Deal done, focus shifts to hard graft at ODC

State-owned diamond trader, the Okavango Diamond Company (ODC), recently saw the weight of its responsibilities transform from independently selling a percentage of Debswana’s production, to carrying the collective aspirations of the country for greater value accretion in the global diamond industry.

Over the 11 years of its existence, the ODC has felt the troughs and crests of the diamond industry, battling through the recession of 2015, COVID-19 knock of 2020 and the exceptional rebound of 2021 and 2022. The impact on the ODC of the diamond market’s fluctuations, have increased proportionate to its growing Debswana allocation, a situation American hip-hop culture colourfully summarises as “more money, more problems”.

Established under the landmark 2011 sales agreement between government and De Beers, the ODC represented Botswana’s first attempts to independently sell diamonds outside the century-old system established by industry juggernaut, De Beers.

The state trader’s allocation grew from an initial 10 percent to 15% by 2015, then jumped to 25% in 2020 after the 2011 agreement expired and was extended pending talks. In a few months’ time, when the agreement in principle reached on June 30 between De Beers and government is formalised, ODC’s allocation from Debswana will immediately move to 30%, then rise to 50% over the next ten years.

ODC’s room for failure and its impact on the broader economy, have grown over those years, from the initial role as a “taste” of independent diamond marketing, to the current position as effectively the world’s fifth biggest diamond “producer” by volume and seventh by value, according to Mmegi calculations based on the recently released Kimberley Process statistics for 2022.

With the new deal, the phased increase in allocation places the ODC front and centre of the country’s ambitions to carve out a significant position in the global diamond industry’s mid and downstream. The ODC, now carrying a larger responsibility to deliver value on the country’s primary economic commodity, also now has a greater role to play in financing the post-diamond economic transformation being pursued by government and its private sector partners.

Judging by statements made recently by its shareholder, the state diamond trader does not have room to rest on its laurels, despite the step-up in Debswana’s allocation expected to stretch over ten years.

“Our hope is that after five years, we will be at 40% allocation and then over ten years, we reach 50%,” Minerals and Energy minister, Lefoko Moagi, told journalists recently.

He explained that the phased approach had been agreed upon in the recent negotiations as a way to avoid sudden market disruption. Debswana accounts for about two-thirds of De Beers’ annual production and a sudden reduction in allocation would have been unsettling for the market.

“Any abrupt change affects the market whether negative or positive.

“De Beers has its clients and if you immediately reduce the number of carats that have been going to De Beers, these clients are not assured of supply from the ODC because they don’t have binding contracts with the ODC. ‘It’s about the realisation that we have to make sure the market does not get jittery and that the business of diamond trading is sustained.”

Does the ODC have what it takes?Various players in the diamond industry have whispered over the years about the ODC’s ability to fully take up its 15% and subsequently its 25% allocation from Debswana. The challenge for the state diamond trader is to take up its allocation and sell this onwards at a premium on a consistent basis, in a market where fortunes swing from one month to the next and where broader prices are determined by titans such as De Beers.

ODC has traditionally used the spot auction method for its diamonds, which, while providing flexibility for price discovery, also means there will be times when few bidders pitch up and when those that do, bid below expectations.

Previously responding to enquiries on the ODC’s ability to take up its full allocation, senior officials said that the only challenge in recent years had come from the pandemic. When it was at 15%, the allocation was fully taken up, but the increase to 25% coincided with the outbreak of COVID-19.

“We did not enjoy that additional allocation in 2020,” ODC CEO, Mmetla Masire, told an FNBB budget breakfast last February.

“Now we are fully opened at ODC, with all staff working full time from the office and taking weekly COVID-19 tests.

“We had a change of strategy in 2021 where because our customers could not come to us in 2021, we had to take the product to them, introducing viewings in Antwerp and Dubai.”

Analysts have noted gaps between the ODC’s allocation and its reported sales figures. Number crunchers at diamond consultancy, Rapaport, estimate that in 2022, the state diamond trader was about 2.8 million carats shy of its full allocation.

However, generally data coming out of ODC indicates stronger sales over the years, moving from topline revenues of about $440.3 million in 2019, slumping to $206.2 million during COVID-19, and then rebounding to $963 million in 2021 and $1.1 billion last year.

Figures for this year will be keenly watched as they represent a form of normalisation after the pandemic slump and the exceptional rebound of 2021 and 2022. The latter two years were powered by both the reopening of the global economy and the COVID stimulus packages in the United States, a market accounting for more than half of global diamond sales.

The challenge before ODC under the new deal, revolves around commitments to purchase that are part of the agreement in principle between government and De Beers. The commitment to purchase clause means that ODC is bound to purchase its allocation from the DTCB, as much as De Beers also has to take up its allocation.

Conceivably such a situation means that even when the ODC faces trouble getting buyers for its diamonds or the client it secures refuse to pay top dollar, it will be still required to purchase its 30% allotment from Debswana.

Such a dilemma would cripple the cash flow of most other businesses, but the ODC, however, is government-backed, not only materially but also through the political will to ensure that the country reaps the full benefit of the concessions secured in the latest deal.

Still the support is not a blank cheque.

“The infrastructure, the skills must be there and they must hit the ground running,” Moagi said.

“We want to make sure that we are not going to sit there with a pile of goods and a stockpile, which would affect the price of goods in the market.

“We want those goods to go to market.”

For Moagi, who represents government as the ODC’s sole shareholder, the added responsibility on the company’s shoulders requires structural changes to its model of doing business.

“Traditionally, we were beholden to these spot auctions, but these people can come and look at the goods and if they are not happy, they walk away,” he said.

“There are other options such as contract sales and spot sales.

“The ODC strategy is to put some of this allocation on contract sales where buyers will be bound to buy the goods.”

Securing long-term contracts with buyers has been in the ODC’s plans since at least 2014, as a way of ensuring fixed supply commitments for its diamonds, similar to the sightholder arrangements that De Beers has. The rising allocation from Debswana now means those plans can no longer be delayed.

Besides initiating these contracts, the ODC is expected to secure a supply arrangement with HB Antwerp, which will purchase a proportion of stones at polished price calculations rather than as a rough. The deal is still being negotiated, but is modelled along the arrangement HB has with Lucara.

In the next 10 years, the ODC is also expected to set aside a portion of its allocation to citizen investors to capacitate them in the diamond industry.

Moagi also revealed that as the shareholder, government, through its negotiators, were able to secure key policy tweaks in the new agreement with De Beers that will help the ODC in its new role.

“We had to negotiate the non-compete clause that we used to have under the old agreement because we were adamant that we cannot have our ODC allocation, then be tied on how to sell it and create value,” he said.

“We negotiated that this should be removed so that we can engage anyone we want in the diamond business.

“De Beers has a price book that we have been using, but how do we know there’s no better value elsewhere?

“That’s an area that we really wanted to sort out.”

The ODC itself is quite confident of its shifting role. Where its shareholder has been busy making policy tweaks to the De Beers agreement in order to capacitate the diamond trader, ODC has also been busy preparing itself.

Speaking ahead of the finalisation of the government/De Beers deal last month, Masire said the company was ready to take on any increased allocation and construction was ongoing on a bigger headquarters to accommodate increased levels of business. “You will recall that in 2020 our allocation from the agreement moved from 15 to 25% and yes, we responded accordingly,” he told local journalists in Las Vegas, USA.

“We believe that we are adaptable and as long as we have reasonable notice, we will be able to accommodate.

“Obviously if it’s a large allocation that’s coming our way, our current facilities are too small to handle, so it depends how much of the increase we are going to be getting, if we get anything.

“In terms of our new facility, we will be moving to our new headquarters which will give us a bigger platform, bigger sorting rooms, more viewing rooms and we are hoping to move in there by April next year.”

Besides the brick and mortar preparedness, the ODC also recently signed an agreement with Rapaport and the Gemological Institute of America (GIA) that gives local stones an exclusive rating for ethical origin as well as premium listing on the world’s biggest diamond trading platform.

Under the partnership, ODC’s diamonds will be assigned a ‘green star’ rating identifying their origin and potentially securing a premium in a market that is increasingly demanding diamond traceability and the highest ethical sourcing standards.

“We believe there will be a premium and in terms of our tender auctions, the people bidding for our diamonds will want to acquire our diamonds because they know they will qualify for the green star rating.

“Hopefully that will result in a very competitive environment,” Masire told Mmegi in Las Vegas last month.

The green star partnership, the ODC believes, will help distinguish its stones as “Botswana-only” in the market, as De Beers’ own production contains product from Botswana, South Africa, Namibia and Canada. Distinguishing, and better branding the ODC’s output is necessary as its allocation builds and as its presence in the global market grows in the next ten years.

This week, the ODC also received ringing endorsement from the Diamond Trading Company Botswana, the government/De Beers joint venture that sorts and values diamonds from Debswana before selling these to the ODC and De Beers.

The DTCB has just two clients; De Beers and the ODC and over the 17 years of its operations, it has watched the state diamond trader during the troughs and crests, through the increases in allocations and towards the new horizons it is reaching for.

“Without any doubt, ODC do more than it is doing, yes, absolutely yes,” DTCB managing director, Sedireng Serumola told Mmegi this week.

“What is recognised and what our principals have been saying, is that it will go through phases.

“But there is no doubt in my mind that once they have signed the agreement, and it jumps to 30%, to 35%, or to 40%, yes ODC can do that.”

For Moagi, the deal and the latest developments are just the beginning of the potential for ODC. Government is already planning for the next stage of value accretion for local diamonds.

“As part of the ODC’s strategy, we are aware that it is better to sell these goods when they have been beneficiated,” he told Mmegi.

“The polishers are here and they will also set up their jewellery manufacturing and even go into the retail end.

“You see, the whole price shifts on these finished goods.

“Look at Surat, look at Antwerp, look at Tel Aviv? Where are their mines?

“They take rough, they make it polished, they make jewellery and they make a killing.

“We can’t be sitting on rough.

“That’s our value proposition and that’s our value chain development.”