Project We Want More offers more questions than answers

In this opinion article, policy adviser and former CEO of De Beers Botswana Sheila Khama writes about the implications of the heads of agreement signed by the Botswana government and diamond miner De Beers for the renewal of the sale of Debswana’s diamonds and the renewal of certain mining licences.

On June 30, Botswana and De Beers jointly issued a heads of agreement announcing the conclusion of negotiations for the renewal of the sale of Debswana diamonds and the renewal of the mining licences for deposits on the books of the 50:50 Debswana joint venture owned by the two parties.

The joint press statement reported two main negotiation outcomes and, though the details were very sketchy, the announcement stated that an in-principle agreement had been reached to extend the sales agreement for Debswana’s rough diamond production by a further ten years until 2033.

In addition, and consistent with Botswana’s mining law, principle agreement had also been reached to extend the Debswana mining licences for 25 years. This is the maximum allowable by law and means that the licences are valid up to 2054. Each party hailed the agreements as transformational.

By July 1, additional details were provided. At a press conference, Botswana officials confirmed that, among others, the supply of diamonds from the Debswana Mines to the State-owned company Okavango Diamond Company (ODC) would increase immediately from 25% to 30% of the Debswana run of mine which is expressed in dollar value of carats produced.

Further that ODC share of production would be increase incrementally such that by the end of the ten-year validity period of the sales agreement the supply would reach 50 %. Further that a Diamond Development Fund & Skills Transfer as well as Botswana diamonds provenance initiative were part of the high-level agreements the details of which were still being thrashed out. On the other hand, Botswana and De Beers have included ‘non-compete clause’ presumably to avoid a price war between ODC and De Beers Group sightholders sales.

SALES AGREEMENT OR PRODUCTION SHARING AGREEMENT?

In a press statement by the company, De Beers Group added even more colour to the way forward as relates to the sales agreement stating, that increasing the share of supply to ODC, would be “ensuring a sustainable transition path for both partners”. The Government of the Republic of Botswana and De Beers Group announce a new partnership for a new era – De Beers Group.

The statement raises the question of what the parties are transitioning towards. In the absence of details, it appears to be towards moving away from the 1969 single channel marketing and sales arrangement towards a Production Sharing Agreement (PSA) instead. What the announcements interestingly did not refer to was the impact of the changes on the profit sharing which was left at an 81:19 ration to Government.

Between future investments in mine development and reduction in share of production and therefore a fall in sales commission to De Beers, it is hard to see how the profit split can remain at this level without disidentifying De Beers in the long run.

For a number of reasons, the extension of the mining license to Debswana was to be expected. Firstly, failure to extend it would disrupt operations especially as relates to mine development and continuity of future production. It would also have implication on the very future of the Debswana partnership. Finally, Botswana law gives De Beers right of first refusal over the mining of deposits as the company made the discoveries.

Therefore, the announcements suggest that though Botswana and De Beers are going separate ways when it comes to the sale of the Debswana production, they remain partners in mining, sorting and valuing.

In addition to any impacts on the profit split, what is missing in the announcement is an explanation why the increase in ODC’s supply is incremental and not immediate. There are several plausible explanations the most likely one being availability of free cashflow from Debswana to both shareholders to each be able to contribute to financing of the Jwaneng underground mine development which will have to happen before 2033. It may also be intended to enable De Beers to synchronize the reduced supply with its three yearly  sightholders contracts some of which affect clients with factories in Botswana and due for renewal end of 2023.

On the other hand, given that ODC would double its volumes, would presumably need to carry out some measures to ensure operational readiness. If so, this might suggest Botswana put the horse before the cart.

TRANSFORMATIONAL?
In the new dispensation, the 50% equity in Debswana appears to have been interpreted to mean not only equal entitlement to dividends, but equal share of run of mine production. Seen this way, the sales arrangements are indeed transformational, and Botswana enters the big league of rough diamond marketing. However, this raises questions about Botswana’s potential future role in the promotion of rough diamonds.

For instance, will ODC contribute towards the marketing and advertising budget, or will the State entity continue to rely on De Beers to drive price and demand? More importantly, what will the Government do with its share to improve beneficiation given that currently ODC auctions its share anywhere in the world and not to Botswana factories?

Otherwise, how doe Botswana create the much needed jobs? Equally, given that less revenue will be received through De Beers sightholder contracts which guarantee revenue every sales cycle, how will the Government ensure stability of national revenue given the less predictable auctions outcomes? Indeed, how will the government mitigate the risk of a fall in public revenue during poor market conditions which often leads to low auction turnout?

Hopefully Botswana’s leaders have plan B, the details of which will be made public in due course.

DE BEERS MARKET FOOTPRINT?
The elephant in the room is what the 30% leading to 50% share to ODC does to De Beers revenue and market footprint? The company’s current market share is estimated at 34% and will drop further. The question is how will the company adjust to the new environment? The company has limited options including scaling down to become a smaller but more profitable company as was envisioned in the 2006 Supplier of Choice strategy.

This might mean cutting down on investment in advertising, R&D in mining and sorting and valuing. On the other hand, subject to sanctions against Russia by EU and US, one wonders whether an opportunity is legally available for De Beers to close the gap with a sales agreement with Alrosa or whether EU anti-trust laws rule this out. Importantly, given that the Sales Agreement with Debswana expires in 2033, the logical question is what will follow post 2033? Will Botswana turn the tables on De Beers and become the main agent for the sale of Debswana goods?

Undoubtedly, investment analysts in the city of London and Anglo shareholders will be pondering these questions and only time will tell how the issues are addressed but for now, the information gap is glaringly missing in its absence. Unless one assumes there is no tipping point.

SECURITY OF TENURE
According to the Annual Survey of Mining Companies, 2022 | Fraser Institute, Botswana was rated top in Africa and on par with others elsewhere including Western Australia for attractiveness as a destination for mineral exploration based on regulatory effectiveness. Botswana’s legendary regulatory consistency has manifest once again proving that on application of the law and therefore guarantee of investor security of tenure, Botswana is indeed a worthy mining destination. The mining licenses for the four lease areas only expire in 2029.

Pragmatically and to pave the way for investment in the Jwaneng resource extension related mine development projects by the shareholders of Debswana, the decision to renew the license has been brought forward by six years. The subtlety cannot be lost on De Beers and other investors that Botswana remains open for business. This, operational efficiencies, and the highly profitable nature of the Jwaneng deposit must give comfort to Anglo despite the reduction in share of production.

ECONOMIC DIVERSIFICATION
In its press statement, De Beers stated as part of the arrangements is that the parties plan on ‘accelerating Botswana’s economic diversification through the creation of a multibillion-pula Diamonds for Development Fund, with an upfront investment by De Beers of one-billion pula (about $75-million) and further contributions over the next ten years that could total up to ten-billion pula.

The statement is not explicit but lack of mention of any contribution by the State must be interpreted to mean there is no contribution by the government. This significant financial commitment in a country in which the 2022 overall development budget of 16.43-billion pula for 2022/23 was a 11.4% year-on-year increase from a 2021/22 budget.

What is not clear is how the fund will be managed. Also, the statement begs the question of how a private company steeped in diamonds succeeds in diversifying Botswana’s economy where one administration after another has struggled to diversify Botswana’s economy five decades? It will be interesting to understand the scope and project management and governance framework.

A FIFTY YEAR OLD TEMPLATE?
If the reader follows the history of deals between Botswana and De Beers, a pattern might emerge. Though deliverables from each sales agreement vary, they nevertheless follow a pattern.  In a nutshell, each renewal of both the mining licenses and sales agreements since 1969 been associated with an add-on which one might call ‘cost of doing business’ for De Beers that are similar to the Pula Diamonds for Development Fund.

For instance, in 1969, De Beers funded civil infrastructure and hospital construction, operational costs that to this day serve as referrals for patients from government primary healthcare clinic.

For the 1978 first Jwaneng mine licence, in addition to a profit split of  GRB = 75%  De Beers = 25% De Beers paid for the design and construction the Orapa House diamond sorting facility and leased to Debswana for P1.00 per year till 2008. For the renewal of the same lease in 2004, and in addition to a profit split of GRB =80, 8%  De Beers =19, 2%,  De Beers financed and equipped the US$82 sorting and valuing facility to house a new JV DTC Botswana. The latest agreements follow a very similar pattern.

NONE BUT OURSELVES
Fifty years is long time, and Botswana and De Beers have done well. Any suggestion to the contrary flies in the face of reason. The country owes much to its leaders. Sir Seretse Khamagave it nationhood through collective ownership of minerals. Sir Ketumile Masire gave the country revenue through 50% equity in Debswana. Festus Mogae set the foundation for the 38 cutting and polishing factories, acquired 15% in DBSA, established the DTCB JV and was the architect for De Beers’ relocation to Botswana. Lt. General Ian Seretse Khama gave the country ODC. Now President Masisi, has delivered 50% of Debswana production to the same State-owned entity.

As can be seen, the milestones and figures are impressive and make for a good victory lap. But one must ask what of long term? The only way to answer this question is by tracking the impacts of these deals on the economy, on the stated desired outcomes and as such the people of Botswana and her people. In the absence of the Government of Botswana having articulated the end state-vision with respect to the agreed terms from June 30, 2023, it not clear what citizens should expect and when. Importantly, one is left wondering whether the development of a country’s most valuable mineral asset is guided by periodic negotiations with a private company and not a vision?