Saturday, June 15, 2024

Botswana/De Beers sales agreement: The Masisi Factor

The diamond sales agreement angst had already crept up on President Mokgweetsi Masisi and his dinner hosts. 

Hardly six months in office, the new president was breaking bread with an exclusive crowd of De Beers big shots and invited guests at the November 2018 De Beers annual diamond conference. Everything seemed to be humming along, then suddenly “Oh! oh!”

The Oh! oh! was an exclamation from one of the invited guests in response to a punchline in the President’s speech. To the uninitiated, Masisi’s gag line came across as a tone-deaf hostage to fortune, considering present company and the hard, tough negotiations ahead: “There is need to move further up the pipeline to jewellery manufacturing and retail”, he said.

The cheeky rallying cry, issued in the same breath with an announcement that Botswana had already assembled its team of negotiators, however, was a bold opening gambit which allowed Masisi to introduce himself to the diamond industry with a cowing panache.

Research has revealed that De Beers makes upwards of 300% more from Botswana diamonds than Botswana government mostly from jewellery manufacturing and retail.

 Masisi was laying down his plan to use the negotiations to claw back the billions of Pula Botswana is currently losing to De Beers. 

Masisi’s statement of intent came a few weeks after the Intergovernmental Forum on Mining (IGF) published a seven-page report titled Botswana: Downstream Linkages – Leveraging the negotiating position. 

The research paper lists producer selling value at 100% of original value, the value then increases to 115% at sorting and valuing stage and increases to 127% at cutting and polishing stage, at polished dealing stage the value stands at 133% and jumps to 166% at jewelry manufacturing stage, by the time it reaches retail it is as high as 320%. 

An industry source pointed out that the research was published in 2018 and that currently the value at retail stands at 500%.

The De Beers Diamond Consortium is involved in all stages from diamond production right down to retail and its business model has been to keep Botswana as a source of raw diamonds up to cutting and polishing stage.

While De Beers insisted on caping the Botswana diamond beneficiation drive at cutting and polishing Masisi indicated that he wanted to play in the major league.

Masisi could not have chosen a worse time to throw down the gauntlet. The air was already thick with tension. A shareholder collision had been building up over a super exceptional 41 carat blue diamond discovered at the Debswana Orapa Diamond Mine in May 2018, only a few weeks after Masisi was sworn in as Botswana’s fifth president. 

The silent war was playing out behind the scenes after Masisi scuppered maneuvers to have the gemstone sold through De Beers. 

The blue diamond with an estimated value of US $200 million (about P2 billion) was the first of its kind to be discovered in Botswana since independence.

The then government valuer, Greg Powell, a British national is understood to have lobbied to have the gemstone sold through De Beers.  

President Masisi however insisted that the stone should be sold through the government owned Okavango Diamond Company (ODC). 

The new president had flipped the Botswana/De Beers “Siamese twins” script and was marching to the beat of his own drummer. 

Masisi’s rebuff against De Beers was a first in the history of the partnerships and marked a shift towards closing the revenue rort pathway which is believed to have enabled the mining giant to rob Botswana out of billions of Pula annually.

The crusade by the government valuer to have the blue diamond sold through De Beers stoked speculations that the government diamond sentinel was doing the bidding for De Beers.

The task of the government diamond valuer is to certify that the parcels are sorted accurately in terms of the price list giving comfort to the Botswana government that the mine production is accurately valued – that the carats produced are exported at the values set by the Price Book”.

Concerns that Greg Powell was a De Beers Trojan Horse were not helped by an investigation which revealed how the government valuer failed to protect Botswana from losing billions of Pula in taxes due to alleged profit shifting by De Beers.

 A few weeks later Greg Powell showed up for work at Diamond Trading Company Botswana (DTCB) only to find his access card had been de-activated.
The dramatic firing of the government valuer marked a new water mark in the shareholder tension between the Botswana government and De Beers. Powell was replaced by a Botswana citizen Norman Madikwe as the post was localized highlighting the behind the scenes shareholder tug-of-war as the two partners braced for what promised to be difficult negotiations.

Some industry insiders dismissed the localization of the Government valuer’s position as more sound and fury than substance, claiming that the De Beers’ secretive Price Book was king and any government valuer has to bow to it. Diamond industry experts describe the price book as De Beers “most valuable” and best-protected “trade secret”, as it uses the metrics therein to set the value of each mine’s production.

The real test of that theory came a few months later with the discovery of a rare flawless pink diamond at Debswana’s Damtshaa mine. The Eternal Pink had the highest clarity rating of “internally faultless,” which means that no flaws are discernible at magnifications smaller than 10x magnification.

The new government valuer found himself haggling with De Beers who wanted to take the special stone at bargain basement price.

 While De Beers wanted to pay US $8 million for the stone, Madikwe pushed for the stone to be sold at its insurance value which was in the double digits. Government valuer and De Beers ended up settling for a double-digit figure less than US$20 million.

De Beers will auction the flawless fancy vivid purplish pink diamond in June for US$35 million, or US$3.3 million per carat, the highest price per carat placed on any diamond or gemstone prior to its sale, according to Sotheby’s.

This is more than 400% profit of the initial price De Beers wanted to pay before the new government valuer intervened.

The raw 23.78-carat diamond was mined by Debswana at the Damtshaa mine in 2019, and was cut and polished by diamond company Diacore’s team over a period of six months. It’s the most vivid pink diamond ever to come to market, Sotheby’s said.

For a president, eager to insure that Botswana got a fair shake from dealings with De Beers, large, special and exceptional stones like the Okavango Blue and the Eternal Pink were always going to be a problem area.

A Sunday Standard investigation revealed that a blunder in the current highly secretive sales agreement between De Beers and Botswana Government opened a revenue rort pathway enabling the mining giant to rob Botswana out of billions of Pula annually – mostly from large, special and exceptional stones. Data passed to the Sunday Standard suggests De Beers robbed Botswana out of billions of Pula when the country’s “special stones”, “exceptional stones” and “very exceptional stones” were devalued on export only to assume a higher value abroad.

The money that accrued from the price adjustment of the Debswana diamond exports’ price was all diverted to swell the De Beers bottom line.

An analysis of confidential data on rough Botswana gemstones shows an average 77, 6 percent increase in value for the stones once they leave Botswana and arrive in a foreign country — before any cutting or polishing takes place.

To address this huge price differential, the Sales Agreement entered into between Botswana and De Beers on 16th September 2011 has what is called the “40 Day Adjustment” clause under which De Beers pays Diamond Trading Company Botswana (DTCB) within 40 days 95% of the balance between the undervalued price and the price realized outside the country.

DTCB on the other hand pays Debswana 90% of the adjusted price.

The clause however excludes big stones classified under the agreement as “special stones”, “exceptional stones” and “very exceptional stones” and only covers small stones referred to as “Serie diamonds.”

An industry source told the Sunday Standard that the “special stones”, “exceptional stones” and “very exceptional stones” are the holy grail of the diamond mining industry and profits from one is often enough to change the fortunes of a mine from loss making to profitable.

For example, the blue diamond discovered by Debswana in 2018 had an estimated value of US $200 million (about P2 billion) which would account for more than 15% of the Debswana 2018 revenue of US$ 1, 25 billion.

Sometimes the run-up is even bigger. In 2016 about 269 rough gem carats originating from Botswana were re-exported from Switzerland to Laos at $16, 5 million, or more than $61 000/carat. In 2016, Swiss freeports exported parcels worth $118m to the US, averaging $84 000/carat.

An analysis of this official inter-government data shows that by the time the rough diamonds left Switzerland for other countries, they had increased in value by $27.8bn.

At least half of this multi- billion “re-export” trade in rough diamonds appears to be the same stones in different packages: Subsidiaries of companies received and repackaged diamonds into new parcels with new invoices. The data shows that the rough diamonds were re-imported and re-exported between different jurisdictions, particularly tax havens, at increasingly higher values.

Data analysis identified 17.1m carats of rough diamonds originating from Botswana from 2003 to 2012. When the stones left Botswana, they were valued at an average of $125.9/carat. When they were re-exported from foreign countries, they were valued at an average of $223.8/carat, for a total of more than $3.8bn over the period – a 77.6 percent increase in value.

The sudden increase in the value of diamonds once they leave Botswana borders is not some happenstance of market forces but the result of an elaborate scheme by De Beers to load the dice against Botswana. A Sunday Standard investigation turned up information of a secret hydrofluoric acid laboratory operated by De Beers at its head-office at the Gaborone Diamond Park. 

Housed inside the De Beers state of the art complex in Gaborone, the miniature cleaning plant is the mining company’s “dirty tricks” department that has enabled it to rig its partnership with the government of Botswana by concealing the true value of Botswana diamonds and gaming the tax man through transfer pricing.

While the devious scheme walks the thin line between fraudulent and shrewd, illegal tax evasion and legal avoidance, what makes it remarkable is its utter simplicity.

De Beers has for years been taking advantage of Botswana government’s naivety to fatten its own bottom line. The company buys Debswana rough diamonds from DTCB at bargain basement prices and then dip them in hydrofluoric acid to release their sparkle and true value.

Besides the wink wink, nod nod from a friendly government valuer, the De Beers “secret” cleaning operation offers the best explanation so far, why Botswana diamonds’value miraculously increases when they are traded between different countries after escaping Botswana’s national borders – and tax brackets. 

The Sunday Standard investigation desk joined the dots and a sinister outline emerged: That De Beers has long crossed the line between illegal tax evasion and legal avoidance. Indications are that the 77.6% increase in the value of Botswana diamonds is actually realized in Botswana between the DTCB plant in Gaborone where the gemstones are salt bathed overnight and the neighboring De Beers complex where they are cleaned further by dipping them in hydrofluoric acid. The company however exports the diamonds at DTCB throw away prices, shifting its profits out of Botswana to low-tax jurisdictions. 

The ink on Sunday Standard’s exclusive expose had hardly dried when government forced De Beers to agree to Diamond Trading Company Botswana (DTCB) cleaning its diamonds with hydrofluoric acid before selling them to De Beers and ODC. 

The story of De Beers’ bag of infinite dirty tricks caught a fresh wind earlier this year after a study commissioned by Botswana Unified Revenue Services (BURS) suggested that the mining company has been paying far less than its fair share of tax to the Botswana government by employing a variety of “accounting tricks.”

Addressing a recent political rally in Moshupa,  President Masisi charged that “If we don’t achieve a win-win situation each party will have to pack its bags and go,”  The president pointed out that
“Now we got an insight into how the diamond market works and we discovered that we had been receiving less than what we should get.
“We also discovered that our diamonds are making a lot of profit and that the (2011) agreement had not been beneficial to us. We are upping the stakes because we want a larger share [of] our diamonds. It can’t be business as usual.”

After five years of playing whack-a-mole with De Beers’ dirty tricks, President Masisi seems to be hoping to use the sales agreement to finally close all revenue rort pathways which enabled the mining giant to rob Botswana out of billions of Pula. 

For the first time in the country’s history, Botswana seems to have a chance to finally bring the diamond industry home. To get here, however, Masisi was not afraid to head into areas that his predecessors feared to tread.

With the benefit of hindsight, the diamond sales agreement negotiations are starting to resemble a gigantic game of chess, with a bold opening gambit by Masisi giving Botswana an advantage, but the game is still far from checkmate.

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