De Beers-Botswana deal signals rocky road for rough diamonds

By Felix Njini and Clara Denina

NAIROBI/LONDON (Reuters) – An eleventh-hour deal between Botswana and De Beers over the weekend demonstrates the pressure the 135-year-old gems producer is under as it resets ties with its leading supplier amid pressure from falling prices and growing competition.

Both parties potentially had a lot to lose if talks broke down. While Botswana supplies 70% of De Beers’ rough diamonds, diamond sales account for two-thirds of Botswana’s foreign currency receipts, and a fifth of its gross domestic product.

Nonetheless, as the deadline for a new sales deal closed in, President Mokgweetsi Masisi publicly threatened to torpedo Botswana’s 54-year ties with De Beers unless it ceded a bigger share of rough stones to the state.

It sounded like populist rhetoric in a high-stakes negotiation – until the global diamond miner caved in.

“There was… a desire to cooperate and reach a deal. The opposite would have been very damaging for everyone concerned, for our industry,” De Beers CEO Al Cook, who took the helm of the company in February, told Reuters on Monday.

The company, along with the rest of the global diamond sector, is facing headwinds from a 6.5% drop in diamond prices in the year to date, and a loss of market share to synthetic diamonds.

Western customers seeking assurances that purchases do not come from Russia, where the other main producer Alrosa is headquartered, also worked strongly in Botswana’s favour in the talks.

That helped the country wring handsome concessions from De Beers, including an increase in its share of diamond production from their Debswana joint venture to 30% in the near term and 50% by 2033, from 25% currently.

Botswana had already increased its share of gems from Debswana – sales of which stood at $4.588 billion in 2022 compared with $3.466 billion in 2021 – from 10% in 2011 to 25% in 2020.

In addition, the world’s number one producing country by value secured multi-billion dollar spending commitments to extend the life of its giant Jwaneng diamond mine, one of the world’s richest.

Analysts said the agreement weakens the investment case for the Anglo American-owned gems miner.

“With the mines going deeper and capital operating costs significantly increasing, the investment required by De Beers for only 19.2% of the profits makes this partnership no longer the dripping roast it once was,” Richard Chetwode, a diamonds industry analyst said.

“Without diamond price upside, this deal makes the investment much more marginal,” he said.

Analysts at RMB Morgan Stanley said the pact could result in a $100 million hit on DeBeers’ core earnings. Over a decade, the impact on its finances may reach $200 million, or 15% of total earnings before interest, tax, depreciation and amortisation, they said.

“The agreement removes prospects of a protracted dispute and an eventual bear-case scenario that could undermine the economics of De Beers’ Botswana business altogether,” RMB Morgan said.

“Nonetheless, the outcome of these discussions is likely to result in additional value leakage.”

Cook, who said some analysts had misinterpreted the details of the deal, defended it.

“We had to do two things,” he said. “Make sure we got what we needed – and make sure that we got Botswana what it needed.” The deal achieved both, he said.

(Reporting by Felix Njini and Clara Denina; Editing by Veronica Brown and Jan Harvey)