LESSONS FROM COVID-19 – WHAT’S NEXT FOR THE CREDIT LENDING SECTOR?
As Botswana is grappling with the second wave of Covid-19 infections, it is becoming increasingly evident that there is no quick solution to the current dynamics playing out. In light of possible further waves of the pandemic, Batswana and the markets will have to continuously adapt to a rapidly changing environment.
The credit lending sector is no exception, and all lenders, be it banks or microfinance institutions, have been impacted to some extent or another by the pandemic.
A tightening credit environment
All lenders have been forced to tighten their credit policies in response to the uncertainty brought about by the pandemic. At this stage it is unclear what impact the second wave will have on the economy, and whether a projected growth of 8.8% will be achieved in 2021. Talks of possible third and fourth waves before herd immunity is reached adds to market uncertainty.
As signalled during the recent Budget Speech by Minister of Finance and Economic Development, Dr Thapelo Matsheka, we do anticipate a change in monetary policy as a result of upwards pressure on inflation, although this is expected to remain in the Bank of Botswana’s target range of between 3% and 6%.
The increase in the VAT rate from 12% to 14%, alongside an increase in fuel tax of 1 Pula per litre will impact on the disposable income of everyone, although there is some relief for those earning P4,000 per month, in the form of a higher tax exemption threshold.
As a result, the credit lending sector will be much more fixated on containing non-performing loans, which means there will likely be a tightening on lending. Loans to higher-risk small, medium, and micro enterprises (SMMEs) will likely be harder to come by, notwithstanding Government’s efforts to assist businesses through an Industry Support Fund (ISF).
With Government focused on reducing the public sector wage bill from its current levels of 15% of GDP to 10% in the short to medium term, competition for market share among payroll-dependent lenders is expected to increase considerably. Competition inevitably will lead to innovation to the benefit of consumers, and we expect a number of rapid digital transformation to follow.
Lessons from a black swan event
Covid-19 took everyone by surprise, with sales reducing significantly under hard lockdown restrictions. This is a scenario no-one had planned for in their risk assessments. The biggest impact to the sector has been the inability of customers to visit branches and transact on their business. Especially moving between zones made people uneasy to travel. Yet customers insisted on talking to us – which demonstrates the need for two-way communication.
With hindsight, we realise how misleading the power of perception can be. Especially as most businesses originally regarded news of the pandemic as something similar to SARS, that will be contained in a few countries.
The main lesson learnt, and something we’ve implemented into our risk assessment is to plan for the worst. The sector could have positioned itself differently some time ago, finding ways of serving and educating customers on financial matters virtually.
Rapid digital transformation
Within this crisis lays the opportunity – we anticipate that Covid-19 will stimulate rapid evolution of online credit processes, especially as Government continues to roll-out online connectivity as part of its Vision 2036 aspirations of turning Botswana into a high-income country.
Through technology, credit scoring will become much more sophisticated, which will allow for credit decisions to be reached within two hours, with same-day pay-outs.
The use of mobile services is further likely to escalate rapidly. A lot of our clients, for instance, live in villages far from formal financial service centres, but almost everyone has a cell phone. A driving factor in the success of mobile money will be education, and in this regard we have already pushed the boat out by educating our agents to teach customers on how to use the technology.
Protecting your credit record and good name
We have noticed a trend where people are living on credit, which is not sustainable. Borrowers often also don’t investigate the terms and interest rates of their contracts. A good credit record is worth its weight in gold, and Batswana will do well to shop around for the best service, advice and repayment terms.
Borrowers should take care to no overexpose themselves – the 40% minimum take-home pay threshold by Government is a guideline and loans should only be taken if it is absolutely needed. Loans should also be paid off in the shortest amount of time possible, to avoid unnecessary interest charges. Dudu Garekwe is Chief Executive Officer (CEO) of FirstCred Limited
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.