Is the Botswana-De Beers model marriage on the rocks?

24 Mar 2023

President Mokgweetsi Masisi has threatened to ‘separate’ from the diamond giant unless Botswana gets a bigger cut of the cash.

Botswana’s President Mokgweetsi Masisi has threatened to walk away from his country’s highly successful 54-year partnership with De Beers if the South African giant doesn’t give Botswana a bigger slice of the large diamond revenues.

Masisi is playing a high-stakes game, many investors say. He could be jeopardising a long and mutually beneficial partnership for short-term gains in next year’s general elections. Others note that the ruling Botswana Democratic Party (BDP), though not wildly popular, is unlikely to lose as the opposition is so divided.

Botswana has been negotiating with De Beers for five years to improve the terms of what is widely regarded as one of Africa’s most successful public-private partnerships. But suddenly last month, Masisi told a BDP rally he would leave the deal if negotiations were unfavourable. “These are our diamonds, and we want a larger share for us,” Masisi said. “If it gets difficult and talks fail, we will have to say, ‘Let’s go our separate ways’.”

These remarks rattled investors – not only in diamonds but also other commodities. They fear Botswana is falling prey to the “resource nationalism” they believe plagued many other African countries, such as Tanzania and Zambia. Even the country’s minerals and energy minister, Lefoko Moagi, said in January: “Anything that would trouble diamonds would make the market jittery.”

The Botswana-De Beers deal is regarded as one of Africa’s most successful public-private partnerships

On the face of it, Botswana has negotiated a good deal over the years. It has a 50:50 joint venture with De Beers called Debswana, but when taxes, royalties and dividends are added, its revenue share rises to about 81%. It also has a 15% stake in De Beers. Diamonds account for about two-thirds of Botswana’s exports and 20% of GDP.

But Botswana is apparently looking for more downstream revenues from marketing, selling and processing rough diamonds. Gems mined by Debswana were previously all sold to De Beers. A new 2011 deal allowed 10% – rising to 25% in 2016 – of Debswana’s stones to be sold to the fully Botswana state-owned Okavango Diamond Company (ODC). This enabled the country to sell those gems outside the De Beers network.

Botswana’s government is apparently pushing to increase the percentage of Debswana’s rough stones that ODC can sell. The 2011 75:25 deal was a 10-year contract that has been extended. It expires in June, creating a pressing deadline.

Read more in Daily Maverick: “Quest for World’s Biggest Diamonds Gives De Beers a Headache”

“We have learnt that the quantum of business in the rough space is very small compared to the value-added business,” Africa Confidential quotes Masisi as saying. “It’s logical that we want more.”

Masisi is reportedly also looking into accusations that De Beers has been avoiding tax due to Botswana. A report commissioned by the Botswana revenue service said De Beers had avoided about four billion pula in taxes between 2014 and 2020 by paying marketing fees and royalties to its UK division. De Beers has denied any wrongdoing.

But many analysts are concerned about Masisi’s demands. “There’s certainly merit in wanting Botswana to have a greater share in the value chain,” mining lawyer Peter Leon of Herbert Smith Freehills told ISS Today. “But it’s not clear whether allocating more would be economically beneficial to the country.” He cites a recent Botswana media report that the ODC lacks the capacity to sell even the 25% of rough gems it is now entitled to.

Anonymous analysts also believe that De Beers’ method of selling rough diamonds through a vast and rather arcane network of “sightholders” helps keep prices more stable than ODC’s use of auctions.

Seeking more gems

Africa Confidential and other industry sources speculate that Masisi might seek more gems from De Beers to sell through the Belgian large-diamond specialist HB Antwerp. The latter already sources diamonds from the independent Lucara Diamond Corporation extracted from its Karowe mine in Botswana.

While Debswana just sells its rough diamonds and moves on, HB Antwerp polishes and processes gems and passes on some of this value addition to Lucara. That arrangement seems to please Botswana, giving it a stake in the downstream value chain. And an anonymous source told ISS Today that some Botswana officials suspected De Beers wasn’t giving Botswana a big enough cut of valuable large diamonds.

Some analysts also speculate that Botswana might want to replace De Beers with international mining rivals like Britain’s Rio Tinto or Russia’s Alrosa. But Leon doubts these are real options. Rio isn’t looking at diamonds now, “and Alrosa is not an option because of the Russia-Ukraine war”. (The US is pushing for sanctions against it, some say.) “HB Antwerp is a very small and new company that has no upstream experience. I don’t think there are any credible alternatives.”

Others say De Beers is such a dominant industry player that cutting it out seems nearly impossible. For instance, Debswana owns Jwaneng in Botswana, the largest diamond mine in the world, and has raised $1.2-billion for its expansion. It plans to dig another underground shaft at Jwaneng, at almost$6-billion, Africa Confidential says. That is a huge commitment. Could anyone else match it?

Another complication is that Botswana and De Beers are separately negotiating the renewal of Debswana’s licences on its four diamond mines, which are due to expire in July 2029. Will the 54-year-old marriage survive that?

Read more in Daily Maverick: “Botswana President Sees Progress on Diamond Pact With De Beers”

Leon says Masisi’s pronouncements “do raise some alarm bells” about Botswana falling prey to the resource nationalism that bedevilled Tanzania and Zambia. “But Botswana has always been a prudent and sensible country,” noting for example that it is the Fraser Institute’s top-ranked mining jurisdiction in Africa. “Their economy is still heavily dependent on diamonds, as they have not managed to diversify as much as they had hoped.”

De Beers seems confident that the partnership will survive. “We’ve been in a marriage for a long time and we are going to continue being in a marriage for a long time,” the company’s co-chairperson, Bruce Cleaver, said recently. And Masisi recently softened his line, telling Texan investors: “It is our earnest hope that the agreement that will come will be an outcome of negotiations and signed off.”

An anonymous source suggests a compromise could be to give ODC a bigger slice of Debswana’s production to sell, perhaps negotiating a better tax agreement and tweaking the pricing of large gems. But he says the clock is ticking, and “crunch time is coming. If there’s no deal by June, then it’s divorce.” And that, everyone seems to agree, would be a disaster. DM

Peter Fabricius is a consultant at the Institute for Security Studies (ISS) Pretoria.

First published by ISS Today.

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