Tuesday, September 29, 2020

Botswana/De Beers shareholder tension

By Kabelo Seitshiro

A muted shareholder tension is simmering between the Botswana government and De Beers over a P 2 billion super exceptional 41 carat blue diamond discovered at the Debswana Orapa Diamond Mine towards the end of 2018.

The silent war has been playing out behind the scenes since President Mokgweetsi 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) is the first of its kind to be discovered in Botswana since independence in 1966.

Over the years such kind of diamonds have fetched between $70 million and $200 million across the world, pricing them higher than the much publicized Lesedi La Rona which was sold for $53m to a London Jeweler.

The rare find has highlighted the behind the scenes shareholder tug-of-war between De Beers and the Botswana government as the two partners brace for what promises to be difficult negotiations when the current sales agreement expires September next year.

The government valuer who is a British national is understood to have lobbied to have the gemstone sold through De Beers.  The government valuer argued that selling the rare gemstone through De Beers would give Botswana mileage.

The move to have the blue diamond sold through De Beers was however thwarted by President Masisi who during his tour of the Diamond Park last year indicated that he wanted the stone sold through the government owned Okavango Diamond Company (ODC). The crusade by the government valuer to have the blue diamond sold through De Beers has stoked speculations that the government diamond sentinel may be 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”.

These concerns have not been 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.

Most of Botswana’s rough gemstone diamonds are exported to other countries to be cut, polished and made into jewellery, which raises the value exponentially.

Yet 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 ÔÇö before any cutting or polishing takes place.

That is, the diamonds’ value miraculously increases when they are traded between different countries after escaping Botswana’s national borders ÔÇö and tax brackets. The data appears to indicate use of an old trick known as profit- shifting, whereby a commodity is undervalued to reduce tax liability. But when the diamonds arrive in a tax-free jurisdiction such as the “freeports” of Switzerland, their value increases by up to 200 percent. (A freeport is a free-trade zone where products can be stored duty-free while awaiting re-export.)

De Beers refunds government the money it lost as a result of undervaluing the diamonds but not the tax on the additional amount because it accrues outside Botswana’s tax regime.

This suggests that the Botswana government is losing significant tax revenues if the diamonds are being undervalued on export only to assume a higher value abroad.

The value of the gems varies greatly depending on which country imports them from Botswana.

For example, Switzerland shows a pattern of importing gemstones before exporting them at much higher values, without having added value to the stones by cutting or polishing them.

Between 2003 and 2016, confidential data shows the value of diamonds originating in Botswana and traded between Switzerland and other countries totalled $67,4bn. This figure includes rough diamonds directly exported from Botswana by Debswana.

Records show that these companies pay an average of $519/ carat for rough stones that are then re-exported at $1 644/carat ÔÇö a 216 percent increase in value.

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 ÔÇô a 77.6 percent increase in value.

Although De Beers refunds Botswana the money the country looses as a result of undervaluing the diamonds, this does not extend to special stones like the blue stones. As a result, if the blue diamond were given to De Beers and the mining giant undervalued it; Botswana would not be able to recover the amount it lost as a result of the undervaluing because its agreement with De Beers does not cover special stones.

DTCB spokesperson Kago Mmopi would not discuss the blue diamond with the Sunday Standard and referred all enquiries to Okavango Diamond Company.

Botswana is expected to expected to push for greater access to and influence over the top secret price book and more leverage on value added charges.

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.

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