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BUILDING ON DIAMONDS

PRINCIPLES OF PARTNERSHIP

To understand the story of Botswana’s growth is to understand the story of its vast diamond resource and the Partnership that transformed it into a driver of development. The Partnership is, of course, codified in various agreements and contracts, but its longevity and success are due to something deeper, namely a mutual understanding that diamonds are unique and require a long-term view; that they are a finite resource whose value must be maximised while it lasts; that they are ultimately a luxury product; and that true partnership requires shared incentives. This section examines these fundamentals in more detail.

A long-term view

Diamond mining is a capital-intensive undertaking with long-term horizons. Finding and mining diamonds in remote areas requires a large investment in exploration, project development, infrastructure, mining equipment and human capital. It can take many years to find and develop a resource, and a mine can operate for decades.

In the case of Orapa, the first mine to be developed in Botswana, exploration took 11 years, with another four years to bring the mine to production. Letlhakane took eight years from discovery to production and Jwaneng 11 years.27 The ability to develop and maximise diamond supply necessarily requires a long-term perspective and confidence in the operating environment. This, in turn, depends on political stability, predictable policies and respect for the rule of law.

In 1967, the new and relatively inexperienced leadership of Botswana had to make long-term choices about how to develop and manage its newly-found diamond resource. A windfall of such magnitude could have started a struggle for control of the diamonds. This was avoided by strong leadership. His Excellency Sir Seretse Khama, the first President, saw that the potential of diamonds would not be realised without a long-term vision for national benefit. He persuaded the Council of Chiefs, the Dikgosi, to relinquish individual tribal rights over diamond discoveries in favour of ownership of the diamonds by the Republic for the benefit of all Batswana. This far-sighted view provided the political basis to develop the diamond industry with stability and confidence.

The early leadership also understood that Botswana did not have the capital or expertise to develop and manage diamond mines alone.28 The Government therefore chose to form the partnership with De Beers, which had discovered the diamond deposits. In mining policy generally, the Government has struck an effective balance between securing the public good and incentivising private capital and skills inflows.

The first production of Debswana from Orapa Mine started in 1971, followed by Letlhakane in 1977, Jwaneng in 1982 and the smaller Damtshaa Mine in 2003. This required ongoing investment in capital-intensive projects as well as the technology required for more efficient mining and diamond recovery processes.

A further major investment was made in 2008 to allow for the next expansion of the Jwaneng open pit. The project is known as Cut-8 as this is the eighth cut, or expansion, of the pit. The cut requires the excavation of more than 500 million tonnes of waste rock before the associated diamond-bearing ore can be accessed at depth. Cut-8 provides access to approximately 105 million carats from around 89 million tonnes mined.29

A view of the Jwaneng Mine pit, which is expanding with Cut-8

A view of the Jwaneng Mine pit, which is expanding with Cut-8.

Cut-8 is expected to continue to yield diamonds until 2029, and stockpile and Tailing Mineral Resource mining will continue beyond 2030.30 The 2015 Life of Mine plan is currently in progress and will inform a new resource and reserve compilation at the end of 2015. This investment will enable the Partnership to continue to invest directly in skills and training, education and healthcare and local enterprise development.

In addition to the diamond revenues provided to the Government, both Partners have chosen to harness the core business of the companies in the Partnership and set aside significant funds for social investment in order to support shared development goals. For example, the hospitals at Orapa and Jwaneng mines both serve the surrounding communities, with Orapa Hospital recording more than 82,000 patient visits in 2014. Through bursaries, as well as local employment with ongoing training and skills development, the Partnership has sought to grow the ultimate natural resource of Botswana – its people.

FIGURE 7: KEY MARKETING CAMPAIGNS AND GROWTH IN POLISHED DIAMOND VALUE

FIGURE 7: KEY MARKETING CAMPAIGNS AND GROWTH IN POLISHED DIAMOND VALUE

A finite resource

It is a paradox that one of the undeniable characteristics of diamonds that gives them lasting value is that production will not last forever. When combined with the importance of diamonds to Botswana’s prosperity, the Partnership is compelled to see each diamond as irreplaceable, and to maximise the value of every carat it recovers. Specifically, this means growing demand for diamonds around the world and leveraging the country’s leading producer position to expand its participation further down the value chain.

GROWING DEMAND

The long-term investment in Botswana’s production is only part of the story. Steadily increasing production of rough diamonds from the 1970s would have accounted for much less if supply had not been matched, or exceeded, by global demand. Diamonds have deep symbolic meaning for many people and De Beers’ well-documented investment over decades to capture that symbolism and transform it into tangible markers in people’s lives has served as the foundation of the modern diamond industry. These efforts have included significant investments in marketing and advertising, building on the success of the 1940s ‘A Diamond is Forever’31 campaign and growing new markets in the United States (1940s/1950s), Japan and Europe (1960s), Asia-Pacific and Latin America (1980s) as well as in China and India (1990s/2000s). According to De Beers data, the polished diamond sector grew by more than 400 per cent from 1980 to 2014. Over the past 15 years, De Beers has invested more than US$1.6 billion in global marketing campaigns. This growth in consumer demand has expanded the end market for Botswana’s diamonds and increased the value of them.

EXPANDING PARTICIPATION IN THE VALUE CHAIN

As a producer nation, Botswana has always understood that greater potential can be captured if more value is added to diamonds domestically. This helps to create ancillary industries in Botswana to support diamond activities. This strategy of beneficiation has been a Government priority from the start and remains a major focus for the Partnership. Many resource-rich developing countries have the same goals but have found that moving from mining to added beneficiation can be challenging.

Sustainable beneficiation occurs in very few of the countries in which diamonds are mined. Most of the world’s diamonds are mined in Russia, Botswana, Canada, Angola, the Democratic Republic of Congo, and South Africa. However, most cutting and polishing takes place in India especially, also China and Israel, while most diamond jewellery manufacturing takes place in India and China, as well as in the main consumer markets. This is because competitiveness in diamond manufacturing does not necessarily translate into competitiveness in cutting and polishing as costs and productivity drivers may be very different. Successful and sustainable beneficiation therefore depends on the ability to establish global competitiveness in the new activity.

Even so, the Partnership has managed to secure more participation in beneficiation in Botswana. Some stakeholders interviewed for this research felt that De Beers could have thrown its weight behind in-country cutting and polishing sooner, although the important role played by relatively recent technology developments in enabling the establishment of sustainable cutting and polishing industries in producer countries should not be discounted.

Nevertheless, in the 2000s, strategic decisions were taken to support beneficiation. Implementation of the strategy included the formation of DTCB in 2006, which was set up to sort and value Debswana’s production. It also included making a supply of rough diamonds available to Sightholders willing to manufacture diamond locally. Currently, 20 Sightholders have cutting and polishing factories in Gaborone.

Moreover, the migration of De Beers’ international sales function from London to Gaborone in 2013 has brought a significant transfer of economic activity to Botswana. De Beers’ international rough diamond supply had been sold in London for more than 70 years, and the relocation of the global sales function to Botswana was a huge logistical undertaking involving the building of a new secure sales facility in Gaborone, new security services, the renegotiation of export taxes, the transfer of technology and systems, and the migration of 80 staff members and their families from London to Gaborone.

The Government also upgraded the international airport and improved access roads to support the expected increase in business and trade as well as the movement of people. Ten times a year, about 200 representatives of the world’s leading diamond manufacturers and traders from places such as Belgium, Israel, the United States, India and China now travel to Gaborone to buy rough diamonds from De Beers. Botswana has seen the value of rough diamonds traded in-country rise from under US$1 billion annually before the relocation to more than US$6 billion since then.

Kimberley Process Certificate

The Kimberley Process Certification Scheme is an intergovernmental framework to prevent conflict diamonds from entering the legitimate value chain.

The relocation of the De Beers’ international sales function was a coup for Botswana’s beneficiation strategy. The Minister of Minerals, Energy and Water Resources at the time, Dr Ponatshego Kedikilwe, hailed the agreement as a major step in securing the future of Botswana’s economy, saying, “Botswana and De Beers have today renewed one of the most successful public-private partnerships in the world. This agreement, and the tangible outcomes it will deliver, will enable Botswana to achieve its aspiration to be a major diamond centre engaged in all aspects of the diamond business.”32

In addition to the employment created by the relocation of De Beers’ sales arm DBGSS, and new ancillary services in sectors such as hospitality and retail, the move provided Botswana with direct access to the diamond market.

Of course, Botswana’s increased exposure to the global diamond market heightens its vulnerability to the market’s increasing volatility. For example, while one new local manufacturing factory opened in 2015, another three closed as the rough diamond sector experienced a downturn.

However, in just 15 years, the Partnership has succeeded in positioning Botswana as a global rough diamond hub, with several more decades at least to build its offering before the supply from mining is depleted. The intention is that the economic momentum will allow these parts of the diamond industry to persist even after the last diamond has been mined in Botswana.

A luxury product

A diamond’s allure is based on an association with purity, love, commitment and a sense of the eternal. Consumers have come to expect verifiable assurances of the origin and provenance of their luxury purchases. The diamond producers and the diamond industry have a responsibility to provide real assurances, particularly as diamonds face competition from other luxury goods, changing consumer spending preferences and potential confusion caused by the emergence of synthetic diamonds.

Furthermore, the ‘purity premium’ associated with diamonds requires the constant safeguarding of diamonds as a responsible and positive product. The Partnership has played an important role in protecting the reputation of diamonds. In the 1990s, this reputation was threatened by an association with civil wars and child labour in some countries with large artisanal diamond deposits. In the early 2000s, governments, civil society and industry leaders (including from De Beers) came together under the auspices of the United Nations to establish the Kimberley Process Certification Scheme, an inter-governmental framework to prevent conflict diamonds from entering the legitimate value chain. Now, more than 99 per cent of the world’s diamonds are certified conflict-free.33

Around the same time, De Beers also moved to formalise the introduction of responsible business practices and ethical standards in its diamond supply chain. In 2003, De Beers initiated the Best Practice Principles Assurance Programme (BPPs), a mandatory business conduct code that applies to all De Beers’ operations as well as to De Beers Sightholders and substantial diamond contractors involved in diamond cutting, polishing and jewellery manufacturing. Meeting these standards is a contractual requirement of supply from De Beers, and compliance is audited externally.

In 2009, the BPPs were aligned with the Responsible Jewellery Council standards to promote responsible ethical, human rights, social and environmental practices in the gold and diamond industries. De Beers estimates that the BPPs directly and indirectly cover approximately 370,000 people working in the diamond industry globally.

Of course, while it is important that the frameworks developed to ensure diamonds (and the revenues accrued from them) do no harm, perhaps most important is recognising the real-world story of the positive role a prudently managed natural resource can play in the development of a nation. Botswana is testament to this, and the Partnership has worked to turn this story of responsible sourcing into a brand premium that can simultaneously protect and enhance the value of Botswana’s diamonds in a highly competitive luxury landscape.

27 Brook M. (2012), Botswana’s Diamonds: Prospecting to Jewellery.

28 Interviews with stakeholders

29 For the purposes of calculating revenue these carats include 4th pipe (0.6 million carats from 2.3 million tonnes) and diamonds that are recovered below the bottom cut off of the treatment plant (4 million carats).

30 The 2015 Life of Mine plan is currently in progress and will inform a new resource and reserve compilation at the end of 2015.

31 In 1999, Advertising Age magazine named the ‘A Diamond is Forever’ ad campaign, the advertising slogan of the 20th century.

32 Engineering News, 16 September 2011: http://www.engineeringnews.co.za/article/london-eclipsed-as-botswana-wrests-full-spectrum-of-diamond-control-2011-09-16/article_comments:1. (Accessed 20 October 2015).

33 World Diamond Council, Diamond Fact Sheet: https://www.worlddiamondcouncil.org/download/resources/documents/Fact%20Sheet%20%28The%20Diamond%20Industry%29.pdf (Accessed7 October 2015).