A dark cloud hangs menacingly over the future of Botswana’s nascent diamond beneficiation and the truth must be told and credit given where it is due. The future of the project hangs in the balance and its failure seems predetermined because of inherent structural problems, choice of the most risky and least profitable part of the diamond value chain, and lack of support and ownership of the idea from those tasked with the responsibility of spearheading it.
Diamond cartel, De Beers, motivated by greed and self-interest and opposed to diamond beneficiation from the onset, seems to have found a perfect opportunity to give Botswana a rope to hang and assured the ultimate demise of Botswana’s attempt at diamond value add.
More importantly, Botswana and other diamond producing countries have missed the boat and been overtaken by events simply because the global diamond industry has changed drastically in the recent past. Diamond players are no longer content with concentrating their business on a single segment of the diamond value chain.
Diamond producers such as Botswana agitating for beneficiation, should have learned a long time ago that cutting and polishing are very risky segments of the business not without their own fundamental problems. Now best practices globally now are for more consolidation characterized by more vertical and horizontal integration along the whole diamond value chain.
Cutting and polishing segment is globally the least profitable realizing the lowest profit margins with some companies earning as little as 1-2 percent, while by comparison, upstream (mining and exploration) and downstream end of the value chain enjoy the highest profits margins of 16- 20 percent and 11 percent to 14 percent respectively.
Some things just did not add up from the beginning and it has never been difficult to discern that the project was not conceived in good faith. There was a lot of hostility at project conceptualization by and between Botswana government and De Beers who over decades were vehemently opposed to any calls for diamonds beneficiation dismissing them as both unworkable and illusionary and rubbishing everyone who dared advance a contrary view.
De Beers and their supporters in government and sections of the media pushed the anti-beneficiation paradigm with much vigor seeking to lock Botswana permanently relegated as a backward factor driven, and nineteen century mercantilist styled economy selling its diamond raw in the international market while De Beers, trying by all means to keep Botswana in the dark by parroting anti-beneficiation propaganda while it alone participated globally in all stages of the diamond value chain.
De Beers’ motive was clear according to diamond industry expert Chaim Even Zohar because, "historically Botswana provided up to two-thirds of De Beers profits. In all fairness, one can fully understand that the cartel went to any length to protect its interests, though it is hard to approve its methods".â€¨
There is therefore, a dichotomy that that the very staunch opponents of diamond beneficiation have now assumed the responsibility spearheading the very idea they were opposed to all along and even rubbished anyone who dared to advance opposite view.
There appears to be an unavoidable coincidence between the instability and uncertainty surrounding Botswana's belated and faltering attempts at diamond beneficiation and De Beers' historical opposition and disdain. Diamond beneficiation proceeded without thorough due diligence, choice of suitable, experienced and capable equity partner with a strong track record in diamond beneficiation.
De Beers was deeply conflicted and was never the right choice. Just as any project of that magnitude would require a social and environmental impact assessment, so too was a human resources impact assessment required but omitted in order to determine the number and appropriate skills mix to support the project.
So no concerted training to deliver the necessary skills mix was done nor were any training institutions identified to provide targeted and appropriate training in all aspects of gemology, either locally or abroad. Instead, heavy reliance was put on the benevolence of outsiders and imported workers in critical areas at high cost to the nation rather than the enterprise of citizens.
It is therefore no wonder that the beneficiation was programmed to fail from the onset because of lack of ownership and conviction from those tasked with its implementation and to make the idea work. De Beers derived huge and disproportionate benefits from the status quo and from the Botswana diamond industry in general and it was not surprisingly it had strong interest to keep things that way.
While De Beers globally participates in all stages along the diamond value chain, the greatest share of the value of the world diamond production it handles are derived from Botswana yet the company abused this privilege by seeking to hoodwink its leadership by hook or crook to perpetually lock her in the relatively inconsequential and less profitable mining and rough diamond aggregation and sales.
By contrast, Paul Rowley De Beers' executive Vice President of global sightholder sales let the cat out the bag recently when he told the Dubai Diamond Conference in April that De Beers was active in throughout the diamond pipeline, through targeted investment in diamond equity at the retail end, midstream in rough diamond sales and distribution and in mining expansion.
"At De Beers, we continue to make investments throughout the value chain that we believe will drive our success in the years ahead and all participants in the diamond industry have a chance to of likewise".â€¨â€¨
Logic dictates that it is simply unbelievable that those who were so vehemently opposed to the beneficiation of Botswana diamonds, namely De Beers and Botswana government supported by some conservative sections of the media and who thoroughly discredited and rubbished anyone who held a contrary view would now by any stretch imagination be convincingly tasked with the responsibility of spearheading the implementation of the very idea they had thoroughly discredited.
For decades both De Beers and Botswana claimed that beneficiation was not feasible and that Botswana, a world leading diamond producer of the best quality diamonds by value did not enjoy any comparative and competitive advantage other things being equal.â€¨
They shied away from the stark reality that the mark-up of diamonds increases exponentially as it passes through the value chain. Beneficiation is the creation of activities beyond mining the natural resource in producing countries as a means of adding value. Out of the ground, rough diamonds move through the pipeline from dealers to diamond cutters and polishers, to jewelry manufacturers, retail stores and finally to consumers.
According to authoritative diamond industry report Bain and Company, the value of diamond increases significantly as they move along the diamond chain from the mine to the final market, nearly quintuple over the course of the journey.
The great value – US$25 billion or more in both cases is added at the jewelry manufacturing and retail stages, Jewelry manufacturing is estimated at approximately 65% of the retail sales based on historic average.
By way of illustration, Bain and Company when rough diamond production generates revenues of $14.8 billion, the revenue will grow to $47.2 billion when the diamonds are manufactured into jewelry and grow again to $72 billion when the jewelry is sold at retail, quoting IDEX; Tacy Ltd and Chaim Even-Zohar and Diamond Value Chain of 2010.â€¨â€¨Maximizing return on assets of rough diamonds very valuable but the ending price of diamond jewelry is worth much more, according to mining academic Rudnicka (2010).
The trend in the world is to shorten the supply chain between the rough coming out of the mine and the shop window through vertical and horizontal integration of the production value chain. By way of example, Rudincka says, Lev Leviev, chairman of Leviev Group of Companies, controls the biggest pit mine, is the world's largest polisher and cutter of diamonds, and own Leviev boutique in London and New York.
De Beers owns diamond shops in London, Paris, Tokyo and Los Angeles (Doulton, 2006). Tiffany and Co for the last 172 years avoided cutting and polishing its own diamonds, but has since decided to move backwards in the supply chain.
In 2002, it began opening cutting and polishing plants in Canada, Belgium, South Africa and Vietnam and later adding operations in China and Mauritius (O'Connely, 2009). Harry Winston Diamond Corp, now owns 40% of Davitz Diamond mine in Canada and retail stores in New York, Paris, Tokyo and planned to open others in the United States, Beijing and Hong Kong.
This has given the company access to the more profitable ends of the diamond value chain – the contract wholesale and retail business because the highest potential for profit lies in retail, because as a rough diamond moves from the mines, it increases exponentially by 320 percent at retail (Covert, 2007).
Bains and Company argue that diamond jewelry manufacturing and retail is the highest level of production that many countries aspire to upgrade to and manufacturing centers hold a lot of power in the final distribution of diamonds which has the highest potential for profit.
Although rough diamond production remains the most lucrative in terms of profit margins estimated at between 16 -20 percent, the only other segment that generates comparable margins is retail, where large chains such as Tiffany and Company and Cartier can archive margins of 11-14 percent. â€¨
Concentrating on mining alone is outdated on the evidence of diamond industry experts and policy makers. To meet the challenges of getting adequate supplies of the right mix of diamond jewelry, some large retailers have extended their operations upstream, investing in mines and in cutting and polishing companies. Tiffany and Company is one retailer who had made such and investment.
Hong Kong Chow Tai Fook, the world's largest vertically integrated jeweler and has responded to the supply challenge by securing long term supply contracts with ALROSA to supplement earlier agreements with De Beers and Rio Tinto. About half of the polished diamonds used in Chow Tai Fook jewelry were produced in-house.
Chow Tai Fook, and Tiffany and Company have already invested in mining operations and integrated backward by acquiring mines and eventually middle market operations. As rough diamond sales are likely to decline, the victim of consolidation will be cutting and polishing firms.
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.