Tuesday, December 7, 2010

Botswana reaches diamond industry milestone

Botswana has long been the darling of the diamond industry, not only as the largest-producing country, but also as a model for beneficiation in Africa.
Last week, the country reached another milestone in its efforts to diversify its diamond-related activity and economy: the first sale of rough outside the De Beers - Debswana framework began in Gaborone.

Botswana quite naturally wants to gain as much leverage as possible from its diamonds and in that vein, the tender, by Firestone Diamonds, constitutes a significant event.

It marks another objective achieved in advancing the country's diamond hub programme and another step in developing Gaborone as an international trading centre.

Firestone is separately tendering 2,500 carats of rough from its BK11 mine in Botswana and an additional 12, 000 carats brought in from its Liqhobong mine in Lesotho.

The Botswana government granted the company its BK11 mining licence on the condition that the company tenders the goods in the country - a policy it has implemented with other developing mines, particularly Lucara Diamonds' AK6 mine, which is expected to come online late next year.

As a result of this policy, Firestone's tender will bring new international buyers to Gaborone, whereas before, only the 16 Diamond Trading Company Botswana (DTCB) sightholders were given licences to buy rough in the country.

For the first time, buyers will now be able to buy rough directly from a Botswana mine as De Beers-Debswana production is aggregated with other De Beers' goods before being distributed locally.

Botswana's diamond story unfolded with the first discovery in 1967, transforming the country from an agricultural, rural-based economy to one whose resource wealth has delivered consistent growth, barring the recession of 2009.

However, the country's mines are old and tired with a naturally limited lifespan. De Beers has invested heavily in the Jwaneng mine, the jewel in its portfolio, as it expects the Cut-8 project to extend the mine's life beyond 2017 by about eight years and 95 million carats.

The new mines currently being developed are nowhere near the scale of Jwaneng in either size or quality. Given these apparently diminishing long-term mining resources, it is therefore vital for Botswana to diversify its economy while the going is good. So far, the country has played its cards the right way.

Botswana launched its cutting and polishing industry in 2007 with the creation of DTCB to supply goods to the local sightholders. One of those sightholders, the South African Diamond Corporation (SAFDICO), subsequently developed the Diamond Technology Park, which opened in January 2009, thus centralising the industry's activities in Gaborone. Two weeks ago, SAFDICO announced its plans to develop a diamond-trading facility as Phase Two of the project, which is expected to be operational in the second half of 2011.

The Firestone tender could be viewed as the introduction to that platform while in the long-term, Botswana envisions that independent companies, located elsewhere in Southern Africa, will sell their rough in Gaborone. One can expect the government, considered investor-friendly and very accessible to the industry, to be at the forefront of the initiative. There are a number of hurdles that still need to be ironed out, however.

Doing business in Botswana must be made more appealing for foreign investors through relieving the double taxation on international companies operating there and developing better infrastructure, including Internet networks.

The country also has to convince the industry that Botswana is more than a niche location, which provides a competitive advantage for companies that got in early and are able to capitalise on the security of the rough supply now being offered there.

Most importantly, to build a sustainable trading platform, the country needs to ensure that a stronger volume of rough is made available to outsiders so that a steady stream of buyers comes through the technology park.

Activity breeds interest and it will take a lot more in the initial stages than just Firestone's production to prove to buyers that trading rough in Botswana is a worthwhile proposition. For this, the government will be looking at De Beers. The two entities are expected to soon announce a new marketing agreement pertaining to production from Debswana, in which they are equal partners, as their current contract expires at the end of 2010.

As discussions continue, it is expected that the government, which also owns 15 percent of De Beers, will try to exert its influence on other shareholders to allow the company to sell goods independently through the prospective trading platform.

While the idea may meet with some resistance from Anglo-American and De Beers' chairman, Nicky Oppenheimer, they have also already demonstrated their willingness to offer De Beers goods on the open market by allowing access to Diamdel online auctions beginning in April of next year.

Whether the coalition will go one step further to sell rough through Botswana's new trading platform remains to be seen.

What is certain is that while Firestone's rough tender gives Botswana reason to celebrate, recruiting De Beers will give the country's government the boost it needs to diversify the economy and ease some industry skepticism.
The tender may well represent a milestone for the country, but it is yet to prove significant for the global diamond sector. To achieve that, both industry and country still depend on De Beers.

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