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High noon for De Beers in Botswana
Brendan Ryan
Posted: Thu, 07 Aug 2008
[miningmx.com] -- THE DISPUTE between African Diamonds and De Beers over the proposed AK6 diamond mine in Botswana has escalated into a legal feud with huge implications.
At stake could be the future of De Beers’ marketing system. During 2007, De Beers mined 33.6 million carats from its mines in Botswana equivalent to 65% of total group production.
Those diamonds are sold in terms of a marketing agreement with the Botswana government which comes up for renewal in 2010 with initial negotiations due to start next year.
“The situation is ugly. We only took this route because we had no other choice after finding ourselves as the ham in the sandwich between De Beers and the Botswana government,” said African Diamonds MD James Campbell.
According to a diamond industry analyst, “De Beers management should not have allowed this dispute to become public. It would
not have happened under previous MD Gary Ralfe.
“It’s a stupid thing to do ahead negotiations with the Botswana government on the next diamond sales contract which start next year.
“De Beers will be seen as bullying a Botswana company because African Diamonds is listed on the Botswana Stock Exchange and 300 of its 1,500 shareholders are Botswanans.”
A former De Beers executive
said, “No junior has ever declared war on De Beers like this before. The underlying driver is probably the tight rough diamond supply situation.
“I also think De Beers management lost sight of the need to replace the production it was so busy marketing.
“Between the 700 staff they retrenched and the 400 that has left them voluntarily I question whether the group has the capacity anymore to deliver on a major, new project.
“We may actually be watching the end of one of the world’s greatest mining companies.”
The Botswana government is on a campaign to transform the country from a diamond producing nation into a diamond marketing and beneficiation centre over the next ten years ahead of a forecast sharp drop in revenues from the country’s diamond industry.
That drop will be triggered when operations at Jwaneng and Orapa – the country’s largest mines owned by De Beers Botswana which is a 50/50 JV between De Beers and the Botswana
government - have to go underground.
That will result in lower production, higher costs, lower profits and reduced tax revenues to Government.
As part of this strategy the Botswana government wants to establish a separate marketing channel for diamonds produced in the country by new operators to be sold outside the established De Beers/Diamond Trading Company (DTC) system.
According
to Akolang Tombale – former permanent secretary in Botswana’s department of minerals, energy and water resources who is now in charge of developing Botswana’s “Diamond Hub” - the reasons for this are to increase overall business volumes and get a comparison against prices on rough diamonds achieved through De Beers/DTC.
Diamonex’s new Lerala mine which has just started production has agreed to do this and the terms of the AK6 mining licence also specified this requirement.
That’s the root of the trouble according to Campbell.
“The Botswana government is taking a harder and harder line on diamond marketing but De Beers won’t budge on its requirement that the production go through the DTC," Campbell said.
“It was only when De Beers realised just how serious the Botswana government was over its marketing demands that it came up with the story AK6 was not viable because of concerns over the future power supply.
“De Beers has now
applied for a retention licence to delay development of AK6 for between three and five years which is not in the interests of African Diamonds nor of Botswana.
“We went to great lengths trying to negotiate with De Beers but eventually found ourselves left with no option but to go after them hammer and tongs as we are now doing,” he said.
Campbell rejected the power supply concerns saying AK6 would need only 7MW to start operations rising to a total of 12MW at full output.
“Even if the Botswana Power Corporation cannot deliver that electricity the economics of the mine justify self-generation of power which is what Diamonex is doing at Lerala and Gem Diamonds will do at Gope,” he commented.
Campbell accused De Beers of inflating the capital cost estimates on AK6 so as to make self generation of power for the mine look uneconomic.
A De Beers spokesperson in London said neither chairman Nicky Oppenheimer nor MD Gareth Penny was
available for comment.
De Beers’ stance is that it is fully committed to bringing AK6 on line but the shortfall on power is not expected to be resolved before the middle of 2012 at the earliest.
De Beers has also stated that “it is likely the diamonds will be marketed through the De Beers/GRB (Government of the Republic of Botswana) joint venture – DTC Botswana.
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