Botswana is caught between a rock and a hard place as it weighs its options to increase its stake in De Beers. This comes in light of recent reports indicating that Anglo American, a major shareholder in De Beers, is contemplating spinning out or exiting its investment in the company.
Heightened involvement in the diamond value chain presents new possibilities for Botswana but also exposes the country to increased risks.
This decision has substantial implications for Botswana’s economic future and its commitment to balancing commercial interests with societal needs, especially considering recent investments in HB Antwerp and the Okavango Diamond Company (ODC).
Should Botswana seize the opportunity to bolster its stake in the diamond industry?
Gov’t preparing for the eventuality
Government remains tight-lipped about its intentions but the possibility looms large.
Botswana said it has been preparing for this eventuality, beginning its preparations for Anglo American’s exit as soon as BHP made an unsolicited bid to acquire Anglo last month.
Anglo dropped a bombshell this week announcing plans to divest from the diamond company in order to improve strategic flexibility for both De Beers and Anglo American.
Permanent Secretary to the President, Emma Peloetletse, told The Business Weekly & Review that throughout the whole process, the government will protect the interests of the country and its citizens through the confines of the law.
“We have started preparing ourselves the first time BHP offered unsolicited bid,” said Peloetletse.
“I can’t say much in terms of how we continue to ready ourselves because of the sensitivity around the whole situation.”
How Anglo took control
Currently, Botswana government through the Minerals Development Company Botswana (MDCB) holds 15 percent shareholding in De Beers while Anglo owns 85 percent.
Whereas Anglo took control of De Beers in 2011, the group’s ties with the diamond miner date as far back as 1926 when Anglo became a shareholder of De Beers.
In 2011, Botswana declined an offer from Anglo to raise its stake in De Beers, leading Anglo to acquire the remaining shares owned by the Oppenheimer family at a cost of $5.1 billion.
However, Peloetletse could not say if the government will consider a move to raise its stake in De Beers or has any first right to acquire the shares.
“There are many pieces of a puzzle that are still fluid and we are alive to our entitlements, and like I said, our job is to fully protect our interests,” she said.
De Beers could be listed
Reports this week indicated that Anglo was exploring an Initial Public Offering (IPO) for De Beers with London being the potential venue.
Anglo-American previously undertook a demerger of Thungela Resources in South Africa as it transitioned from thermal coal. Thungela Resources was then listed on the Johannesburg Stock Exchange. With the completion of the demerger and at the point of listing of Thungela, 100 percent of the issued share capital of Thungela was held by Anglo American’s shareholders who each received one Thungela share for every ten Anglo American shares that they held. Each Anglo-American shareholder also retained their existing shareholding in Anglo-American.
The new phase for Anglo
Anglo’s reason to divest from De Beers is that it would to focus more on copper.
Its Chief Executive, Duncan Wanblad, said in a statement that the decision to focus Anglo American’s portfolio in world-class resource asset base in copper and premium iron ore – while retaining crop nutrients optionality at Woodsmith – marks a major new phase in executing Anglo’s strategy.
Wanblad said these actions represent the most radical changes to Anglo American in decades.
“Of course, we are conscious of the impacts of making such far-reaching changes, particularly on our employees,” said Wanblad.
“We see considerable opportunities for our employees, both in delivering the full potential of Anglo-American and in the businesses that we will be divesting or demerging, all of which are high-quality businesses in their own right.”
Anglo-American said through the simplification of structure and portfolio, it is focused on operational and cost performance to deliver superior margins.
The group stated that the organisational re-design simplifies work execution and provides clear accountabilities for delivery.
Further, Anglo-American said it is on track to achieve the previously announced run rate of US$1 billion annual savings in operating expenditure in 2024.
Additionally, a further $0.8 billion of cost out from the end of 2025 is targeted with the capital expenditure reduction of US$1.6 billion over the next three years set out in December 2023 also understood to be on track.
Gov’t decision hinges on ability to sell
While the government of Botswana may be offered an opportunity to acquire a stake in De Beers, Investment Analyst at Kgori, Kitso Mokhurutshe, argued that for the government to increase its shareholding of De Beers to at least a controlling stake, it will depend entirely on Debswana’s level of ability to sell the diamonds.
Botswana currently sells its portion of diamonds through ODC. De Beers Diamond Group and the government of Botswana have recently reached a significant milestone in their diamond sales agreement. ODC anticipates that the new allocation will rise from 25 percent to 30 percent, with a projected increase to 50 percent over the years. ODC is currently strategically positioning itself to manage an increased quota from Debswana Diamond Company. MD Mmetla Masire told this publication previously that the expansion will firmly position the state-owned diamond company as a prominent leader in the diamond market.
De Beers’ market share may decline
Diamond experts worry that due to ceding a portion of its quota (which was 75 percent) to ODC, De Beers might lose market share going forward.
But De Beers’ CEO Al Cook said this week that the group has led the diamond industry for more than a century and he is confident that the group will remain the diamond leader for the next century.
“In particular, we look forward to finalising our transformational agreement with the Government of the Republic of Botswana, who holds a 15 percent ownership interest in De Beers.” He said later this month, De Beers will present the new strategy for De Beers.
Synthetics impact Jwaneng diamonds
However, the diamond market conditions have been subdued with recovery expected in the second half of the year.
Notwithstanding the explanation given by Anglo, Mokhurutshe noted that factors such as growth of lab-made diamonds could have partially contributed to the decision.
“Anglo has said it would like to focus more on copper, but the growth of synthetics could have played a role in their decision,” Mokhurutshe said in a webinar organised by Kgori Capital on Wednesday.
Diamond miners previously revealed that lab-grown diamonds are affecting some of Botswana’s colored stones, especially from the Jwaneng mine, one of the world’s largest diamond mines. Last year, a report by Rapaport’s Avi Krawitz showed that the price differential between natural diamonds and fake diamonds was currently working in favor of synthetics.
Krawitz cited Rapaport Group Chairman Martin Rapaport comparing the cost and selling price of a 2-carat, F-colour, VVS2-clarity natural diamond with the equivalent synthetic stone at various stages of the distribution chain. “The profit margin earned by jewellers was 24 percent for the natural diamond versus 83 percent for the synthetic stone,” Rapaport reported then.
Opportunity for wider diamond value chain
De Beers is the largest diamond producer in the world by value and participates in the larger diamond value chain from exploration, mining, sorting, valuing, sales, marketing, and retail of diamonds. Before government and De Beers reached an agreement, President Mokgeetsi Masisi was threatening to sever ties with the mining giant, claiming that Botswana could run its mines.
It is believed an increase in shareholding by the government on De Beers could expose the country to a wider diamond value chain. Already, the Government has set aside P890 million to buy shares in Belgian diamond trader HB Antwerp, according to 2024 estimates of the budget expenditure. HB Antwerp was set up in Botswana as HB Botswana In March 2023, the company’s first branch outside Antwerp.
Social needs considerations
But as the De Beers opportunity presents itself, observers discussing the matter were cognisant of the government’s social obligations. Tshegofatso Tlhong, the Chief Investment Officer pondered: given Botswana’s increased investment, what’s the cost-benefit comparison between allocating funds to purchase a commercial entity versus addressing social needs?
Additionally, Botswana’s diamond production originates from its soil, implying that the government will now shoulder the risk of extraction and marketing to a larger extent.
Al Cook vouched for De Beers’ unparalleled expertise, outstanding assets across more than 20 countries, a unique sales model, and an iconic brand, synonymous with diamonds.
Diamond revenues in secular decline
What Botswana should also consider is that Economist Keith Jefferis warned that revenues are in secular decline, as diamond deposits get deeper and more expensive to mine (and hence the profitability of diamond mining declines, and along with it, tax, and other government revenues from the industry). Secondly, he said that based on current estimates, the existing mines will be exhausted at some time between the mid-2040s and early 2050s (i.e. 20-25 years from now), at which point diamond fiscal revenues will hit fiscal cliff. As the mines get deeper, Botswana will need to invest more.
“Ideally, we should be saving a (considerable) portion of diamond revenues to build up government savings in a new Sovereign Wealth Fund, which can provide an income stream that can (partially) replace mineral revenues when the major diamond deposits are exhausted,” Jefferis said.
BMWU to be informed
Meanwhile, the Botswana Mine Workers Union (BMWU) this week said it was yet to be informed about the latest developments.
“We haven’t been informed on anything. We also see the news flying around in the public domain,” the union president, Joseph Tsimako said.
“Therefore, it would be premature or irresponsible on our part if could make a comment or form a position on something that has not been communicated to us formally or that we have bit made any investigations on.”
Tsimako said the union will comment once certain on what is going with an informed point of view. The union represents about 4,000 Debswana employees.
