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Slow recovery of global diamond market extends ODC closure

ODC Managing Director: Marcus ter Haar

The economic shock occasioned by COVID-19 on the global diamond market has delivered the heaviest blow to Botswana’s wholly state owned Okavango Diamond Company (ODC), the worst since its establishment in 2012.

While other diamond operations across the value chain gradually reopen, ODC will remain closed until diamond market conditions fully recover. This was revealed by Permanent Secretary in the Ministry of Mineral Resources, Green Technology & Energy Security, Mmetla Masire this week.

Following a slow year for the global diamond industry in 2019 owing to the US-China trade war, the industry realized a slight upswing in the first month of 2020, spilling over from recovery signs in late 2019.

However all that was reversed by COVID-19. The virus, which broke in late 2019 in the Wuhan province of China intensified in February, spreading across the world, curtailing movements and international travels.

With the diamond industry, global lockdowns and travel restrictions resulted in muted rough diamond trade, closure of cutting and polishing firms, jewelry outlets and other segments of trade across the value chain.

Mmetla Masire noted that key markets like India are still relatively closed with little demand for rough import for those in operation, as inventories are still swamped up with stock piles. “ODC will remain closed because demand of rough diamonds globally is still very low, so ODC management took a decision to remain closed until demand fully recovers,” he said.

Masire reiterated that major markets for Botswana diamonds such as United States are still on lockdown. He said, “ODC sells its diamonds through auctions; it is still very difficult to hold auctions as of now, so the company will remain closed, with management working from home.”

Okavango Diamond Corporation (ODC) is a wholly state owned diamond marketing and sales company established in 2012 to sell Botswana diamonds outside De Beers’s channels and price books.

ODC markets and sells 15 % of Debswana diamonds after being sorted and valued by Diamond Trading Company (DTCB), while 85 % is sold by De Beers Global Sightholder Sales (DBGSS). Debswana and DTCB are 50-50 ventures of De Beers Group and Botswana Government. DBGSS is wholly owned by De Beers Group.

Botswana Government has a direct 15 % stake in De Beers Group, the remaining 85 % of De Beers Group is owned by Anglo American. Over 60 % of De Beers global production comes from Botswana (Debswana). Meanwhile Debswana, Diamond Trading Company (DTCB), De Beers Global Sightholder Sales (DBGSS) have opened and resumed operations at 60- 70 % workforce.

Mmetla Masire further revealed that DBGSS has started shipping some diamonds to their sightholders in a bid to cultivate market and trading activity amid COVID-19 imposed new normal.

OKAVANGO BLUE YET TO SELL

Okavango Diamond Company has also deferred the sale of Okavango Blue, the magnificent oval shaped blue diamond weighing over 20 carats, unearthed at Debswana Orapa mine at over 40 carats rough weight in 2018.

The sparkling Type IIb ‘Fancy Deep Blue’ unveiled to the world in Gaborone as 20 carats polished last year is yet to sell as demand and prices are still very low to inspire purchase of such a magnificent gem.

The Gemological Institute of America (GIA), has graded the diamond as an Oval Brilliant Cut, VVS2 clarity making it one of the highest polished colour classifications attainable for any blue diamond and at 20.46 carats it sits in the very top bracket of all-time historical blue diamond finds.

Its unique and vibrant blue colour, is created by the molecular inclusion of the rare mineral boron which between 1-3 billion years ago was present in the rocks of ancient oceans during violent diamond forming volcanic activity. Okavango Blue will be showcased over the coming months to promote Botswana as a leading global producer of natural ethical diamonds with an anticipated sale toward the end of the year.

GLOBAL DIAMOND INDUSTRY CRISIS

A couple of months into serious measures to slow the spread of the virus, it has already squashed diamond miners’ dawning hopes of a recovery. Alrosa the world’s largest diamond producer by output, last week reported 95% decline in sales during April, when gauged against the same months last year. This resulted the Russian state-owned deciding to halt production at two of its mines, citing worsening market conditions.

De Beers, the world’s largest producer by value, cut 2020 production guidance by a fifth last month. It had earlier cancelled its April sales event. Canada’s Dominion Diamond Mines, the controlling owner of Ekati mine and a 40% partner to Rio Tinto in the Diavik mine, filed for insolvency protection in April.

Lucara Diamond another Canadian company, posted last week a net loss of $3.2 million, or $0.01 a share, for the first three months of the year. The figure was in sharp contrast with the $7.4 million in net income, or $0.02 in earning per share the miner reported in the same period last year.

South Africa’s Petra Diamonds has recently delayed interest payments to borrow $21 million in new debt, a crucial move to keep the company afloat. Investment banks are increasingly reluctant to extend credit to diamond producers, as inventory is not being sold and defaults are possible, analysts have warned.

“We are concerned about oversupply of rough diamonds following the reopening of economies, as a lot of inventory could potentially be flooded into the system and the market might not be able to absorb all of it, resulting in increased pricing pressure,” said leading European diamond industry think tank, Learnbonds in a statement early this month.

Business

Covid-19, informal sector joins P40 billion economic clichés

29th June 2020

What is it all about this 2020/21 – 2022/2023 Economic Recovery and Transformation Plan (ERTP) much talked about this week? Notably, the word Covid-19 has inevitably forced itself into the economic jargon while the fiscus’ perpetual mere mention or omission at most time, informal sector, joined the other clichés this time.

BusinessPost engaged the new services of new sophistication, Data Journalism Tools, which makes a quick guide to find tools to analyze and visualize data, to see the peculiarity of the 64 document which was coveted by many hands this week. This publication introspected the language, tone and words behind the much anticipated ERTP.

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P40 billion needed to take Botswana’s economy out of Covid-19 mess

29th June 2020

Botswana will need a total of approximately P40 billion to emerge out of COVID-19 economic shocks and reset back to pre-pandemic growth trajectories and development ambitions. This is contained in the Economic Recovery and Transformational Plan (ERTP) released this week by Ministry of Finance & Economic Development.

Themed “Sustainable and Resilient Recovery towards High – Income Status”, the plan which is still a draft seeks to respond swiftly to the catastrophic depression on Botswana’s economy delivered by the COVID-19 pandemic.
The minds involved in this strategic economic rescue path include Bank of Botswana, Ministry of Investment Trade & Industry, University of Botswana and Ministry of Finances amongst others. They envisage cultivation of exponential growth that will catapult Botswana’s economy to resilient development trajectories.

COVID-19 MESS

According to International Monetary Fund (IMF) COVID-19 global pandemic will shrink global economies by 3 % against initial expected growth of over 3 %. Locally against initial projected revenue of P62.4 billion, Botswana‘s economy will only generate a projected revenue of about P48 billion.

Government has trimmed its budget from P67.6 billion to P59.6 billion. Budget deficit will now shoot up from initial P5.2 billion, 2.4 % GDP to over P10 billion which will now be over 5 % of GDP, well over government threshold of 4%.Government will therefore do away with some planned expenditures and projects.

The decline in government revenue will be attributable to a massive reduction in Mining & Mineral revenue which is anticipated to shrink by over 33 %. The decline in mining and mineral revenue is predominately as a result of halt in rough diamond sales due to travel restriction and stand still in trading across the industry.

The diamond industry is Botswana‘s key foreign income earner and largest contributor to GDP. It was projected that diamond revenue will bring to the table a total of P20 billion, while Government experts revenue from mineral revenue to only be around P6 billion. Trade & Hotels revenue will go down over 32 %.

Manufacturing will go down by 10 %, Transport and communication will decline by over 4 %.Non Mineral tax revenue will shrink by P2 billion from initial projection of P14 billion to P12 billion. Revenue from Value Added Tax (VAT) will go down from P8.6 billion to P7.6 billion.

GOVERNMENT RESPONSE

As part of Economic response to COVID 19 Bank of Botswana moved its regulatory mantle to make key adjustments. At the meeting held on April 30, 2020, the Monetary Policy Committee (MPC) of the Bank of Botswana decided to reduce the Bank Rate by 50 basis points from 4.75 percent to 4.25 percent and the primary reserve requirement (PRR) from 5 percent to 2.5 percent.

Inflation was unchanged for the fourth consecutive month at 2.2 percent in March 2020, remaining below the lower bound of the Bank’s desired medium-term objective range of 3 – 6 percent.  According to BOB forecast, Inflation will revert to within the objective range in the fourth quarter of 2020. This represents a significant downward revision compared to forecasts contained in the February 2020 Monetary Policy Statement.

The reduction of Bank rate implied that for those with loans would now pay 0.5 percent less on their monthly loan repayment premiums. The Prime rate now stands at 5.75 percent from 6.25%. BOB’s decision to trim primary reserve requirement from 5 percent to 2.5 percent, effective May 13, 2020 mirrored commercial Bank will be able to keep more money in their hands which they can lend to new borrowers. The PRR cut is expected to result in an injection of liquidity of approximately P1.6 billion into the banking system.

THE RECOVERY

However all these according to the Economic Recovery & Transformational Plan were just the beginning, the middle income country still has a long way to go. ERTP has underscored the need to invest in Agriculture to reduce import bill and propel Botswana to food security heights, ICT to enable globalization and enhance easy of doing business and tap into 4th Industrial Revolution as well as infrastructure to facilitate setting up of businesses.

The team led by Ministry of Finance says securing funding for the above initiatives is one of the most difficult components of the process. First, government revenue will be much lower than earlier anticipated; hence, there will already be a need for much larger deficit funding in the short- to medium term, even before adding ERTP initiatives.

Second, to be effective and meaningful, a stimulus package has to be larger than the “business as usual” or “just counter-cyclical”; that is, replacing what would have been the path of spending. This according to Experts implies a substantial injection of resources, which needs to be undertaken judiciously and for initiatives and projects that have significant multiplier effects and long-term economic durability and impact, i.e. evaluation of returns, and prioritization, is needed.

“Even as this is desirable, there is need for care not to overburden implementation and absorptive capacity of the economy. This is to guard against possible destabilization, in terms of prices, monetary growth and budget sustainability, as well as wastage and opportunities for corruption,” reads the draft plan.

There are five main options to fund the ERTP via the Budget, that is drawing down on the Government’s portion of the foreign exchange reserves and from Government Investment Account held at Bank of Botswana, external and foreign borrowing which may involve international financial institutions such as World Bank and IMF .

The other funding mechanism available is domestic borrowing from capital markets; by issuing bonds and treasury bills, sale of assets through for instance privatization and increasing domestic revenue generation. Ministry of Finance says the preferred options are domestic borrowing and revenue mobilization. However, they are unlikely to be sufficient to meet the entire funding needs over the remainder of the NDP 11 period.

The Ministry says the estimated total cost of ERTP spending is P20 billion over 2.5 years. In addition, the anticipated budget deficit over the same period is P20 billion, making a total of approximately P40 billion to be funded.
On the positive side the Ministry says there is considerable potential for increased borrowing through the issuance of government bonds, which currently amounts to around 7.5% of GDP. This compares with a legal limit on total domestic borrowing including guarantees of 20% of GDP, and an “ideal” size for an efficient, liquid government bond market of 15% of GDP.

Furthermore the draft plan suggested that Finance for budget deficits and the ERTP can be raised by doubling the size of total government borrowing from P15 billion to P30 billion. “The additional P15 billion of borrowing can be sourced from domestic savers (e.g. institutions such as insurance companies and pension funds) and banks, although the impact on cost (interest rates paid) is still to be determined. Encouraging the purchase of (Pula) bonds by foreign investors should also be considered,” reads the ERTP.

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Gov’t wants Debswana dividend intact

29th June 2020
Debswana Cut 9 at Jwaneng Mines

Debswana, a 50-50 diamond mining partnership between Government of Botswana and De Beers Group could find itself heading to capital markets, banks and other financial institutions for a credit line, loan or any suitable funding arrangements to finance its major expansion projects.

This is a suggestion by Economists and Finance experts under the auspices of the Ministry of Finance & Economic Development who crafted and documented Botswana’s new path of an economy post COVID-19 pandemic.  The Economic Recovery & Transformation Plan (ERTP) was released this week as a draft.

Underscored in the draft plan is the need to expand Botswana’s revenue base amid depleting fiscal buffers. Botswana’s economy is anchored by diamond revenue; around one third of the national budget is funded by revenue from diamond sales.

Though present in other streams of the pipeline, Botswana gathers the gist of its diamond profits from the upstream business it owns on equal shareholding with mining behemoth De Beers Group.  This is through Debswana Diamond Company, by far one the most prolific mining operations in the world.

Having been in operation since 1969, Debswana periodically embarks on massive expansion projects to extend the life of its mines and improve their operations. These undertakings come with multibillion pula investments to resource studies, construction, engineering and procurement to expose more ore and unearth diamonds from deep underground beneath earth formations.

This involves moving waste, hauling dump, building new processing plants, refurbishing existing assets and erecting new infrastructure. To fund this, the norm with Debswana has been that the two shareholders would forgo or curtail their dividend take come to finance the high capital intensive projects; however the new economic recovery plan by Botswana Government COVID-19 response team spearheaded by Ministry of Finance wants this to be a thing of the past.

To further supplement available funding models such as domestic borrowing in terms of bonds and treasury bills issuance, external borrowing, drawing down on cash balances and increasing domestic revenue mobilization such as taxes, the team that prepared the recovery plan have a suggest another avenue, they want government dividend from Debswana to be left untouched.

The team led by the Permanent Secretary Dr Wilfred Mandlebe has suggested that to further fill the national budget financing gap Government should table motion to its other shareholder for the two parties to agree that the way Debswana funds its expansion project be changed altogether.

“In addition to raising user charges and fees for public services, there is need to urgently initiate a programme and timetable with respect to the intent  to raise additional revenues  and hence reduce the budget deficit and financing gap,” reads the draft plan.

The plan (which if approved would be implemented from 2020/21- 2020/23 financial years) further reads “This includes changing the way in which Debswana finances expansion and life-of-mine extension projects, to rely less on self-generated funds and use more loan finance, which would increase revenue distributions to government.”

Current Debswana expansion projects are Debswana Cut 9 at Jwaneng Mines and Cut 3 at Orapa Mine. Cut 9 is a P15 billion project which commenced in early 2019 to extend the Prince of Mines to 2034. Ongoing in Orapa, though still in pre-feasibility study is Cut 3 to extend the “Resting place of lions” by a whopping 30 years to 2050.

Cut 9 is expected to yield an estimated 53 million carats of rough diamonds from 44 million tonnes of treated material. The preceding expansion project Cut-8 cost Debswana shareholders over P24 billion.

The project became the main source of ore for the mine in 2018, increasing the depth of the mine from 400 metres to 650 metres, ensuring continuous production until at least 2024.

It provided access to an estimated 88 million carats of mainly high-quality diamonds from about 75 million tonnes of material. Post Cut 9 reports indicate Jwaneng mine will possibly go underground.

At Orapa Mine, a detailed design study is underway to extend the life of the mine beyond the current open pit (Cut 2). Studies are at pre-feasibility stage and will inform the various parameters for Cut-3. The current Life of Mine, which only includes Cut-2, extends to 2030. Cut-3 is expected to take the life of the mine beyond 2050.

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