De Beers, Botswana Prep for New Sales Deal

RAPAPORT... Botswana once again finds itself at a crossroads. The sparsely populated,landlocked country is in a constant battle to ensure the longevity of itsdiamond industry.Recognizing that diamond mining will not last forever, thegovernment's beneficiation program has sought to establish cutting andpolishing, trading, and auxiliary services in an effort to diversify itsindustry - and economy - away from its reliance on the mining sector. Beyond miningDe Beers, which counts around 59% of its production by valuein Botswana, has played no small part in that effort. It did so initially byearmarking a part of its rough supply to be manufactured in Botswana, and todaythere are 18 sightholders with factories in the country. In 2013, De Beersmoved its sales headquarters to Gaborone, meaning that its 10 annual sightswere taken out of London, thus diverting traffic and diamond-related activityto the African city. Furthermore, the establishment of the parastatal OkavangoDiamond Company that same year gave the government access to 15% of productionby Debswana, its joint mining venture with De Beers. That was the first timesubstantial rough sales from Debswana took place outside of the De Beerssystem. The 2011 agreement that governed those developments is upfor renewal in 2020, and negotiations are expected to begin in the coming year.For its part, the government is seeking to increase supply to localsightholders as a means of creating more jobs, newly elected PresidentMokgweetsi Masisi told Bloomberg in May. Some question whether Botswana can handle moremanufacturing, given that a few factories have closed in recent years. Ifprofitability remains the biggest challenge facing manufacturers, Gaborone hasyet to prove itself as a viable center for high-volume cutting. Perhaps DeBeers can play a further role there, too.The government will also likely want to increase thepercentage of Debswana supply that Okavango receives. And it might want torenegotiate greater access to the large and high-value diamonds Debswanarecovers. Digging deepBotswana has some leverage in the relationship with DeBeers. It owns a 15% stake in the group, with Anglo American holding theremaining 85%. And the two are equal partners in Debswana and in DTC Botswana,which sorts and mixes production for De Beers and Okavango. De Beers, meanwhile, brings to the table its miningexpertise and budget. In 2010, it committed to investing $3 billion over 15years in the Cut-8 expansion of the Jwaneng mine - considered the world's mostvaluable diamond-producing asset. That project is expected to start yielding diamonds nextyear, extending the life of mine at Jwaneng to 2030 and by some 93 millioncarats. Studies for the viability of Cut-9 are under way, which would furtherextend the life of Jwaneng. A final investment decision on the project isexpected later this year, reports a De Beers spokesperson. De Beers could use the potential Cut-9 investment, as wellas funding extensions at the Orapa and Letlhakane mines, as a bargaining toolin negotiations with the government. African investmentsDe Beers walks a similarly fine line in other Africancountries where it operates. In South Africa, it may have to reduce ownership of itslocal businesses from 74% to 70% under the new mining charter, as thegovernment wants to see more local black economic empowerment (BEE)involvement. That said, De Beers is engaged in a $2 billion project to developunderground mining at the Venetia asset. From next year, Venetia will be itsonly mine in South Africa, as it plans to close the Voorspoed mine. It hasalready sold the Finsch, Cullinan and Kimberley operations over the pastdecade. Meanwhile, in May 2016, De Beers signed a 10-year salesagreement with Namibia, in which it ceded 15% of local supply to the governmentand promised more diamonds to local cutters. The company subsequently announcedmajor investments in its marine mining operations off the Namibian coast. It's that give-and-take that Masisi is hoping will result ina "win-win" for both parties as they negotiate their next long-term deal -especially given that so much of Botswana's future diamond production dependson Jwaneng's expansion. "We have had a wonderful relationship with De Beers, and weexpect that relationship to be even more cemented," the president toldBloomberg in May. "The returns [from the Jwaneng development] are going to berealized in the period of the next deal. This is a marriage we're after."This article was first published in the July issue of Rapaport Magazine.