Does De Beers Really Have a Future in Botswana?

Special guest blogger Ben Janowski, a longtime diamond industry consultant and occasional JCK contributor, helms the Cutting Remarks blog while Rob Bates is on leave:

In my blog last week, I closed with two questions: What is De Beers’ long-term plan, and will its parent company, Anglo American, continue to have an interest in supporting a small, declining part of its business?

Any answer is speculative by nature, as we have no particular entree into Anglo’s corporate thinking. But we can make some fair assumptions.

De Beers’ business can be divided into mining operations, and its sales and marketing side. Let’s focus on the latter. It is clear that De Beers has fully committed to making Botswana its operational center for sales. There is not even a glimmer of a suggestion that other, better-suited cities could be considered. 

Botswana, as we noted last week, is difficult to access, has a poor business infrastructure, and lacks the ability to rapidly build one that can attract expats in large numbers. A parallel would be Dubai, which possesses a huge cash cow in natural gas and oil, and very aggressively built a major trading and financial center. It can be said safely that Botswana does not have the resources or the drive to replicate a comparable transformation.

Were this a different age, one in which the development of major diamond finds was before us, and one in which a long-term development of a major sales and distribution center could proceed slowly and organically, we could imagine Botswana having a future as a global center. That is just not the case today.

It could have happened in South Africa, but didn’t, as that country’s heyday preceded the end of apartheid and the push for beneficiation. It has happened to a degree in Russia, partly a result of European regulators forcing De Beers to cease writing contracts for the purchase of the majority of Russia’s diamond output.

De Beers performed brilliantly for decades, most of the time, as an inventory buffer, managing to assure itself and its sightholders long-term profits. It ran beacon campaigns that built a public appetite for diamonds. And it pretty much forced all its stakeholders, including producing nations, to play by its rules.  None of that is part of the conversation any more. 

Now that the die is cast, the center of gravity is shifting to the cutters, especially the major ones, who need rough based on market demands, and are increasingly showing independence in how and where they buy. De Beers is in the midst of a major effort to build a value-adding program for itself and the sightholders; it’s called Forevermark and the jury is still out on that effort.

So what could De Beers be planning? I find it difficult to believe that Forevermark will become its destiny once mine production has dropped to unsustainable levels. (That’s a whole other subject!) Once the Botswana agreement expires in about eight years, it might make the most sense to simply turn all of that over to Botswana to manage under some payout basis, assuming that Anglo has not already acted to end its involvement before that.

If Anglo now has any thought of selling off, or spinning off, its diamond business (a reasonable possibility), it must clear up what is now a muddied picture. In 2012, the company put about $100 million into Forevermark, presumably to cover developmental and marketing costs. That amounted to about 80 percent of Forevermark revenues last year. The balance is hardly a meaningful number to Anglo, or anyone else. This year will be a test year to see if early projections will hold. Next year, however, will likely be decisive.

These kinds of hanging uncertainties complicate selling off the business as a whole. Rio Tinto recently backed off efforts to sell its diamond business for various reasons. These are not easy businesses to sell because there is not great clarity and reasonably definable future profits. So one option is to spin off Forevermark and the mining business separately, assuming both are profitable and have distinct value over some projected periods.

On the mining side, a steady revision of the sight process will make sense. More flexibility is needed in the face of volatile market conditions and toughening banking availability. More tenders are likely. The mining business and rough sales will become more like normal mining ventures (if I can use that word to describe the diamond business!).

The elephant in the room is man-made diamonds. I have long contended that this represents the future, still many years off, of the vast bulk of the retail business.  And the more it becomes a factor, the more difficult it will become to sell a diamond mine. De Beers is undoubtedly well prepared to be a major factor in producing and marketing man-made diamonds. It is where the company will be, I believe, once the Botswana contract is over, once any spinoffs are done, and once it is clear that diamond mining has a very limited future.

JCK News Director