Acid test for 54-year old marriage

President Mokgweetsi Masisi’s remarks in his home village of Moshupa on Sunday have set the diamond world buzzing, as they hinted for the first time that the 54-year “marriage” between government and De Beers may not be as rosy as has been assumed.

“Support me and the minister and the Cabinet in that these diamonds, the revenues coming back to the country must be better not meagre like they are,” he said at a ruling party political rally.

“Support us because this is the first time we are doing this and we are facing a giant of a company, not a small one.

“It’s the first time it has been shaken like this. These are our diamonds and we want a larger share for us, but through negotiations.

“If it gets difficult and talks fail, we will have to say let’s go our separate ways.”

At its heart, the sales agreement between De Beers and the Government of Botswana governs the conditions around the sale of diamonds from

Debswana through the De Beers process. Essentially, since the joint venture agreement kicked off in 1969, government has provided the land, the mineral resources and the manpower, while De Beers has provided the technical and technological skills to explore, run the mines and find buyers for the diamonds.

The last such talks, which were concluded in September 2011, delivered by far the best deal for Botswana, with the migration of multibillion US dollar diamond activities from London to Gaborone and the establishment of a 15% allocation for the ODC, allowing government to independently find a market and the related valuation for rough diamonds produced by Debswana.

Negotiations for the latest deal began in 2018, with both sides appointing five-member teams to work on their heads of agreement. The current agreement expired in September 2020 and has been extended several times, initially because of the pandemic and later without clear explanations by either party. The next agreed deadline is June 2023 and from the most recent revelations, tensions appear to be rising between the two sides.

The closely-guarded De Beers/Government of Botswana sales deal is one of the global diamond industry’s most valuable covenants and delays in finalising the talks have unnerved a broad ecosystem that includes contractors, sightholders, factories, retailers, financiers and others.

In essence, Botswana is the world’s second largest producer of rough diamonds by volume and value. The production and sale of these diamonds is governed by the sales agreement, and with the precious stones providing the backbone of both budget revenues and foreign currency receipts, the deal is of paramount importance to the country.

A marriage, a secret

In their public statements on the sales deal, both De Beers and government use the “marriage” analogy, an appropriate parallel as the two sides have endured the fluctuations of the diamond market over the decades, the changes of corporate and political leadership and growing sophistication of Botswana’s development aspirations.

In 2018, before negotiations for the latest deal began, Masisi spoke of a “marriage” between De Beers and Botswana and described the negotiations as a “renewal of vows”. At the time, De Beers group CEO, Bruce Cleaver, who left the position earlier this month, said the diamond giant “couldn’t wish for a better partner” and said the relationship would be “around for another 50 years”.

But the exact nature of the relationship between De Beers and government, as contained in the sales agreement is so secret that even the Auditor General has tried and failed to gain access to the pact. Both government and De Beers say the secrecy is due to the fact that the agreement contains sensitive commercial terms and forecasts that need to be protected in an industry where pricing of stones depends on a large number of variables.

The result is that outside of the ten negotiators who have been hammering out the terms of the new deal since 2018, and their superiors in government, no one directly knows what each party is pursuing or even what the previous agreements provided for.

What’s known is that the first point for the negotiations is for both sides to draft and agree on heads of agreement, which essentially are what the issues the negotiations will focus on or simply the agenda for the talks.

The process involves extensive consultation with shareholders on both sides, drafting and re-drafting before the actual horse-trading begins.

It is also known that the local negotiating team, officially called the Minerals Policy Committee, comprises the Bank of Botswana governor, Permanent Secretary to the President, Attorney General and Finance Ministry permanent secretary, amongst others.

A statement, a demand

Masisi’s remarks in Moshupa therefore mark a rare peak into the sales deal negotiations. However, even prior to this, the President had given broad indications of what Botswana was seeking from the latest agreement.

“We need to move further up the pipeline to jewellery manufacturing and retail,” the president said at the Diamond Conference held in November 2018.

“Participation at these upmarket levels of the pipeline, however small, will go a long way in promoting the development of Gaborone as a diamond city and Botswana as the number one diamond destination.”

The country’s leverage in the negotiations has somewhat declined since the 2011 deal as the Debswana mines have gotten older and the extraction processes more expensive. De Beers has directly or indirectly carried the lion’s share of the costs of major expansions at Debswana such as Cut 8, with a budget of P24 billion, or Cut 9, which is ongoing with a budget of P16 billion.

Both “Cuts” pale in comparison to the mammoth P65 billion underground project planned for Jwaneng, which will produce the world’s largest underground diamond. The massive project will involve 360 kilometres of tunnels scraping the earth’s insides for the precious stones at Jwaneng and take the iconic mine to its end, somewhere around 2054.

Still, the mines have more than paid back the investment made into them, continuing to contribute more than two thirds of De Beers’ global annual output and frequently dishing out “gifts” such as Okavango Blue, one of the largest blue diamonds discovered in history.

Through the expansions and the underground project, De Beers and government will postpone the inevitable sunset at Debswana. However, Masisi’s dream, as he has stated, is to ensure that starting with the current deal on the table, more sustainable value from diamonds is retained in the country.

This will be achieved even if it means taking other more willing parties on board, the President made clear on Sunday.

While Masisi spoke of getting a fairer and larger revenue share from the De Beers’ partnership, he did not specify in what areas he wanted this to take place. From available records, the current revenue split at Debswana is 80:20 in favour of government versus De Beers. Highly placed sources within the Minerals Ministry have previously said government believed De Beers “could continue to exist comfortably and profitably at a split of 97:3.”

From available information, it would also appear that while Botswana is pushing for an increase in this revenue split, it is primarily eyeing increased production allocations from Debswana to the ODC, the state-owned diamond trader. At present, ODC is entitled to purchase up to 25% of Debswana’s supply, which it independently markets through online auctions and, since last year, through the Dubai Multi-Commodities Centre.

Masisi hinted as much recently during a press briefing with Swiss president, Alain Berset.

The president’s hopes for a foothold in the diamond downstream could be realised by gaining a larger share for ODC and finalising a partnership with HP Antwerp and Lucara. The two entities sealed their own arrangement where HB Antwerp is purchasing diamonds from Karowe Mine based on their value as polished stones, rather than the standard practice of paying for rough product. According to HB Antwerp that has resulted in 40% higher diamond royalties to the Botswana government over the past two years.

Masisi has visited the Antwerp diamond community and HB Antwerp in particular, meeting with the company’s top executives and sealing agreements on training of Batswana.

“We believe there is enormous scalable potential for the profit-sharing model that Botswana and HB Antwerp are pioneering,” he said in a meeting with HB Antwerp officials on the sidelines of the UN General Assembly last September.

“The way that extractive industries interact with African governments has to fundamentally change, and Botswana is excited to be working with HB Antwerp to realise a more transparent and sustainable way of working for the global diamond supply chain.

“We believe that this collaboration can pave the way for greater shared economic development across the African continent.”

In Moshupa on Sunday, Masisi hinted at the HB Antwerp/Lucara link.

“We are in talks and the agreements will be done, talking to another company so that we take those diamonds and value add them and sell them with the company as jewellery and finished products.”

A test, an opportunity

While Masisi said the life-long partners could part ways should an agreement not be forthcoming, the intricacies of actually making the break are complex.

One challenge lies in the fact that the mines which are the source of the value being negotiated, are run on leases that only expire in 2029. Kicking De Beers out would require a reformulation of Debswana and its assets, which include the mining licences, which in turn have proven resources running into millions of carats. It’s also unclear what would happen, in terms of the law, to the mining licences currently held by Debswana in the event that government and De Beers stop being partners.

One possibility is that government could offer to buy De Beers out of Debswana, but this would involve national budget-ruining numbers, although government did previously government buy De Beers’ out of Morupule Coal and has been in control for several years. Another option would be to bring in a technical partner with pockets as deep as De Beers and a balance sheet that will support a P65 billion expansion and other billions budgeted for expansions.

“It’s also unclear how the intellectual property De Beers has developed and invested specifically for its mines in Botswana over the decades, would be treated in a breakdown between the two,” an analyst following the latest development says.

“This includes the possibly proprietary technology being used at the tailings treatment plants at Letlhakane and Jwaneng, which have the potential to produce nearly two million carats a year.”

The analyst points out that what may seem as insurmountable challenges to breaking away from De Beers, could possibly be resolved through recourse to clauses in the top secret deal.

“The trouble is you may think it’s impossible to break away, while actually the 2011 deal may contain clauses that specify what should be done when there are irreconcilable differences.

“The trouble, of course, is that no one knows what’s in the agreement,” the analyst said.

The latest developments are a far cry from the hope that the talks first kicked off with. At the time, then Minerals minister, Eric Molale told Mmegi that parting ways with De Beers was impossible.

“As partners in this industry, it would shock the world if we were to part; the diamond industry would never be the same again,” he said at a 2018 media briefing at which he sat side by side with Cleaver.

“We need each other in this journey and we shall remain steadfast as the two parties for a win-win situation.”

The coming months will define the 54-year old marriage’s future and with it, the outcomes for the local economy and its citizens.

“I can tell Batswana that ‘please do not lose patience’, although we know that people can become impatient,” Molale’s successor, Lefoko Moagi told Mmegi late last month.

“Over the many years that we have been together as government and De Beers, we have learnt and understand each other.”