New Diamond Deal Laid Bare

The Minister of Minerals and Energy, Lefoko Moagi, said in answer to questions at a press briefing to apprise the fourth estate of the sale and mining agreements between the Government of Botswana and De Beers in Gaborone on Thursday this week: “We had wanted a much shorter period.” The questions from The Business Weekly & Review sought to understand from the minister why implementation of the 50 percent allocation of supply of diamonds to Okavango Diamond Company (ODC) is to be staggered over 10 years. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] While government announced recently that it has concluded with the diamond miner to supply ODC with 50 percent caratage, the agreement is for Botswana to have 30 percent first that will be raised to 40 percent in the fourth year quota and 50 percent at year 10. Quantum of carats Observers and the general public have been wondering why this increment is not immediate. “Any abrupt change affects the market, whether positively or negatively,” Minister Moagi said. Because De Beers has its clients, the minister cautioned that reducing the quantum of carats that have been going to De Beers clients immediately could have a negative effect on the market in the absence of any binding contracts with ODC. “ODC has its clients as well,” he said. “So it is in the realisation that we need to ensure that the market doesn’t get jittery and will sustain the business of diamond trading. These are the gives and takes of any negotiation.” The point is that that the government should find itself sitting with a pile of goods. “If you have a stockpile and where there is abundance, it will affect the pricing of diamonds,” he explained. “We don’t want anybody holding pricing in that sense. The preparative nature must be to the point.” Contract sales and spot sales De Beers has built loyalty with Sighholders who have been coming to Botswana over decades. As the minister noted, ODC will generate its own clients so that apart from the traditional auction sales, the parastatal can also have contract sales and spot sales. “It’s good to have contract sales so that we are assured that any time our diamonds will be bought because you have a binding contract with those people,” he said, adding that with auction sales, suitors “can come to your sight, view your goods and decide to go away without buying while you have cash flow issues to deal with”. Moagi emphasised that with contract and spot sales, anyone allocated goods is compelled and mandated to buy those goods. “You are forced to buy those to make sure that there is no ambiguity of goods sitting there and stockpiles being created,” he said. Beneficiation criteria According to the minister, a part of the agreement is that it will be subject to satisfying certain objectives in the beneficiation criteria. As Moagi detailed the beneficiation criteria, he explained that should the objectives not be achieved by De Beers, extension of sales agreements will be harmed. “It means De Beers will not be able to sell if they can’t satisfy some of these agreements,” he said. “But we will be able to sell our own way though our own channels.” Non-compete clause to be removed Key among issues he highlighted was a non-compete clause in the agreement. The government was adamant and unflinching that it cannot have its ODC allocations and be controlled as to how to sell them. He said they need to create maximum value for such diamonds. “We negotiated that this be removed so that we are not restricted to engage anybody that we want to engage in the diamond business,” Moagi said, noting that De Beers has its own price book. “How do we know that there are better values elsewhere if we are reliant on just the De Beers price book?” He pointed out that this was one of the areas that the government really wanted to sort out for betterment of value through ODC. Profit share ratio Under the previous agreement, the profit share was on the basis of a ratio of 81:19 for the government and De Beers respectively. As the Minister Moagi explained, Botswana considered this flawed because in there it includes taxes and royalties which should not be combined with profit that is due to the government. “Any business pays taxes if it is the law,” he said. “Those must be over and above the profit that shareholders get out of that. There is little forgetfulness in terms of how we have been contributing to capex in the same split. So you tell me, who has been getting a raw deal?” Special stones Another milestone is in agreed terms for special diamonds. According to the minister, the position of Botswana is that whenever that special diamond is discovered, the government and De Beers will jointly find the person to cut and polish that stone. “We don’t want anybody to damage our stones and we lose value,” he said. “It will not be chosen by De Beers alone but will be a joint decision-making so that we both take accountability for that stone and get revenues out of that.” Marketing spend Regarding synthetics, Moagi said the government is aware that the lab grown diamonds threaten natural diamonds. That being the case, the government will have a joint defence strategy against the synthetics. The government plans to pump money into its marketing so that it can sell its natural diamonds and tell the Botswana story. To that end, there will be a marketing committee to make sure that Botswana develops marketing skills so that the critical territory “doesn’t become a forte of De Beers alone”. Development of technology But what about innovations and technology? Minister Moagi noted how any disruption is propelled by technology nowadays, saying the government will not be using dated technology from the shelves. Instead, he said, the government wants its own young people to be part and parcel of development of technology. “We want an innovation academy to be established by De Beers,” he stated. “We want IT support systems which will be set up here by De Beers. Audit and geometric facilities will be set up here by De Beers. There is no way we can have the hub of the business here and the technology that supports it that sitting elsewhere.” To develop and export skills Moagi wants Botswana to pride itself beyond just diamonds but aims to export the skills to other countries where they are needed. “You’d be surprised how many countries have diamonds but don’t have the skills,” he noted. “We will come with our upstream skills to the downstream and help these countries. That is a knowledge-based economy; an export-led economy. We would like Batswana to derive wealth out of these diamonds.” De Beers will be expected to set up a jewellery manufacturing facility, a vocational training institute and grading labs and to establish diamond entrepreneurship and talent programmes. Moagi said there is 350 skills set for immediate attention in areas that include pricing, valuation, grading and marketing. “All of these things talk to the skills we need to impart on Batswana so that they grow beyond being just workers,” said the minister. “They can set up their own facilities assisted through the likes of the development fund, for instance. There will be a push from the government to ensure that pension funds and all other institutions that can fund these assist Batswana. ODC will be available to give them the goods that they want to use for their businesses.” [/ihc-hide-content]

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