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Botswana’s Decision
Editorial
Jun 15, 2012 6:51 AM
By Avi Krawitz
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RAPAPORT... There’s a dark horse lurking in the shadows of the diamond industry in the form of the Botswana government. Not only is it about to become a major rough diamond supplier in its own right – that is, independent of the Diamond Trading Company (DTC) – but it may soon gain more of a say at De Beers.
The government has an option to raise its stake in De Beers from 15 percent to 25 percent when Anglo American closes its buyout of the Oppenheimer family, which is expected in the third quarter. The government will therefore have to decide in the coming months whether or not to take the shares.
There are valid arguments either way regarding whether it should proceed with the deal. De Beers has long been a cash cow for the country, and given Botswana’s vast but limited diamond resources, the government should possibly milk as much out of the industry as it can, while it can.
The government is well aware of its confines. It has successfully embarked on a “diamond hub” program to ease its reliance on the mining sector and bring additional diamond-related activity to the country. Today, 21 sightholders either operate or are setting up cutting facilities in Botswana. The DTC is in the process of transferring its London sights to Gaborone and numerous ancillary services, such as banks, freight companies, brokers and laboratories, have likewise set up shop there (see forthcoming July edition of the Rapaport Magazine for an extensive review of Botswana’s burgeoning industry).
The next phase of diversification to introduce rough trading is imminent, even if it is undergoing some growing pains and delays. The newly formed Okavango Diamond Trading Company is still negotiating a contract to appoint a chief executive officer (CEO) and the company is expected to launch sales by the end of the year, it hopes, more than a year late.
Still, diversification is well underway and attention now turns to the Anglo deal. In November, the mining giant agreed to acquire the Oppenheimers’ 40 percent stake in De Beers for $5.1 billion, thus raising its own stake to 85 percent. As part of the agreement, the government has the right to increase its interest in De Beers from 15 percent to 25 percent, in which case Anglo’s stake would be 75 percent.
Little has been revealed about the terms of the option agreement. One assumes the government is being offered the same price for which Anglo bought the Oppenheimer stake. It would therefore have to pay about $1.3 billion for the extra 10 percent.
Des Kilalea, an analyst at RBC Capital Markets, suggested to Rapaport News that the government’s consideration therefore would probably be purely budgetary. Does the government recognize De Beers as a good way to spend $1.3 billion or would those funds be better spent elsewhere?
In his budget speech given in February, O.K. Matambo, Botswana’s minister of finance and development planning, acknowledged the constrained budget under which he operates and outlined government’s main concerns for the year.
“Government priorities for the 2012-13 budget continue to focus on service delivery and maintenance of existing infrastructure, while completing on-going projects, such as energy generation, dams, roads and self-liquidating projects with high rates of return,” he said. “These priority areas are expected to improve efficiency, create employment opportunities and foster private sector growth.”
Frankly speaking, the prospective De Beers investment would not contribute to employment creation, nor would it encourage private sector growth. On the contrary, it would raise the already inflated public sector holdings. The treasury will also be reluctant to raise its debt position to fund the acquisition in the current economic environment.
Given the weak global economy, the government may also consider whether increasing its exposure to diamonds is such a good idea. Matambo warned that if projections for flat growth in the volume of diamond sales in 2012 hold true – those projections may have become even bleaker since February – the consequences may be dire for the local economy.
“Should the global economy experience a double-dip recession, and given that the country is still in debt, quick and full recovery in the domestic economy might prove difficult, in which case we all have to be prepared to make sacrifices,” he said.
Of course, the converse holds true; an upturn would prove a windfall for the budget and the government will surely have the proverbial De Beers long-term supply-shortage-rising-demand curve scenario in mind when making the decision.
Botswana has a complicated ownership structure in De Beers. In addition to the 15 percent stake in the holding company, it is also an equal joint-venture partner with De Beers in Debswana, the local diamond mining company, and in DTC Botswana, the local rough distribution arm. The structure dictates that an estimated 80 cents of every dollar worth of diamonds sold by De Beers is accrued by the government.
As a result, the extra revenue it will gain via the additional 10 percent is difficult to quantify from the outside. Kilalea notes that the shares would help diversify the government’s holding in mining operations outside of Botswana, given De Beers South African, Namibian and Canadian operations. The deal would also raise its exposure to the company’s retail and industrial synthetics programs.
However, an equally pertinent question revolves around the government’s relationship with Anglo. While Nicky Oppenheimer was considered the De Beers go-to guy for the government, his family’s divestment presents a new, more corporate dynamic for Botswana – one which may throw the government out of its comfort zone.
Ultimately, with or without the 10 percent, the government will be the minority partner in the business. Should it feel that it can exert more influence on the decision-making process with more shares, this may tilt its decision in favor of the deal.
This is unlikely, however, and the decision should not depend on this factor. As Kilalea states, the decision is likely to be a budgetary one. Essentially, the government should consider whether the long-term benefit substantiates the cost.
However, the decision should also accommodate the country’s long-term economic strategy. The government has done well to position itself to further benefit from its diamond resources. Ultimately, its hub program, and the pending developments therein, offer better prospects and more excitement to its projected role in the industry. Not that the two are mutually exclusive. But whether the Anglo deal will provide additional benefit to the strategy seems improbable.
The writer can be contacted at avi@diamonds.net.
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags:
Avi Krawitz, Botswana, De Beers, Debswana, Diamond Trading Company, DTC, Oppenheimer, Rapaport
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