Learning the lessons from the Lesedi la Rona sabotage

In June 2016, Lucara Diamond Corp’s 1,109-carat Lesedi la Rona, the largest diamond recovered in a century and the pride of the country, failed to sell at widely livestreamed auction.

The story around the stone began when the giant stone was pulled out of the sands of the Boteti sub-district In November 2015. Approximately the size of a tennis ball, the 1,109-carat stone triggered global astonishment and awe for its sheer mass, clarity and rarity, being the largest since the 3,106-carat Cullinan Diamond discovered near Pretoria in 1905.

Lucara Diamond Corp, the Canadian miner responsible for the find, quickly set about strategising how to retrieve value for the stone. An auction sale was chosen and the giant stone was taken on a global tour through glittering cities such as Hong Kong, Singapore, Dubai, New York and Geneva, amidst frenzied media coverage.

Lucara chose legendary auctioneers’ Sotheby’s of London to conduct the auction and on June 29, 2016 a roomful of potential buyers waited anxiously for bidding to start. A historic event, the auction was livestreamed across the world and all eyes, particularly those of ordinary Batswana, were on Lesedi la Rona.

Lucara’s then chairman, William Lamb, had some strong words about what happened at the auction, when he took Mmegi into his confidence a few years ago. The auction room had two types of buyers; wealthy private investors interested in the diamond as a personal asset and traders, or middlemen interested in the diamond to cut and polish it for jewellery. Of these two, the traders were more sophisticated and understood the value of the diamond. The investors waited to take their cue from them.

According to Lamb, traders, who were part of the bidders at the auction, not only plotted in advance to push down Lesedi la Rona’s price, they also sent negative signals into the market as a protest against the auction method chosen by Lucara for the historic stone.

“Two weeks before, the traders began talking Lesedi la Rona down,” the former chair said previously. “They were saying buyers would only get a 25% yield from the stone, which was not true; even Sotheby’s expected between 30% and 40%. “If you did not want the stone to be bought by the private investors, then that’s what you would do. “They did not like the public auction as they said they would have to pay Sotheby’s also. “They did not like the public nature of the auction, with their names up in lights.”

Lamb continued: “When the hammer went down, three people from the trade came so close to me that I could smell what they had for lunch. They said we needed to talk in the next few weeks and I thought ‘why didn’t you put up your paddle’? “Within 40 seconds, I had someone ask me for a private meeting. Someone else approached three people close to our company and their efforts were to try to push the price down.”

Prior to the auction, it had been estimated that Lesedi la Rona would fetch at least $80 million and it was insured for $120 million. Instead, it eventually sold for $53 million to British jeweller Graff, who then cut it into one large diamond weighing 302.37 carats and 66 smaller stones.

Sparkling: Lesedi la Rona was eventually cut into one large diamond weighing 302.37 carats and 66 smaller stones

Lucara and Botswana had tasted the power and machinations that exist in the world of large rough diamonds. Simply possessing a large, rare find is not enough and in fact, it can be close to nothing. The key is finding someone to take it off your hands at the best price, a fact that perhaps explains why the Okavango Diamond Company still has not put the spectacular Okavango Blue up for sale, nearly five years after discovery of the exceptional diamond.

Lucara Botswana managing director, Naseem Lahri, explains the dynamics that affected the sale of the Lesedi la Rona.

“You know when we started extracting the large stones, the market was completely excited because they had never seen these stones before ever,” she says, in an interview on the sidelines of the Forbes Under 30 Summit. “They were willing to pay the best price for these stones but literally from 2015 up to 2019, the value of those stones went down by 40% specifically because there were only a select few customers that could purchase these stones. “There were basically 10 clients that could purchase these stones. “Selling it in rough again at the auction didn’t work for us because now these 10 customers could obviously collude to bring the value of the stone down, which made more sense for them because if they were going to get the stones, they needed to do that. “They wanted the stone because it was considered one of these high profile stones. That’s exactly what happened and the entire auction, in my opinion, was sabotaged.”

The drama around the Lesedi la Rona painfully taught the country what happens when it is limited to simply mining the stones and fails to take more participation or control downstream, ensuring that it has a seat at the table when the end values of a Botswana-born stone are negotiated.

“We talk about value add but the country didn’t participate in the uplift, nor did the company,” Lahri says. “Botswana did not participate even from a publicity perspective; we didn’t see that nor did the company.”

She adds: “So we want to do things differently and this was the birth of the HB contract. “Looking at that contract, we are looking at transparency which is very key. “As Lucara, we are not polishers, we are miners. We don’t know how to polish but we make sure that we get the value from the time that the stone is extracted until the time that it’s actually sold as polished. “We get the publicity rights and the upside in terms of revenue. “HB do what they do best, which is to get the high end retailers to come on board and get our stones sold at a premium from where we get this uplift. “From a marketing perspective, we leverage off that. “It’s a very transparent process; even in getting the data extraction of the process, the price points and all that. “It’s amazing.”

Lahri is referring to HB Botswana, the Belgian diamond trading start-up that has been in the news lately after government took up a 24% equity stake in the firm, the state’s first shareholding in any private diamond-type entity since it burnt its fingers in the DiamonEx collapse around 2015.

HB Antwerp which has secured a 20,000 square-metre plot in the Innovation Hub from where it says it plans to expand its activities in the country by more than 10 times in the next few years, recently opened a state-of-the-art facility at the Diamond Technology Park.

HB Antwerp leveraged its technology, which includes robotics, to secure a ten-year deal with Lucara last year under which stones from Karowe bigger than 10.8 carats are sold to HB Antwerp at prices based on the estimated polished values, rather than the industry standard where traders purchase based on rough values. According to HB Antwerp executives, the projected polished price is determined using “state-of-the-art scanning and planning technology and is then adjusted through top-up payments based on actual polished sales, less a fee, and the cost of manufacturing”.

The executives have said an earlier 24-month arrangement between HB and Lucara reportedly resulted in 40% higher diamond royalties to the Botswana government over the period.

President Mokgweetsi Masisi, who has repeatedly spoken out about Botswana’s dreams for greater downstream participation in the diamond industry, recently revealed that the equity deal with HB came after seeing the results of the Belgian firm’s arrangement with Lucara.

While Masisi does not sit in the ongoing negotiations with De Beers for a new sales agreement and renewed mining leases, as head of state, he has set out the nation’s goals for diamonds and the outcomes he wants to see when the deadline for the talks elapses in June.

For Lucara, the HB deal was the natural evolution of the company’s drive for greater value from its Karowe Diamond Mine. Having pioneered technology that used carbon content rather than luminescence to better spot large stones and having also finetuned its technology to ensure these weren’t crushed in processing, Lucara found that this innovation had to spread from the mining side to the revenue side as well.

“We fairly quickly found out that we had really large diamonds and we extracted the 1,109 carat Lesedi,” says Lahri. “So we had the Lesedis and other various large stones coming out and we realised that our revenue base was mainly the large stones. “Seventy percent of the revenue was the large stones, yet in a production profile, it’s typically 30%. “So at 30% of your production and 70% of your bottom line, this means if the value of your stones goes down, this hits your bottom line directly; it’s immediate. “We needed to come up with a plan on how to better sell our stones.”

Government was carefully watching the developments, as the ultimate mineral and land rights owner in the country. Conversations about how to secure more value for Botswana from deals such as those with De Beers, have been going on for decades but in Lucara, authorities found the proverbial canary they could send down the mine.

According to Masisi, government carefully monitored Lucara’s deal with HB Antwerp, even making accommodations in the area of royalties.

The local landscape had few examples government could mirror. On one end were the dying embers of DiamonEx, which sank with government’s P10 million investment, while on the other hand, Debswana was too large-scale an operation to act as a canary. In addition, it was and remains linked to the traditional De Beers’ model of value extraction, an ecosystem controlled by the diamond giant.

Lucara, with its focus on innovation, was fit for purpose and small enough for dynamic decision-making. In addition, both Lucara and government had had their fingers burnt in the London auction house in 2016.

“I say we are the eye-openers of the industry showing the government what can potentially be done,” Lahri explains. “I always say we export mining talent out into the world and we don’t have any experience in the downstream. “Government is rightfully going into the downstream activities because they need to extract the best possible value out of the resources that they have. “As a country, we have not done really well in the downstream activities and this is where I think we should be participating because we have done an excellent job in the upstream, but downstream is something that the government has not really looked at. “This is the opportunity and this is where value is extracted. “They have seen it with the pilots we have run and it has opened their eyes.”

Lahri has earned herself a reputation as somewhat of a broker for the country’s downstream diamond dreams, from testing the HB Antwerp proposition, to leading a growing move into the retail diamond jewellery arena, the last point of the diamond pipeline, which at global level is worth more than five times the value of rough diamond mining activities.

Last month, Lahri appeared in a set of photographs released by the Office of President where Masisi met with Andre Messika, the founder of Messika diamond retail group, a prominent jeweller worn by celebrities ranging such as Rihanna, Beyonce and Kim Kardashian.

French Ambassador to Botswana, Olivier Brochenin recently told Mmegi that Messika was keen to establish in the country.

Lahri says her role in the country’s aspirations is something expected of any citizen.

“Who better to do it than a Motswana? I think I consider myself an ambassador even though I don’t have the title. “I think if people hear it from a Motswana, they understand it better. “We are the best individuals to tell the story of Botswana diamonds, as Batswana. “The industry that we are in, we are the largest producer by production and value as a country, and that’s very important. “This is where the future of the diamond industry is and why not bring in those people that can actually do it locally? “France has really amazing spaces to be in from a jewellery perspective or any other place like Italy and others. “They have great spaces, but can’t we bring it local? “Why can’t we use the Delta or others and we have so many other amazing spaces. The Cradle of Mankind that is the Makgadikgadi Pans and others, are the spaces we need to bring in, even from a tourism perspective.”

She adds: “We talk about jewellery and we have the resource here. “Why do you want to take the jewellery design and take it elsewhere, because the source is here? “The clientele that we have want the Botswana story.”

From the frustration of the auction in London, Batswana are more confident in the country’s future in the global industry.