Latest market observation depicts lukewarm local bourse with less action amid hangover from the seemingly unpredictable and uncertain polls. A general notion is that foreign investors are not yet ready or treading carefully not to pop out money and pour it into the local market yet.
The local market has been dogged by illiquidity and this year of elections has been referred by market specialist as “worse than other years,” prompting belief that the issue of former President breaking ranks with his successor before joining opposition could spell the highest political uncertainty for this country, a huge scare for foreign investors.
The market has been shaking at a small movement days before the general elections, just as it has since the beginning of 2019. Stockbroker Motswedi Securities recently said, when opening the week (this after coming from the polls) the market wasted no time getting into the groove of things. The stockbroker further said as volumes traded amounted to 12.6 million shares with a market value of P16.1 million – of which traded across 10 stocks on the domestic main board.
“Leading the trades was Letshego, claiming the bulk of session's liquidity with 10.25 million shares in the name changing ownership, with a worth P8.2 million. The stock's demand has been increasing exponentially, since the price stepped down to where it is now, i.e. its lowest valuation in its history of being listed on the exchange,” said Motswedi.
On Monday only a slight price movement was registered by Barclays bank whose stock climbed 4 thebe in the session to P5.45/share as 71,728 shares moved across the board as investors booked profits. However, the Barclays price rise has no links to the elections aftermath, the slight share price upswing was merely the investors’ reaction to the company’s rise in profits for its current financial year and payment of a net dividend of approximately 12.94 thebe per share.
According to market statistics, just a week coming from elections and last week’s public holidays, 12,591,498 traded on Monday while a turnover was P16 090 407. Just a day before the elections, Motswedi Securities said the market was thrumming with activity jumping from trading 2 121 448 shares on the second week of October to 4 140 699 shares.
A day before the national polls (22 October 2019), a general observation by Motswedi Securities was that, “investors were trying to make up for the lost next couple of days as the national elections commence. The local equity market traded volumes just above 4.14mn, to get to a turnover of just under P13.83, moving across 14 stocks.”
After the polls, this week, shares in the Botswana Stock Exchange increased its trading by three times, hopping from 4 140 699 to 12,591,498. This could mean investor confidence is slowly being recovered by the local bourse. But market experts remain skeptical of the local market saying it continues to be “slow and inefficient” and illiquid. A lot of experts did not expect the local market to shake much after the elections because it has always been synonymous with illiquidity and it is a very small market.
When making an analysis on African capital markets titled ‘Driving liquidity in African capital markets’, the Botswana Stock Exchange (BSE) Chief Executive Officer Thapelo Tsheole, highlighted limited foreign investor participation as one of the factors contributing to the continent’s susceptibility to illiquidity.
Stockbrokers Botswana recent market commentary, which was done out of the research carried out a day before the elections is that; the Domestic Company Index was flat at 7526.85 points, a similar for the Foreign Company Index which was also flat closing at 1564.54 points. In the elections week, Stockbrokers Botswana said the short trading week saw turnover coming in at P20 845 806 as 6 262 147 shares traded. In that week, the largest contributors to turnover were FNBB (39 percent), Sechaba (25 percent) and Barclays (11 percent).
A previous week before the elections Stockbrokers Botswana said, the Domestic Company Index ticked up by 0.16 percent to close the week at 7472.45. The Foreign Company Index has remained flat for weeks as it closed at 1564.54 points. BTCL was the biggest gainer this week, up 4 thebe to close at 105 thebe. Total turnover for the week amounted to P14 961 093 as 1 846 272 securities exchanged hands. For the ET, NewGold held the lion’s share of turnover with 82 percent. BTCL’s share was 4 percent while Letshego’s was 3 percent.
How the markets fared in a quarter (Q3) towards elections
According to Stockbrokers Botswana’s latest released research on market performance during a quarter before election, Quarter 3(Q3) the Domestic Company Index depreciated albeit at a slower rate, losing 2.12 percent compared to a contraction of 3.34 percent in Q2. ‘’The Domestic Company Index reached a 12-month low of 7397.77 points in August, however, it recovered over September to close Q3 at 7460.95 points,” said Stockbrokers Botswana Q3 research.
According to the stockbroker, the downward movement of the domestic index can mainly be attributed to Letshego which lost 59 thebe (41 percent) during the quarter. Stanchart was the second biggest loser after it lost 13 thebe (12 percent). “Conversely, majority of counters on the Domestic Company Index recorded prices which either increases or no changes at all. Only 7 counters experienced downward price movements during the quarter. The biggest gainer was Letlole which climbed up 16 percent.’’
Also in the third quarter, BTCL joined the top performers for the first time since 2017, appreciating 13 percent to close the quarter at 101 thebe. In the ETF board NewPlat (+10.9 percent) and NewGold (+10.2 percent) made the top 5 gainers list once again, as seen in Q1 and Q2. Cresta gained 9.1% to reach 132 thebe, which is its highest price since 2011.
According to Stockbrokers Botswana, Total turnover amounted to P458.2 million (Q2 2019: BWP582.2 million) off of an exchange of 130.9 million securities (Q2 2019: 101.5 million securities). The lion’s share of these figures was held by Far Property Company (FPC), following a related party transaction which accounted for 50 percent of total turnover and 70 percent of total volume, said Stockbrokers Botswana. Just like what observers have been saying about this elections year, StockBorkers Botswana said low trading can only suggest that the market remained starved of liquidity in the third quarter, the period of the polls.
In Q3, Stockbrokers said, the market capitalization declined 6 percent to BWP38.5 billion (Q2 2019: BWP40.8 billion). This was weighed down by losses in Letshego and Stanchart, as well as the Wilderness delisting which occurred in the beginning of July. Stockbrokers Botswana said, weighted P/E Ratio was marginally lower at 11.2x (Q2 2019: 11.3x) while dividend yield was 5.5 percent from 5.3 percent in the last quarter.
Moody’s vindicated or is still early?
While other think tanks predicted BDP to win with a slight margins and elections to be chaotic, the US Moody’s before the polls said Botswana will not head to any political instability. Moodys said it expects limited election-related policy uncertainty in Botswana, Namibia, Senegal and Ghana, “given their track records of political stability.”
While there was no uproar after the election results were released, most in the opposition front are skeptic of how elections were run. Some allege the elections were flawed and unfair, accusing the elections body to have fraudulently swayed election win to the ruling BDP. A court application against the results is said to be looming, raising much political uncertainty hence further investor fright which has been worse since the beginning of this year. This might dent Moody’s trust on Botswana which calls this country politically stable, this is if things go out of control.
BDP won this year’s elections by 51 percent and this contradicts Africa’s leading bank by assets Standard Bank’s prediction which said while BDP will win, it will be without an outright majority. The bank said an ongoing feud between the current President and his predecessor has wrought political unrest in the country. However the bank was still hopeful of Botswana even before this month’s polls saying: “We view the current political turmoil as temporary; we expect no significant deviation from the current economic policy, even if the BDP lost the election.”
Most surveys and researches predicted that the 2014 elections in which BDP’s 46 percent vote will shrink even further. BDP got a popular vote of 53.3 percent in 2009. According to Afrobarometer survey conducted in July/August 2019, BDP would enjoy a 2-to-1 lead over the opposition UDC 44 percent to 22 percent. Many have been caught by surprise with this year’s elections because many predicted lower than 46 percent lead by BDP, given the damage caused by its former leader Ian Khama. Some even predicted a “hung parliament.” That is why the election results remain debatable and doubtful to some while few accepted results.
Lucara Diamond Corporation, 100% owners of Karowe Diamond mine, has released its results for the first quarter of 2021 ending March 31, 2021.
Figures contained in the report depict strong financial and operational performance for the quarter. Revenue for the three months period jumped by 56% to $53.1 million (approximately P540 million) or $579 per carat sold in Q1 2021.
This includes diamonds sold through a combination of regular tenders, Clara, and through HB Antwerp (HB) under the supply agreement announced in July 2020.
This 56% increase in revenue comes after a slow Q1 2020 which was characterized by intensifying COVID pandemic. Lucara then announced it would hold on and suspend sale of its large stones until the market normalizes.
During the quarter total operating cash costs of $29.24 per tonne processed was incurred, this was 7% lower than Q1 2020. Adjusted EBITDA closed the quarter at $22.2 million, marking a return to higher levels of operating margin.
The company recorded net income of $3.4 million during Q1 2021 (earnings per share of $0.01), as compared to a net loss of $3.2 million for Q1 2020 (loss per share of $0.01).
The value of the rough diamonds transacted through the Clara platform in Q1 2021 was $6.0 million over six sales, double the $3.0 million transacted on the platform in Q1 2020.
Strong price increases have been observed in each of the sales conducted since the beginning of the year.
As at March 31st 2021, the company had cash and cash equivalents of $27.9 million, an increase of $23.0 million from December 31st 2020 and a net debt of $22.2 million.
Following the quarter-end on May 5th 2021, the Company’s $50 million working capital facility was extended with Rand Merchant Bank, a division of FirstRand Bank Limited, London Branch.
In January 2021, Lucara announced the recoveries of two, top white gem quality diamonds (341 carats and 378 carats) from ore sourced from the M/PK(s) unit within the South Lobe. Both stones were recovered unbroken.
In April 2021, Lucara announced the 24-month extension of its novel supply agreement with HB in respect of all diamonds produced in excess of 10.8 carats in size from the Karowe mine to be sold as polished.
In May 2021, Lucara received credit approved commitments from a syndicate of five international lenders for a senior secured project financing debt package of up to $220 million (over P2.3 billion) to fund an underground expansion at the Karowe Mine in Botswana.
Eira Thomas, President & CEO commented: “Lucara has bounced back in the first quarter of the year, demonstrating its resiliency at a time of continued uncertainty in respect of the ongoing COVID-19 pandemic. Our solid performance in the first quarter reflects a stronger business environment, Lucara’s continued focus on operational discipline and our innovative approach to sales.
We also made significant progress towards the completion of a supplemental debt financing package with credit approved commitments received from five international lenders, in support of our plans for underground expansion.
Our outlook for the diamond market remains strong, and with close to 20 years of future mining now ahead of us at Karowe, Lucara is highly levered to an improving diamond price environment, particularly in respect of large, high value gem diamonds, the hallmark of Karowe’s production profile.”
Ore and waste mined of 1.1 million tonnes and 0.8 million tonnes, respectively.0.67 million tonnes of ore processed resulting in 80,014 carats recovered, achieving a recovered grade of 11.9 carats per hundred tonnes.
188 Specials (+10.8 carats) were recovered from direct milling during the first quarter, representing 6.8% weight percentage of total direct milling recovered carats, in line with resource expectations.
2 diamonds were recovered greater than 300 carats in weight and 2 diamonds were recovered greater than 200 carats in weight.
Diamond sales in Q1 2021 were held through a combination of regular tenders, and the Clara platform, for diamonds less than 10.8 carats, and through HB under the supply agreement for those diamonds greater than 10.8 carats.
The Company recognized revenue of $53.1 million or $579 per carat from the sale of 91,760 carats. Price recovery was observed in most size and quality classes.
Included in this amount is variable consideration of $9.1 million which relates to “top-up” payments which arise from polished diamond sales in excess of the initial planned value paid to Lucara.
Beginning in Q2 2020, all +10.8 carat diamonds mined from Karowe were sold to HB pursuant to the terms of the diamond supply agreement described below.
Karowe’s large, high value diamonds have historically accounted for approximately 60% to 70% of Lucara’s annual revenues.
Though the mine remained fully operational following the declaration of COVID-19 as a global pandemic, Lucara made a decision not to tender any of its +10.8 carat production after early March 2020 amidst the uncertainty caused by the global crisis and the significant weakness observed in the rough diamond market.
LUCARA- HB SALES AGREEMENT
The polished diamond market performed better through this period and subsequently, in July 2020, Lucara announced a ground breaking partnership agreement with HB, entering into a definitive supply agreement for the remainder of 2020, for all diamonds produced in excess of +10.8 carats from their 100% owned Karowe Diamond mine in Botswana.
This agreement was subsequently extended for a 24 month period, from January 1, 2021 to December 31, 2022.
Under the supply agreement with HB, Lucara’s +10.8 carat production is being sold at prices based on the estimated polished outcome of each diamond, determined through state of the art scanning and planning technology, with a true up amount payable to Lucara on actual achieved polished sales in excess of the initial estimated polished price, less a fee and the cost of manufacturing.
This unique pricing mechanism delivers regular cash flow for this important segment of our production profile.
Revenue from stones delivered to HB in 2020 will continue to be recognised in 2021 as polished diamonds are sold and “top-up” payments are realised.
CLARA SALES PLATFORM
With global restrictions impeding travel for many diamond manufacturers, interest in Clara- Lucara’s proprietary, secure, web-based digital sales platform- grew significantly in 2020 and that positive momentum continued through Q1 2021.
Six sales were held in the first quarter with total sales volume transacted of $6.0 million, more than double the volume from the comparable period in 2020.
Encouragingly, Clara also observed consistent price increase at each subsequent sale throughout the period.
The number of buyers on the platform increased to 80 and the company is maintaining a waiting list to manage supply and demand. Discussions continue with third party sellers to build supply.
KAROWE MINE UNDERGROUND PROJECT
During Q1 2021, Lucara spent $9.9 million (over P100 million) on project execution activities for the Karowe underground expansion, including shaft and geotechnical engineering, surface infrastructure, dewatering and power line engineering and procurement.
Site construction work commenced early in the quarter and in March the production and ventilation shaft box cuts were drilled and blasted to bulk excavation elevations.
A significant amount of time and effort was also spent on due diligence related to technical, environment and social matters as part of ongoing project financing efforts.
The first quarter of 2021 continued with unprecedented challenges emanating from the 2020 outbreak of the COVID-19. In Botswana, the economy continues to reel from the effect and impact of the pandemic.
The FABI generated a negative quarterly return, with the index declining by 0.3% for the quarter. Government bonds were the main reason for the decline, registering a return of -0.4% for the quarter under review.
According to Kgori Capital Domestic Fixed Income and Macro Commentary Q1 2021, corporate bonds generated positive returns of 0.9% for the quarter.
Kgosi Capital Portfolio Manager, Kwabena Antwi, says government bonds have continued to come under pressure due to increased supply as government looks for funding for its Economic Recovery and Transformation Plan (ERTP). He says there were three auctions held during the quarter where P8.6 billion of bonds and T-Bills were offered.
“There was decent demand with P10.8 billion of bids received, however, in a similar manner to Q4 2020’s auctions, all auctions were under-allotted with an allotment ratio (allotment divided by securities on offer) of 59.0%. The low allotment was likely due to bids received considered too rich. The key question is how the government plans to fund its projected deficits. Even with the possibility of securing bilateral funding, there is an increase likelihood that projects under its ERTP may be delayed.”
Antwi indicated that inflation breached the lower bound of the Bank of Botswana’s objective range, ending the quarter at 3.2% in March 2021. He says, the main driver of inflation was transport inflation which moved out of deflation territory as a result of the 6.9% increase in pump prices effected in March 2021.
“We expect inflation to accelerate further and briefly touch the 6% upper bound of the Bank of Botswana’s objective range in late Q2 2021/Q3 2021 before accelerating. Our expectation is premised on continued supply-push inflation and base effects arising from the Transport basket,” he said.
GROSS DOMETIC PRODUCT
Kgori Capital highlighted that their GDP growth estimate for 2021 has increased following the release of better-than-expected Q4 2021 economic data which indicated that the economy contracted by 7.9% versus their expectation of an 8.5% contraction.
“We have revised our 2021 growth expectation upwards to 7.2% from 6.3% previously with risks balanced. Whilst there have been no hard lockdowns yet in 2021, curfews have been implemented since January 2021 and alcohol sales were banned between January 2021 and February 2021. Current restrictions are less constricting than the lockdown imposed in 2020 but they will nonetheless constrain business activity in 2021. Forecasts will remain fluid as we get more information on the status of the local and global vaccine rollout as well as the implementation of government’s ERTP.”
Debswana — the world’s leading rough diamonds producer by value says it is “watching” the developments around lab grown diamonds closely as events unfold.
The world‘s largest jewellery maker Pandora, this week announced that it will completely abandon mined diamonds and shift totally to lesser expensive stones manufactured in laboratories citing “environmental reasons.”
Pandora is by far one of the most important jewellery makers in the world.
The company which started as a family-run jewellery shop in Copenhagen, Denmark, is now globally known for its customizable charm bracelets, designer rings, necklaces and watches, crafting them from the world’s finest mined diamonds.
In an announcement that sent shock waves across the diamond industry corridors on Monday, the world’s biggest jewellery maker told global media outlets that it will no longer sell mined diamonds and will switch to exclusively laboratory-made diamonds.
Pandora Executives cited concerns about the environment and working practices in the mining industry saying this has led to growing demand for “alternative products”.
Alexander Lacik, Chief Executive Officer of Pandora told UK based media group BBC, that “the change was part of a broader sustainability drive”. He explained that Pandora is taking that direction because, “it’s the right thing to do”.
“Synthetic diamonds are also cheaper, we can essentially create the same outcome as nature has created, but at a very, very different price,” he said.
The move by Pandora, according to Industry experts, reflects a reorientation of the jewellery market brought on by the pandemic and the sentiments of younger buyers, who are more likely to factor in environmental and human rights concerns when choosing products.
“For millennials in particular, the awareness of what a lab-created diamond is, is significantly higher than with the older generation, so it’s a matter of education as well,” Alexander Lacik told American media outlet Bloomberg on Monday.
He added: “These categories of buyers are more concerned about sustainability aspects.”
“WE ARE WATCHING THIS SPACE VERY CLOSELY”— DEBSWANA
Two weeks ago, Debswana, a De Beers partly owned company, said the synthetic diamond space is being monitored closely.
In a statement following a virtual stakeholder engagement meeting on the 23rd of April, 2021 Debswana Corporate Affairs said the company is keeping an eye on the new developments.
“We do watch this space very closely and also do know that De Beers does the same, overall, research shows that the size of the lab grown diamond market continues to be very small in comparison to the size of the natural diamond market (a low to mid-single digit percentage of the size,” stated the company.
Debswana said one of the key advancements with regard to lab grown diamonds in 2020 was that new production sources continued to come online, including the new De Beers owned Lightbox facility in Oregon, United States.
The increase in supply, coupled with continued advancements in technology, have seen lab grown diamonds continue their downward price trajectory throughout 2020, the company said- citing a report by Brain- that lab-grown diamonds are now retailing at an average of around 35% of the value of an equivalent natural diamond, down from around 65% in 2017.
In addition Debswana cited a research conducted by its parent company De Beers and other industry players that “90% of consumers want gifts that hold their value over time, and natural diamonds are seen as the top gift of this nature, above other jewellery, designer clothing or electronics”.
“Diamonds hold a symbolism, meaning and value that lab-grown diamonds do not provide as a mass-produced product of technology.”
DE BEERS SYNTHETIC DIAMOND BUSINESS
De Beers entered the retail space of synthetic diamonds space in 2018, through its jewellery brand Lightbox.
The company committed an investment of US$94 million (around P1 billion) on an Element Six production facility near Portland, Oregon, US adding to Element Six’s existing UK-based facilities.
Through its wholly owned subsidiary Element Six De Beers Group has been making diamonds in laboratories for 50 years but solely for industrial purposes.
“Lightbox will transform the lab-grown diamond sector by offering consumers a lab-grown product they have told us they want but aren’t getting: affordable fashion jewellery that may not be forever, but is perfect for right now,” said Bruce Cleaver, CEO of De Beers Group in 2018.
Cleaver said his company was making this move informed by an extensive research that signals consumers regard lab-grown diamonds as a fun, pretty product that shouldn’t cost that much.
“We see an opportunity here that’s been missed by lab-grown diamond producers. Lab-grown diamonds are a product of technology, and as we’ve seen with synthetic sapphires, rubies and emeralds, as the technology advances, products become more affordable,” he said.
Initially De Beers has had a policy against synthetic diamonds however in 2018 the global diamond giant reported that after decades of investment into the extensive Research & Development the company could now offer consumers high quality gems with customer tailored cuts that suits fashion requisites better at affordable prices.
“While it will be a small business compared with our core diamond business, we think the Lightbox brand will resonate well with consumers at the same time provide a new, complementary commercial opportunity for De Beers Group,” observed the Group CEO.
De Beers Lightbox Jewellery brand is retailing in the market, with the product uptake by consumers satisfactory.
However, De Beers reiterated in many forums that it will remain a natural diamond business. In 2019 at the Diamond Conference held in Botswana, Bruce Clever said the over 100 year old mining giant will remain a primarily “natural” diamonds business because the mine stones are forever and offer something no any other product could offer.