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Okavango Rough Sales Meeting Expectations
Q & A With Toby Frears - Managing Director of Okavango Diamond Company
Sep 7, 2014 8:31 AM
By Avi Krawitz
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RAPAPORT... Okavango Diamond Company (ODC) was established as a vehicle to enable the Botswana government to conduct independent rough diamond sales from a portion of production by Debswana, a mining joint venture between the government and De Beers. Toby Frears joined ODC in 2012 and oversaw the launch of the company’s sales in 2013. Having completed one year of operations, Frears discussed the company’s operations and plans with Rapaport News.
 Rapaport News: What is your background and how did you come to Okavango Diamond Company?
TF: Prior to joining ODC, I spent 22 years with De Beers, mostly in Africa and mostly in sales and marketing roles. I came to Botswana in 2007 to set up the sales function at DTC Botswana, a joint venture between De Beers and the Botswana government, which I ran for a number of years before taking over as head of operations. In 2012, the Ministry of Minerals, Energy and Water Resources asked if I would help establish their new sales channel, ODC, and I jumped at the chance. ODC is set to be a significant supplier to the industry and it’s rare that one gets an opportunity to be part of such an exciting new start up.
Rapaport News: How do you assess the company’s performance in its first year of operation?
TF: We had our pilot sale in July 2013 and our first official auction in September. The team worked hard to bring ODC to market and meet the aggressive timeline that was set. We’ve now been trading for almost a year and we’re very pleased with how our sales are performing.
Ultimately, our performance is best judged by our shareholder, the ministry, and our customers. We place great emphasis on working with our customers to ensure that we deliver a product and service that best meets their needs. The feedback that we’ve received regarding the design and consistency of our selling assortment, the efficiency and transparency of our online auction, and the facility and services that we provide has been extremely positive. I think our shareholder is happy that we are fulfilling our mandate and performing in line with expectations.
Rapaport News: Have you met your sales and pricing targets?
TF: Yes, we’ve had close to 100 percent sales of our goods, and we believe we are achieving market price. Under the sales agreement between the government and De Beers, we’re entitled to purchase 13 percent of Debswana’s run of mine production this year, rising to 14 percent next year and 15 percent from 2016.
This year, our sales are averaging around 330,000 carats per cycle for approximately $50 million to $60 million, depending on the size and make-up of the production. We publish our sales results on our website every month. We’re planning 10 sales events this year, which will give you an indication of our likely annual turnover, and our intake is set to increase next year in line with our entitlement percentage of Debswana production.
Rapaport News: How does your product differ from De Beers?
TF: We offer a very different product than De Beers in that we sell purely Botswana production, rather than an aggregated mix from different countries. We are the largest source of Botswana-only production in the market. We present our goods in a recognized market assortment and the feedback we have received from our customers on both the design of our assortment and the consistency of our presentation has been very positive.
Rapaport News: How is the supply structured?
TF: ODC is currently entitled to market 13 percent of Debswana’s run of mine production, from gem to industrial qualities and including special and exceptional stones above 10.8 carats.
ODC’s purchases from Debswana are first sorted by DTC Botswana into ODC’s own bespoke assortment, then quality assured by our technical team before we fine-tune the supply, value the goods and blend them into our selling assortments. A lot of work goes into delivering a consistent product for every sale.
Rapaport News: Are you in talks with other mining companies operating in Botswana, such as Lucara Diamond Corp and Gem Diamonds, to gain a portion of their supply?
TF: Our focus this year has been on settling the business and refining our sales proposition. That encompasses developing the next stage of our IT strategy to support our customers, embedding our processes, refining our sales assortments and building our customer base. We really want to use this year to consolidate our operations and position ODC for future growth. We are open minded and that growth could come be from either our contractual supply arrangements from Debswana or from other producers.
Rapaport News: Do you expect to gain a greater percentage of Debswana production in the long term?
TF: That is a matter for the government, but at ODC we have designed a scalable business that has the capacity to take on additional production should the opportunity arise. In terms of the supply contract, our supply from Debswana is capped at 15 percent from 2016 to 2020.
Rapaport News: Will you be moving into polished sales at some point?
TF: Our focus until now has been on launching our rough diamond auction sales. We have no current plans to diversify into polished sales, but we remain open to future growth opportunities.
Rapaport News: How are your sales structured?
TF: We hold 10 sales a year where we offer the full range of production in a single two to three hour online auction event, following viewings that take place over a two-week period at our purpose-built facility in Gaborone.
We have twelve viewing rooms and we offer each of our registered customers a full day of viewing, which means that we have the capacity to accommodate up to 120 viewing companies at each sale.
We have chosen to hold regular spot auctions at the core of our sales offering because they provide a transparent and efficient mechanism for selling goods to those that value them most, and since they achieve market price through a competitive bidding process.
We operate an ‘ascending clock auction,’ which takes place over multiple rounds and is designed to give bidders valuable market feedback during the course of the auction that allows them to make informed bidding decisions. Our auction software allows customers to participate round by round or to submit single bids, such as in a sealed bid tender, depending on their preferences. The winning bidder is the bidder who has offered the highest price for the sales lot, but under our pricing rule, they pay the price that was offered by the next highest bidder.
As is common practice in auctions, we set a reserve price for each sales lot prior to every sale. Where possible, we’ll always look to sell rather than hold goods back and therefore we would only exercise the reserve price when it’s commercially prudent to do so.
Rapaport News: Have you had goods that failed to meet the reserve price?
TF: We have had lots that failed to meet their respective reserve price and went unsold, but this rarely happens and on these occasions the goods are then re-priced and sold at the next auction. So far, our sales have been close to 100 percent.
Rapaport News: What are your plans regarding the introduction of contract sales?
TF: We recognize the value that buyers place in committed and predicted supply arrangements. It’s always been our intention to introduce some form of contract supply to complement our spot auction sales when we have sufficient volume. It’s an important decision as we want the right sales model for our business and for our customers, and we have invested a lot of time recently in looking at different contract options, forecasting our future supply and engaging with our customers.
Our customers told us that while they would like us to introduce supply contracts, the volume that we supply in those contracts must be meaningful. At the same time, we don’t want to compromise our regular spot auctions. So, at the moment we’re assessing whether we have the scale to introduce contracts and we hope to be in a position to communicate our intentions to our customers shortly.
Rapaport News: What is the registration process for buyers to participate in the auction?
TF: Any legitimate diamond company can apply to become an ODC customer through our website. We carry out the usual know-your-customer and anti-money laundering checks, as one would expect. We also ask our customers to sign a number of declarations to ensure that we are doing business with companies that share our ethical standards. We support our customers by assisting with visa applications and facilitating export documentations. We really want it to be as easy as possible for our customers to do business in Botswana. We don’t require our customers to have local partners or any form of local presence, and any purchases from ODC can be exported without duty.
Rapaport News: What is the typical profile of your customers?
TF: We have a broad and diverse customer base comprising small and large, local and international companies, manufacturers and dealers. Our sales model doesn’t discriminate and all of our customers have an equal and fair opportunity to succeed at our sales. As one might expect, we find that the majority of our sales are exported either to Belgium or directly to India.
We tend to coincide our viewing period with the local De Beers sights and so we see many sightholders at our viewings. When it comes to our actual sales, generally these seem to be pretty evenly split between sightholder entities and non-sightholders.
Rapaport News: What is the biggest challenge facing ODC moving forward?
TF: As with any diamond sales channel, our primary challenge is to attract and retain the right customer base. This is particularly important for us because we appreciate that many of our customers travel long distances to participate in our sales and so their experience in dealing with ODC has to be worthwhile. It is for this reason that we have adopted such an open and transparent sales model that customers can trust, and it’s why we place great emphasis on delivering a product and service that best meet our customers’ needs.
Rapaport News: How do you envision ODC 10 years from now?
TF: I’d like to see ODC as a leading supplier to the market, selling diverse production and with a reputation for integrity, efficiency and innovation.
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Tags:
Avi Krawitz, Rapaport News
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