased commercial activity in Jwaneng.' Asked whether the policy shift had been communicated to the Government of Botswana, Gould said the government was intimately involved in the policy's approval. 'The Botswana government has a 15-percent shareholding in De Beers s.a. (the De Beers Group) and a 50-percebt shareholding in Debswana and DTC Botswana joint ventures,' she said.

'Management prepares the budget plans for approval by the board before those plans are executed. Additionally, these plans are presented to shareholders for approval.  'In this case, what was communicated to our sightholders was based on these plans, approved by both our boards and shareholders. In this case, the Botswana government approved the policy at the Debswana and DTC Botswana board levels and, moreover, as a shareholder in De Beers s.a.'

In a terse statement, the Ministry of Minerals, Energy and Water Resources said it supported De Beers' policy shift.

'As a general statement, mining is a business in which shareholders expect returns from their investment, a spokeswoman of the ministry spokeswoman said. 'It therefore makes economic sense to shareholders to operate mines if the products can be sold, and at a price that gives returns to them.'