Botswana: Soon to Become an International Diamond Hub

Botswana wants to expand its presence and extract more value from its diamond industry. To achieve this goal, its government is developing the country into an international diamond hub — but in doing so, the country also wants to lay a foundation for further economic diversification.

Diamond industry players should not be shocked if future business has them embarking on, or at least contemplating, a trip to Gaborone, the capital of Botswana. If things play out the way the Botswana government envisions, this city will become the place to go for all things diamond.

Botswana already has the goods. Last year, the government signed a 10-year supply agreement with De Beers. Under the terms, De Beers agreed to shift its sights and sales operations to Gaborone. That was a significant milestone for Botswana as activities that have been conducted in London for decades will now take place within its borders.

De Beers is making the transition in stages. Aggregation of its global supply in Gaborone began in August, and is expected to result in $6 billion worth of diamonds flowing through Botswana. The transition of sights and sales operations is expected to be complete in less than a year.

While DTC, wholly owned by De Beers, is in Gaborone sorting, selling and holding sights on behalf of its parent company, DTC Botswana (DTCB), a 50/50 joint venture between Botswana’s government and De Beers, will be similarly engaged. DTCB will sort and value the diamonds mined by Debswana, another 50/50 joint venture between Botswana and De Beers.

Botswana has also plotted out a sales pipeline that will function independent of De Beers. The government made a deal that will see it receive 10 percent of Debswana’s production — rising to 15 percent over five years — and has developed the Okavango Diamond Trading Company to market and sell the diamonds it will gain through that agreement. Trading from this enterprise is slated to begin in the second quarter of 2013.

The government recognizes that achieving its goals cannot be a solo effort and has called the private sector to the playing field. Many individuals and organizations are answering.

Cutting and polishing operations, jewelry manufacturers, brokers, freight companies, banks and other businesses see opportunity and are establishing operations in Gaborone. Some, including consultants, gemologists and diamond miners, are doing so as tenants in the new Diamond Technology Park (DTP). Included in this complex is the Bourse Building, a diamond-trading platform that DTP CEO Rutang Moses said is “designed as a diamond tender house.”

Nations that have failed to get in on the value-added portion of pipelines for the resources they produce are considered a major cause of stunted economic growth in Africa. Botswana is clearly striving not to be part of that crowd.

But Botswana’s effort to establish an international diamond hub is about more than becoming a dominant global diamond player. It is about laying the foundation for economic diversification.

Botswana is extremely dependent on the diamond industry. Diamonds account for roughly a third of its GDP and 70 percent of its exports. If prices or demand dive, the nation’s economy feels the pinch.

Furthermore, Botswana’s diamond reserves are believed to be dwindling.

International Monetary Fund forecasts show that Botswana’s diamond reserves will reach a peak of 31 million carats in 2017, suffer sharp declines beginning in 2020 and then be depleted in 2029, a Rabobank report states.

A World Bank report identifies diversification into sectors beyond diamonds as a “major challenge” for Botswana. It also notes that “the level of economic diversification needed to offset diminishing mineral revenues will remain an elusive goal unless concerted actions are taken now.”

Thus, Botswana’s plan is to build out its diamond industry in the hope that doing so will result in the development and expansion of other industries.

Junior miners eyeing opportunities in Botswana should have at least two things in mind. First, while Botswana is considered an investment-friendly and politically-stable country, the government is aiming to extract more benefits from the diamond sector.

“We would like to see all diamonds produced in Botswana, sold in Botswana,” PHK Kedikilwe, Botswana’s minister of minerals, energy and water resources, told Rapaport.

The growing diamond pipeline companies with value-added or branding goals could find Botswana an accommodating environment. But those looking to simply dig and export rough diamonds may find themselves increasingly at odds with national interests.

Second, companies should remember that Botswana is focused on the diversification of its economy. As the government seeks to achieve its goals, it is encouraging investment in — and exploration and development of — Botswana’s other exploitable resources. That could provide diversification opportunities for junior miners.

Securities Disclosure: I, Michelle Smith, do not hold equity interest in any companies mentioned in this article.