De Beers Sees Evolution of More Synergies in the New Deal

While De Beers’ executive vice president of diamond trading, Paul Rowley, says the deal is a “win-win,” there are fears in the market that the new sales agreement between De Beers and the Government of Botswana could negatively impact De Beers’ bottom line. Rowley was responding to media inquiries at De Beers offices in Gaborone last week where they presented their financial results to business scribes. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] Botswana and De Beers reached an agreement in principle that includes a new 10-year sales deal and a 25-year renewal of the company’s diamond mining licences when they expire in 2029. Under the new deal, Okavango Diamond Company (ODC), which is owned 100 percent by government, gets to have the amount of diamonds it can sell from Debswana - the 50/50 joint venture between Government and De Beers - increased. ODC has been getting and selling 25 percent of Debswana’s production. Under the new agreement in principle, ODC’s share of Debswana’s production was immediately increased to 30 percent. Further, ODC will get 40 percent of Debswana’s production in four years and a further 50 percent by 2033 when the current sales agreement comes to an end. Cash cow While De Beers is the largest player in the diamond industry, and makes money along the entire value chain, its cash cow is the sale of rough diamonds from Debswana. Further, De Beers operates in Botswana, Canada, South Africa and Namibia but Botswana accounts for the lion’s share of the De Beers value from rough diamonds. At the recent briefing, Rowley said rough diamond production was marginally lower than the strong first half of 2022, at 16.5 million carats (30 June 2022: 16.9 million carats), reflecting strong operational performance in most regions, offset by the planned reduction in South Africa as the Venetia open pit transitions to underground operations. In Botswana, production increased by 9 percent to 12.7 million carats (30 June 2022: 11.7 million carats), driven by the planned treatment of higher grade ore at Orapa. The Botswana production accounts for 77 percent of De Beers’ total production, which consequently means that approximately 77 percent of the De Beers rough diamond revenue could be coming from Botswana. Namibia production increased by 21 percent to 1.2 million carats (30 June 2022: 1.0 million carats), primarily driven by the contribution from the Benguela Gem vessel, which commenced production in March 2022, and the ongoing ramp-up and expansion of the mining area at the land operations. South African production decreased by 59 percent to 1.2 million carats (30 June 2022: 2.9 million carats), due to the planned completion of the Venetia open pit in December 2022. Venetia continues to process lower grade surface stockpiles, which will result in temporary lower production levels as it transitions to underground operations where first production was recently achieved. Win-win It will ramp up over the next few years as development continues. Production in Canada increased by 9 percent to 1.4 million carats (30 June 2022: 1.2 million carats) as the treatment of higher grade ore offset planned plant maintenance. What this means is that Canada, South Africa and Namibia cumulatively account for approximately 23 percent of De Beers production, which is three times smaller than Botswana’s production. Considering the significance of Botswana’s production to De Beers, market watchers argue that as ODC takes up more production from De Beers, it would result in the gigantic diamond company losing on rough diamond sales revenue, which would affect its bottom line. While he did not get into details, Rowley says the deal is a “win-win” for both partners and the wider diamond industry. He says the De Beers business model is not only focused on selling rough diamonds. “Remember, De Beers used to sell 100 percent of Debswana production before ODC took up 25 percent. This did not negatively impact the bottom line because our business is about evolvement and not supply of product. We found ways of diversifying the business and supplement revenue,” he told journalists. The new deal, he says, presents an opportunity for joint exploration in highly prospective regions of the world such as the DRC. To him, should the exploration bring forth positive results, it will translate into opportunities for new mines which will bring in more money, not only for De Beers but for Government of Botswana as well. Institute of Diamonds “The deal will enable establishment of high-tech operations in-country, including a De Beers Institute of Diamonds grading lab and inscription facility in Gaborone, IT support hub for midstream technology and exploration processing and micro-diamond lab,” he said. The new deal will also support appropriate skills development through establishment of a Diamond Vocational Training Institute and Diamond Entrepreneurs Programme for greater citizen participation in the industry. He added that it also presents an opportunity for the establishment of a JV with a leading sightholder to create a scale jewellery manufacturing facility in Botswana. Potential for a joint venture “The win for us is the fact that there’s a continuity of supply to the industry,” he pointed out. “It has really relieved many people that this is not just a 10-year sales agreement, but, perhaps even more importantly, we have a 25-year mining lease. So that will be another 30 years of steady supply, and that’s great for everyone.” Both ODC and De Beers buy goods from Diamond Trading Company Botswana at a fixed percentage off what’s called their “standard selling value,” which is based on the De Beers price book. De Beers Global Sightholder Sales then sells its percentage of the diamonds to its clients at full price-book value. Though De Beers is not getting zero for goods sold by the Botswana government (and vice versa), it won’t get as much as if it sold them itself. Okavango generally sells by tender, which leads some to people believe that it may get more for its goods than if they were sold by De Beers. But it is also possible that it might get less in a bad market. Rowley said while De Beers will eventually have fewer Botswana goods to sell, the company’s overall volume won’t necessarily decrease. “Ten years is a long time,” he says. “We’ll see (South African mine) Venetia come back strongly in that period of time, and we’re looking at other exploration opportunities in the future and some of those, hopefully, the Botswana government will look to a joint-venture with us.” [/ihc-hide-content]

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De Beers Sees Evolution of More Synergies in the New Deal

To fears that the new diamond deal may lead to a waning of De Beers in gains and stature as the indisputable global force in everything to do with diamonds, the giant points to evolution, diversification and more exploration resulting in more mines and emphasises the two-way nature of the new era

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De Beers Sees Evolution of More Synergies in the New Deal

To fears that the new diamond deal may lead to a waning of De Beers in gains and stature as the indisputable global force in everything to do with diamonds, the giant points to evolution, diversification and more exploration resulting in more mines and emphasises the two-way nature of the new era

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