Wednesday, May 22, 2024

Masisi to ditch De Beers for Lucara and HB Antwerp?

Botswana is expected to divert most of its large diamonds from De Beers and sell them through the Okavango Diamond Company (ODC) to the Lucara Diamonds and HB Antwerp partnership under the new sales agreement which is still on the drawing board.

The Lucara/ HB Antwerp proposition is a hard act to follow for De Beers. It promises a more than 45% increase in Botswana’s diamond revenue, thousands of jobs for Batswana and a huge boost to the country’s GDP.

And President Mokgweetsi Masisi has already been won over. As negotiations between De Beers and Botswana Government seemed to be hitting the skids, President Masisi indicated earlier this year that he was inclined towards the Lucara Diamonds and HB Antwerp proposition.

Speaking at a Gala dinner in Gaborone in April, Masisi stated that, “he no longer wished to operate under any model other than the one set up by Lucara Diamonds and HB Antwerp.”

HB Antwerp and Lucara Diamond Corp surprised the diamond world in 2020 when they entered into a unique supply agreement. This agreement saw HB Antwerp formally commit to purchasing all of Lucara Diamond’s +10.8 carat rough diamonds from the Karowe mine in Botswana.  Both parties recently  announced a new long-term partnership agreement.  For a minimum period of 24 months, HB Antwerp will purchase all of Lucara Diamond’s +10.8 carat rough diamonds. Under the terms of this supply agreement, the purchase price paid for each 10.8 carat rough diamond is based on the estimated polished outcome, determined through state-of-the-art scanning and planning technology, with a true up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing. More than a supply agreement, this deal structurally embeds a more transparent and sustainable way of working in the diamond value chain. For the first time, different partners of the supply chain would be fully aligned, sharing complete data and information throughout the process from mine to consumer. This is a break from the De Beers’ opaque system in which Botswana has to operate on blind trust in an organisation that does most of its dealings in tax haves, far from prying eyes.

Sunday Standard investigations have turned up a revenue bolthole in the current sales agreement between De Beers and Botswana which has allowed De Beers to make billions of pula by undervaluing Debswana’s “special stones”, “exceptional stones” and “very exceptional stones” on export and adjusting their value once they have left Botswana.

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.

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 realised 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 recently 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.

And these are the stones Lucara and HB Antwerp are targeting.

Masisi’s announcement earlier this year, that he was inclined towards the Lucara Diamonds and HB Antwerp business model came in the wake of an apparent courtship between Lucara Diamonds and Botswana President which has been in the works from as far back as 2019. This was when Masisi announced that with Lucara Diamond, Botswana has a friend whom she can trust as the country moves from the middle-income trap to becoming one with high income countries. The president was speaking  during the  naming ceremony for the 1,758 carat diamond – Sewelo-  the largest diamond ever discovered in Botswana.

The relationship seemed to have bloomed  when  President Masisi, government officials, Lucara officals, Louis Vuitton officials and ODC officials held a behind closed door meeting during the Dubai Expo in March this year.

Lucara, HB Antwerp and Louis Vuitton better known for fine leather than fine jewelry partnered over the 1,758-carat Sewelô sale and marketing. HB and Lucara  have already signed a co-operation agreement with the French luxury conglomerate Louis Vuitton, that commits to buy some of the polished stones originating from their partnership.

Immediately after the Dubai secret meeting Lucara Diamonds Botswana  Managing Director Botswana Naseem Lahri flew out with Botswana’s Minister of Trade, Mmusi Kgafelo to Antwerp for a meeting with HB Antwerp officials.

HB Antwerp, which two years ago was a relatively unknown is now  Belgium’s largest diamond manufacturer and seems determined to shake Botswana’s diamond industry.

In a recent interview HB Antwerp’s founder Rafael Papisme pointed to Botswana, “where HB Antwerp is focused.” He pointed out that the population there is just under 2.4 million. He says approximately 800,000 people in India work in the diamond industry, mostly polishing, which is “not even a fraction” of the country’s GDP. But shifting even 25 percent of that labor to Botswana could offer a significant economic boom to the country where the average age is just 24 years old. This could help the younger population afford school and housing, and offer support for young families, he says.

There have been efforts before, like keeping auctions in the country where diamonds are mined, which Botswana began to require about seven years ago. It was aimed at boosting the local economy. The theory was traders would come to the country, stay in hotels, eat, explore, and support the local economy. But Papismedov says it failed to live up to expectations, with people coming for a single night, buying their diamonds, and leaving.

Through its deal with Lucara, HB Antwerp has transitioned  Botswana’s participating mines away from the auction, and increased the market price per diamond by more than 45 percent, he says. Part of the reason is provenance. There’s no longer a question where the diamonds come from in HB Antwerp’s scenario. Consumers get peace of mind, and there’s value in that. Papismedov sees it as unavoidable for any government to drop the old system.

“We’re living in a world today where it’s very difficult for governments to justify unjustifiable actions. So it will be almost impossible for them to choose a path that goes against logic,” he says. “And if HB Antwerp is able to demonstrate there’s a much higher multiple returning to Botswana, to the people of Botswana, and to the mines, then other governments are only incentivized to try to replicate that approach.”

While De Beers is uncertain of its future in Botswana, HB Antwerp is already making long term plans in the country. In February, HB Antwerp announced a five-year partnership with the Botswana International University of Science and Technology, offering scholarships and innovations to help create job opportunities in the region. Last year, it partnered with the incubator WomHub to recruit Botswana engineering students. Until December 2021, De Beers cited Covid-19 as the reason for repeated delays to its talks with Botswana over a new sales deal. The old agreement was supposed to expire at the end of 2020. De Beers and the government extended the existing arrangement for a year. With the pandemic’s logistical challenges remaining, they deferred it again for another six months.

The miner is no longer using the virus as an explanation. On June 29, De Beers announced yet another extension, this time through to June 2023. The company referred only to “positive progress” toward a new deal during the first half and said the one-year postponement would “enable the finalization of the ongoing discussions.”

The Covid-19 explanation was likely more than an excuse. Some aspects of the agreement can only be negotiated face-to-face, sources say. That was almost impossible while travel restrictions were in place.

Yet flights between the UK and Gaborone have been renewed.

“Obviously, now Covid-19 can’t be the reason,” a source said on condition of anonymity. “But it could be a reason that things got so delayed [and as a result they] need more time.”


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