From mine to mistress

During a gathering in Gaborone this week, the leader of opposition Alliance for Progressives (AP), Ndaba Gaolathe, put on his economic hat and weighed in on the fuss over the De Beers/Botswana divide which has generated debate like no other in independent Botswana and drawn unprecedented attention to the small landlocked diamond rich country. Gaolathe is a finance expert and researcher by profession, having worked at BIDPA, the Botswana Institute of Development Policy Analysis, and several finance institutions. Toward the end of his speech that evening, he warned: “It would be a blunder of grave proportions to walk away from De Beers without a plan.” [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] He was not saying Botswana cannot walk away if “we need to” but wondered if Botswana can afford to. “For us to walk away, I believe on the mining side we are okay,” he said. His remarks were in response to the much-publicised position of President Mokgweetsi Masisi who has threatened - more than once in recent times - to sever ties with De Beers if the parties cannot reach a mutually beneficial agreement. The AP and its leader, an alumnus of the George Washington University with a BA in Economics and a BSc in Pure Mathematics, had assembled the public on the evening of Wednesday under the theme, Unravelling the Ongoing Diamond Sales Hooha. He has previously been a staunch critic of the mining company. “Not quite” On why Botswana can afford to walk away Gaolathe said: “We have people, systems at Debswana. We can actually get away with it.” He added quickly: “But even in saying so, I’d say not quite because we have a problem.” He drew the attention of the audience to the changing landscape of the mining sector, noting that the profitability is diminishing because the mines are getting deeper. Industry players have supported this, explaining that surface mining is best suited to extracting minerals near the earth's surface. It is also usually a more cost-effective mining method compared to underground mining, which is costlier because it is more capital-intensive. Experts say the ore body is too deep to mine profitably by open cast. “As the mines get deeper, we need to invest,” Gaolathe cautioned. The current investment at Debswana is Cut 9. Jwaneng Mine has been an open-pit mine since 1982, but in the following stages of development, it has moved its operations underground in the hunt for more gems. The parastatal previously announced that it expected to invest about $2 billion (P27 billion) over the life of the project (Cut 9), underpinning the partnership’s commitment to the future of Botswana’s diamond industry. In addition to the P27 billion, the underground investment of the mine will see an investment of $6 billion (P82 billion). Note that because Debswana is a 50/50 joint venture between De Beers and Botswana, each party needs to fork out its share, which minimises strain. “ We need to have a plan where we will get that,” Gaolathe said about the cost of going solo. The Pula versus the USD In the midst of this back and forth, it is important to stress that in recent times, the government has faced liquidity challenges. It has previously indicated its preference of raising debt locally, as Parliament approved (in November 2020) a government request to double its domestic borrowing programme to P30 billion ($2.6 billion) to fund its budget deficit and economic stimulus. The government’s Medium Term Debt Management Strategy indicates the need to rebalance the debt portfolio by borrowing more locally than externally in order to minimise the risk exposure (interest rates and exchange rates). The Pula has been depreciating versus the USD, from about P4 in 2013 (5.6 percent Compound annual growth rate) and about P8 in 2013 (5 percent Compound annual growth rate) to about P13 currently. This means there are implications for government to continue to adding on USD-denominated debt when the long term trend suggests that future repayment will be expensive. Consistent with the government’s strategy, private bilateral foreign denominated debt is generally being minimised with the preference for borrowing from multilateral international organisations and governments at concessional and lower interest rates. However, the government has not quite been able to raise P30 billion which it needed to reboot the economy after the battering pandemic. By last year, around P9 billion was raised in the debt market but momentum dwindled following decreased surplus liquidity in the market. Observers tell this publication though that the government continues its efforts to raise money through bond auctions. To stress the issue of lack of liquidity more, the government recently embarked on a process to downsize the public sector wage bill, known as rationalisation, which is expected to result in layoffs as parastatals merge to address issues of redundancies. 5000 types of stones But for Botswana’s mines to keep running, the government will either have to fork out billions in pula alone or find a partner to compete with De Beers, which Gaolathe argued has built enough experience over decades to elbow Botswana out. “De Beers categorised diamonds into 5000 types of stones and assorted them into 125 boxes in a way that they fetch the best prices possible,” he said. “The mining side can be done, but I would not recommend we do it now.” Statistics Botswana has shown that diamond exports contributed 87 percent of total exports, with the US the major destination for minerals at 55 percent while China accounted for 11 percent. Botswana rough diamonds accounted for 63 percent of total diamonds in 2022, polished diamonds 20 percent, and re-exported (aggregated) rough 17 percent. According to economist Sethunya Kegakgametse, polished diamond exports have boomed as the local manufacturing sector expanded and global demand became strong, increasing by 93 percent in 2022 over 2021. The latest budget speech by finance minister Peggy Serame shows that mineral revenue, estimated at P23.34 billion or 29.3 percent of total revenues, accounts for the second largest contribution to projected total revenues and grants for the 2023/2024 financial year. Diamonds are the leading contributor to mineral revenue. President Masisi feels Botswana has been getting a raw deal in agreements with De Beers. He told a political rally in Mmadinare recently that the government has learnt a lot from its relationship with De Beers, saying Botswana loses $15 billion every year by selling diamonds raw without beneficiation. “We are a major global diamond producer, both in terms of value and quantity. We should therefore benefit more. Our benefit from the potential $15 billion is at most $8 billion,” he said, adding that further beneficiation of diamonds into gems and jewellery is worth $100 billion. Where is our benefit from there?, the President queried rhetorically. “Clearly our agreement with De Beers is very limiting for us and we must either get a better deal or walk away completely. We must refuse to be enslaved.” For its part of the deal, De Beers says it pays the government about 80 percent of the profit from diamonds and keeps only 20 percent. According to De Beers Group executives, Botswana’s earnings from Debswana production alone was $2.6 billion (over P32 billion) in 2022, tax and mineral royalties included. He expressed concern that if Botswana walked away, it may not be able to get the prices that De Beers has been getting. “Infact, if we become De Beers competitor and they become hostile, it would be dire for the Botswana economy,” he warned. “The technology that we use is still theirs.” De Beers recently touted its Blockchain Technology, Tracr (for traceability), which the government supported. De Beers says more than half of its global production by value is now being uploaded to Tracr. Of the 1 million rough diamonds uploaded to Tracr, De Beers says 200,000 have been registered by Sightholders, with 100,000 having also been converted into polished diamonds with permanent records of their provenance. Economists have lamented that Botswana does not even partake in the technology. Whether synthetic, new ways of discovering without having to dig a hole, and the drones that have been used. The Okavango Diamond Company (ODC) has started to develop its own technology but Ndaba argued that “they are not yet there”. Against this background, industry experts say “we are consumers of technology”, and again losing out on the value chain. The way Gaolathe imagines the partnership with De Beers is such that the mining company help Botswana to develop its IP, technology and processes as well and not depend on the De Beers ones, especially at the mining level, sorting, valuing and aggregation. “I hope we would phase out their participation in mining activities and that we would eventually take over the mine,” Gaolathe answered when asked what he would do different. Craftsmanship The agreement between Botswana and De Beers is premised on mining rough diamonds. That is what De Beers does in conjunction with Botswana, to mine rough diamonds. Another agreement is to sell. Mining itself is one of the most profitable parts of the value chain, which Gaolathe believes Botswana can do. That is where Debswana sprang to life. According to Gaolathe, it has margins of more than 30 percent on average and much more in the Botswana context. “De Beers is mining company, not a polishing company,” he pointed out. “If we want to develop our polishing and cutting sector, we must do it ourselves. Why should De Beers do it for us? There are things we need to be doing that were are not doing; things that Israel is doing. Israel is spending billions of US dollars training their people and raising craftsmanship.” Labour costs For Gaolathe, the point is how much we have invested in training our people and raising our craftsmanship. The margins in cutting and polishing are reportedly around 2 percent. Before 2013, Botswana diamonds were sold by De Beers through its London-based Central Selling Organisation (CSO), and Botswana had no role in the auctioning of its diamonds in the British capital. In 2011, an agreement was struck between the government and De Beers which saw Diamond Trading Company International (DTCI) relocate its sight and sales operations to Gaborone. The government had hoped that the move would enable the country to tap into the manufacturing side of diamonds - the cutting and polishing where refining is done before the final product is made by retailers. Countries like Belgium and India had perfected their own industries over time, meaning that it was cheaper and more productive to polish and cut in their own countries than in Botswana, which has failed to develop the expertise to do so. Diamond cutting and polishing companies have said they found it more and more difficult to operate here because the costs were high in terms of labour and turnaround times. What this means is that because Botswana’s cutting and polishing industry failed to really take off, the country still exports raw stones and does not exploit the value chain. At the gathering to discuss the brouhaha over diamonds this week, Gaolathe asserted: “If we develop our financial sector so that we have banking and financial institutions that are tailored to develop diamonds and polishing centres, we can raise it (margin) to margins of 10 percent.” He emphasizes that De Beers itself does not play in the cutting a polishing hence Botswana should take it upon itself to develop itself. [/ihc-hide-content]

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