Botswana Takes the Next Step

Botswana, along with its diamond-dependent economy, finds itself on the brink. After years of planning and negotiations, Botswana’s capital city of Gaborone is about to assume the position of the world’s premier rough distribution location. That new role is due to the imminent relocation of the De Beers Diamond Trading Company (DTC) from London to Gaborone, as well as the Botswana government’s planned launch of its own rough diamond sales.

The timing could not be better. Botswana urgently needs to diversify its economy away from diamond mining. It was a question of now-or-never to ensure the country’s long-term economic sustainability. Despite its current rank as the world’s largest producer of rough diamonds, those diamond resources are limited, making development of downstream diamond activities imperative to Botswana’s long-term future — its life after diamond mining.

“The real long-term question is whether the cutting and polishing industry can sustain itself,” says Keith Jefferis, managing director of Econsult Botswana, a private economic and development consultancy, and former deputy governor of the Bank of Botswana. “It’s one thing to get the diamond-cutting factories here when you are a major rough producer; it’s another to keep them here when the resource runs out.”

Debswana, the local diamond-mining joint venture between the government and De Beers, recognizes its resource limitations. Chief Executive Officer (CEO) Jim Gowans estimates that the company’s four mines have about 20 years of life left in them. He points out that while Debswana intends to ramp up production from the approximately 24 million carats expected in 2012 to stabilize at approximately 29 million carats per year over the next 15 years, output would come exclusively from the current portfolio of mines. “We’re not so much about growth,” Gowans says. “Most of our investments have been to extend the life of the mines we already operate.”

THE REAL POTENTIAL IS DOWNSTREAM

Botswana’s growth is, therefore, expected to be driven downstream. With 16 diamond factories in operation and five additional plants being established, Botswana’s “diamond hub” diversification program is readying to move beyond the cutting and polishing stage. Jacob Thamage, the diamond hub coordinator, explains that the diversification strategy hinges on four areas, namely: the promotion of cutting and polishing, establishing rough trading in the country, the development of a jewelry manufacturing industry and the establishment of services that support the diamond industry.

The Botswana government, which has a 15 percent stake in De Beers and an option to increase that to 25 percent following Anglo American’s buyout of the Oppenheimer family in November 2011, has been trying to move this program forward for some time now. Its efforts succeeded with the government’s signing of a ten-year supply agreement with De Beers in September 2011 that outlined DTC’s move from London and the prospective launch of the Botswana state-run rough sales. “This agreement, and the tangible outcomes it will deliver, will enable Botswana to achieve its aspiration to be a major diamond center engaged in all aspects of the diamond business,” says Ponatshego Kedikilwe, Botswana minister of minerals, energy and water resources. For De Beers, the benefit for agreeing to the move was a secure supply of rough for the next ten years.

The historic deal — after all, diamond rough sales have been conducted in London since the very first sights in 1934 — will transfer DTC’s aggregation and sorting activities and sales to international clients to Gaborone by the end of 2013. A company has been registered in Botswana, currently under the name De Beers Aggregation Company, to incorporate DTC’s international business that will take place there. Discussions are underway to change the company name to reflect the full extent of its operations beyond just aggregation.

The structure of DTC’s activities in Botswana will therefore be split between the newly formed company overseeing the international operation and DTC Botswana, which will concentrate on its core function of sorting and valuing production from Debswana. DTC Botswana, which, like Debswana, is a 50-50 joint venture between De Beers and the Botswana government, will therefore be servicing both its parent companies — DTC and the government. Eventually, it will also supply the state-owned Okavango Diamond Trading Company with its rough allotment.

Both DTC’s international unit and DTC Botswana will operate from the DTC Botswana building in Gaborone, and much of the current construction work underway there involves refurbishing the building and making the necessary infrastructure and logistical adjustments to accommodate the two companies. The three-story structure, which was opened in 2007, has a capacity to handle 50 million carats of diamonds. Until now, it has processed less than half of that amount because only Debswana production has been sorted at the building and then shipped to London. Starting in October 2012, all of De Beers rough production will be flowing through Gaborone.

A PLATFORM FOR TRADING

Debswana

Okavango was set up in March 2012 following the 2011 agreement between DTC and the Botswana government to make available a portion of Debswana’s production for sale independent of DTC. According to the agreement, the government’s share of Debswana’s production, 10 percent of which was available retroactively to January 2011, will increase by 1 percent per year until it stabilizes at 15 percent, which is anticipated in 2016. If the government — through Okavango — declines to take its entitlement, as it has until now, DTC has the first right of refusal to buy those goods. 

Given current production levels and future projections, Okavango is expected to have between 3 million and 4 million carats per year available for local sales. The goods will be supplied by Debswana in a ten-sight cycle to mirror the one used by the DTC. Significantly, the sales will mark the first time that Debswana goods are sold in a nonaggregated format — that is, not mixed with De Beers production from other centers in South Africa, Namibia and Canada — which Thamage recognizes as an opportunity to sell purely Botswana branded diamonds for the first time.

Thamage, who also serves as the nonexecutive chairman of Okavango, acknowledges that the planned launch of rough sales is behind schedule. The government had envisaged starting at the beginning of 2012. But at press time, the company was still in the process of appointing a CEO to head the management team who will design the sales strategy for the company. “We are open to all options and no sales method has been set up yet,” Thamage says. “But we would be disappointed if sales did not commence by the end of 2012.”

Paul Rowley, acting CEO of DTC Botswana, notes that his company still needs to determine how Okavango’s Debswana entitlement will be handed over since the supply cannot reflect DTC boxes or selling assortments due to laws regarding competition, given that there is a potential overlap between the DTC and Okavango operations. “Now that the government has established its trading organization, we will form a workshop and working group to determine how to hand over the goods at DTC Botswana,” he says.

THE BOTSWANA BOURSE

Regardless of the method of sales decided upon, the country is gearing up for its inevitable launch. In May, the Diamond Technology Park (DTP), a private initiative of South African Diamond Corporation (SAFDICO), completed construction of the second phase of development at the park, a three-story bourse building that includes a trading platform with 12 viewing rooms for tenders and auctions.

DTC Botswana diamond sorter in Gaborone.

Moses reports plans are being made to accommodate demand for additional office space with a new high-rise building located next to the bourse building. DTP has 130,000 square feet of land available for expansion, and occupancy of the proposed phase-three building is expected to start around the beginning of 2013. “Our business model is to grow with the industry and make sure that we are aligned with the government’s aspirations to transform the country into a leading diamond trading center,” she says.

DTC’S CONTINENTAL SHIFT

The industry is betting that such growth will come because the government sales will incentivize more of the diamond industry to come to Botswana to buy rough and do business. And the DTC’s shift of its aggregation and selling and distribution operations from London to Gaborone also will bring more dealers and sightholders to the country.

By the end of the transition process, approximately 80 London-based DTC employees will have relocated with their families, and hundreds of diamantaires are expected to travel to Botswana for each DTC sight. Rowley, who is overseeing the move, notes that DTC is on track to complete the move by the end of 2013, when the so-called “London sight” will take place in Gaborone for the first time.

Until then, DTC is moving in stages. Rowley explains that whatever currently operates out of DTC’s London offices will eventually operate out of Gaborone, except for DTC’s research and development and pricing functions.

By August 2012, the quality-assurance team, consisting of about 20 individuals, will have relocated, and they will be followed by the aggregation team of about 20 people in preparation for the October 2012 sight, which is scheduled to be the first with goods aggregated in Botswana.

From the date of that first Botswana aggregated sight, until the entire transition is completed more than a year later, the sight boxes will essentially be created in Gaborone and forwarded to the U.K. for distribution to the 66 London sightholders and two Canadian sightholders. The appropriate boxes will be sent directly from Gaborone to Johannesburg for the ten South African sightholders, to Windhoek, the capital of Namibia, for the 13 DTC Namibia sightholders, with the remainder staying in Gaborone for DTC Botswana’s 21 sightholders.

The behind-the-scenes work, or, as Rowley puts it, “the number crunching and instructions on how to create the boxes,” will be sent via IT networks from October until the rest of the planning and logistics staff are in place in Gaborone, which is expected in the first half of 2013. The final group to relocate will be the sales team — as well as DTC CEO Varda Shine — and they will be on location when the “London sight” is launched in Gaborone around November-December 2013.

RESTRUCTURING

The approximately 80 DTC London employees have committed to moving to Gaborone with three-to-five-year contracts, after which they will be nationalized if they stay on, or their jobs will be localized, as is expected to be the case in most instances. DTC will initially hire another 40 local Botswana citizens to bring the full employee count to 120. That is in addition to approximately 430 people, mostly local, currently employed by DTC Botswana.

“Over time, there will be shifts in those dynamics, but for now, we want to make sure that we move a business that is operational and that we have a seamless transition,” Rowley says. “That’s why it’s so important that we bring the skills over from London, where appropriate, because we don’t want any hiccups in the process.”

REAPING THE BENEFITS

By itself, the additional volume of goods will benefit Botswana’s economy, and Thamage estimates that the value of the country’s annual diamond exports will rise from around $4 billion to above $7 billion. But the real economic benefits will not be immediate. Given the country’s high unemployment rate of around 18 percent, and its small population size of approximately 2 million, the additional exports are not expected to give a major boost to job creation.

“It will have a positive impact but it’s very difficult to quantify,” says Jefferis. “The broader impact of the sights moving here will depend on whether the sightholders themselves physically come, how often, how long they stay and if they spend more than the minimal time required here.”

Jefferis projects that the main beneficiaries will be the tourism and retail industries. Potentially, he observes, 500 people will be traveling to Botswana every month, staying at the local hotels and eating at the city’s restaurants. And, as the industry grows, so, too, will demand for related ancillary services needed to conduct diamond business. Already, banks, brokers, freight services and packaging companies have set up offices in Gaborone.

Rowley agrees, and stresses that the benefits of DTC’s relocation are not just about the number of diamond jobs, but about what those jobs will create beyond the industry. “It’s about ensuring beneficiation beyond diamonds and what it will attract in a broader economic sense — tourism, the hotel industry, the excitement and commerce that comes with it,” he says. “Really, the opportunities for Botswana are what this is all about — how we move into diversification and what our economy looks like beyond diamonds — that is the catalyst.”

Article from the Rapaport Magazine - July 2012. To subscribe click here.