De Beers prospects blemished after Botswana cuts new diamond deal

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After four years of tense negotiations, the world’s biggest diamond miner and the largest producing country by value struck a landmark deal last month aimed at guaranteeing supply of the precious stones to the world’s jewellers and retailers for years to come.

The 10-year sales agreement and 25-year licence awarded to De Beers to mine in Botswana keeps alive a 54-year-old partnership. But critics say the new terms, which are much less favourable for the company, will ultimately backfire on the African nation.

President Mokgweetsi Masisi waged a populist campaign against De Beers with an eye to next year’s elections, pushing it into handing the country a bigger share of output in a further blow to the company’s one-time monopoly and continuing stewardship role in the $16.5bn industry.

“The deal is not good for De Beers, the industry and even Botswana in the long term,” said Richard Chetwode, an independent diamond sector consultant.

The previous agreement struck in 2011 was widely seen as one of the fairest in the mining industry, with Botswana receiving more than 80 per cent of the value of the country’s diamond output when tax, dividends and royalties paid by De Beers were taken into account.

The new deal gives Botswana more of the rough stones mined from its land, with the country’s former 25 per cent share of output initially rising to 30 per cent, then 40 per cent in five years and 50 per cent before the deal expires in 2033.

Some observers warn this will leave the miner with less cash to pump into marketing, seen as vital for sales and the health of the diamond industry, exacerbating the slide in earnings already expected from the deal.

Morgan Stanley analysts predict the arrangement will shave off $100mn a year initially, rising to $200mn, or 15 per cent, of De Beers’ forecast average annual core earnings of $1.3bn over the next 10 years.

Other analysts are reserving judgment until more details are provided by De Beers, which since 2012 has been 85 per cent owned by Anglo American.

Al Cook, appointed as De Beers chief executive five months ago, stressed the deal’s merits, insisting it would allow the company to lead the diamond industry for another 50 years, if not 100.

As recently as the start of the century De Beers controlled about 80 of rough diamond distribution but that has fallen to 37 per cent as Russia’s Alrosa — now a target of US sanctions — grew to become an industry giant, according to Edahn Golan, an industry analyst.

“We knew from the very beginning that there would be no win for De Beers without a win for Botswana,” Cook said. “This agreement in principle absolutely meets those ambitions.”

However, he admitted the company needed to diversify away from the African nation that supplies 70 per cent of the group’s diamonds, saying De Beers must be “across multiple countries”, highlighting exploration campaigns for new deposits in Canada, South Africa and Angola.

Kieron Hodgson, analyst at Panmure Gordon, said an important merit of the deal was avoiding the huge disruption to global diamond supply that would have come if the parties had not reached an agreement.

“They’re Botswana’s diamonds. De Beers is merely a renter,” he said, while acknowledging that “if the state takes a higher percentage of the overall wealth generated, then it can clearly be negative for some stakeholders”.

Some warn that any drop in marketing spend from De Beers could hit sales and income for the entire sector as well as for Botswana, especially when natural diamonds are under threat from lab-grown stones. The company’s postwar advertising campaign “A Diamond is Forever” is credited with almost single-handedly creating a multibillion-dollar market.

Income for Botswana, which holds a 15 per cent equity stake in De Beers, could also fall because of lower dividend payments if sales drop.

Diamonds have helped Botswana, unlike many of its poorer neighbours, climb into the ranks of middle-income countries with average earnings per person of between $3.11 and $37.93 a day.

The country is even targeting high-income status above that upper threshold around the mid-2030s when it starts underground mining at Jwaneng, the richest diamond mine in the world whose open-pit operations are close to exhaustion, as part of a multibillion-dollar investment plan that will extend the project’s life beyond 2050.

Money generated by De Beers will also be used by Botswana to kick-start a diamonds development fund, which will help finance investment in other sectors of the economy in order to create jobs, essential in a country with an unemployment rate of about 20 per cent.

A key challenge for Botswana will be hitting selling targets.

In its previous sales deal with De Beers in 2011, it established the state-owned Okavango Diamond Company to sell its allocation of diamonds to international buyers through auctions. But more than a decade after its inception, ODC is still struggling to sell large volumes.

James Campbell, an ex-De Beers employee who runs London-listed exploration company Botswana Diamonds, expects ODC to move away from auctions and create a sales system similar to De Beers to boost sales. This involves selling allotments to a coveted list of De Beers’ customers, known as “sightholders”, at 10 annual events.

The small initial rise in the share of production that Botswana has secured reflects that “the state-owned entity does not have capacity to take 50 per cent right away”, said Sheila Khama, a former chief executive of De Beers Botswana and an adviser on natural resources policy.

There are also concerns that Botswana will later want to review the terms of the agreement and demand control over sales above the agreed 50 per cent of production before its expiry in 10 years’ time.

“The last deal in 2011 was seen as a big win for Botswana at the time,” said Hans Merket, a diamond specialist at the International Peace Information Service. “Yet 10 years later it was being called a bad deal.”