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INTERVIEW WITH DAVID MAGANG, BOTSWANA'S MINING MINISTER (November 17, 1997)


WE PLAN TO GO "DOWNSTREAM," CUTTING BETTER QUALITIES ­ FOREIGN MANUFACTURERS ARE INVITED TO SET UP DIAMOND PLANTS.

COMMITTED TO SINGLE-CHANNEL MARKETING, BUT NOT TO MAINTAINING BUFFER STOCKS

POTENTIAL NEW NON-DE BEERS MINING PRODUCERS MAY MARKET INDEPENDENTLY

An annual diamond mining output of some $ 1.6 billion makes Botswana the world's richest rough diamond producer. With a population of only 1.6 million, the country's annual diamond revenue is $1,000 per capita. Its substantial mineral resources have helped transform this sub-Saharan African country from one of the poorest in the 1960's and 70's to a middle-income country in the 1990's. It enjoys a stable democratic system, dominated by the Botswana Democratic Party (BDP). The economy is almost fully "diamond driven": rough diamond production accounts for about 30 percent of GDP, 70 percent of exports, and more than 45 percent of government revenues. When the international diamond markets weakened in 1992-1995, Botswana had to contend with a serious economic recession, compounded by the impact of the worst droughts of the century in 1991. With annual inflation rates of 10-11 percent and serious unemployment, the government's National Development Plan focuses on "sustainable economic diversification." The government considers the development of a labor-intensive diamond manufacturing sector as top priority. This was stressed by the Hon. David N. Magang, M.P., Minister of Minerals, Energy and Water Affairs, in an exclusive interview with Miller Freeman Group Diamond Editor Chaim Even-Zohar. Extracts follow.

David Magang: It is important to understand that the history of Botswana's diamond industry is relatively short in duration but has been extraordinarily eventful. It is scarcely thirty years since De Beers geologists first discovered diamonds in Botswana. The announcement of a discovery at Orapa was made in 1967, the year after Botswana's independence. Development of the Orapa mine was completed and production commenced in 1971.

Within a very short time, plans were made to double Orapa's production and also to develop another smaller mine at nearby Letlhakane. These projects were completed in the mid-1970's and, very shortly thereafter, the discovery of an even richer deposit at Jwaneng was announced. Construction of the Jwaneng mine began in 1979 and it commenced commercial production in 1982. Within a few years, its capacity was expanded. Almost as soon as that was completed, work began on planning a major expansion of Orapa to double its capacity again (from about 6 million carats per year to about 12 million by the year 2000). This project is one of the largest single diamond mining projects ever undertaken anywhere in the world ­ it is well under way and scheduled for completion towards the end of 1999.

CEZ: You currently have three diamond manufacturing operations in your country. The manager of one of these told me that he was actually losing money. Why is it so important for you to widen the manufacturing sector?

DM: With an economy that is dominated by one world-class resource, we have to look to the diamond industry to meet a wide range of socioeconomic objectives which extend beyond the mining and marketing of rough diamonds. Obviously we have to ensure the health of the goose which lays our golden eggs, but as long as it remains strong we must look to it as a means of achieving broader objectives such as: (1) training and developing our young and inexperienced labor force; (2) extending our range of activities from primary extraction to secondary manufacturing and tertiary services; (3) forging linkages with other economic sectors which will pull some of them into a higher league of fully competitive, free-standing international industries; (4) opening up opportunities for Botswana's professionals and entrepreneurs to begin the process of building a successful economic base for our country. In short, we must seek out any and every opportunity to generate greater value added from our diamond resources.

CEZ: You continuously intimate that diamond manufacturing has great potential for Botswana, even though there is no proven record of making profits.

DM: What we would like to be able to do is to build upon our position as the world's leading supplier of rough diamonds and to extend the range of activities which can be undertaken on an internationally competitive basis in Botswana. A logical strategy would be to move "downstream." A substantial diamond cutting and polishing industry, combined with the manufacturing of diamond jewelry, could genuinely add value to our rough stones and, at the same time, provide employment for many of our citizens. For all its many virtues, our diamond mining industry generates very little direct employment relative to the scale of investment and the value of its output, and therefore, in a sense, it is failing to contribute to one of our foremost economic objectives, namely employment generation. Diamond cutting on a fully competitive basis could have the potential to contribute much more to our employment needs.

CEZ: But if you agree that the diamond plants in Botswana are losing money, why do you think that you can attract more foreign investors to set-up cutting plants?

DM: I think there are many factors. We, as a government, initially focused mostly on employment creation. Thus we started to process small diamonds which is very labor intensive and thus clearly answered one of the government's requirements to create more employment. But we ended up competing against India which has competitive advantages at [cutting] these small goods and therefore, here the competition is much greater than we initially thought. My strategy now is that we can improve upon that by going to higher goods which are more salable and much more profitable. Now, we should put the emphasis on value. It does not matter whether you are employing 100 or 50 or 10 people as long as you add value. Therefore, although these two companies [one factory is a joint venture between the government and De Beers, and another with Lazare Kaplan] are running at a loss. They do provide employment, but because of the tough competition against the Indian market, they are not making money. There are also other factors.

CEZ: What is your solution to enable the present, and future, factories to become profitable?

DM: Polishing diamonds at a loss does not add value to anything. We are looking carefully at them [the two large unprofitable factories] to see how their viability can be improved. The solution will probably entail an improvement in skills and a move towards cutting larger, higher value stones. We would very much like to have new, free standing internationally competitive cutting factories in Botswana, but they must be genuinely viable. Otherwise, we could end up detracting from the value of our existing production rather than enhancing it.

CEZ: Do I understand correctly that you want to process the better qualities, the Thai and/or Israeli type of goods in Botswana? Do you invite foreign (Israeli and other) manufacturers to come to Botswana?

DM: Yes, we invite them. After all Israelis are benefiting from diamonds through processing although they have no diamond reserves in their own country. Most of our diamonds are being manufactured in Israel and in India. The fact is that in a cutting center, such as we are aiming for, employment would not only be in the industry itself, but many would also acquire skills in terms of marketing sales and gain expertise about the product that is being sold. We have determined that we must go for the better goods. The Indian industry has set a standard of competitiveness in the polishing of small diamonds which no other cutting center can match.

CEZ: You seem determined to transform Botswana into a manufacturing center. You are basically extending invitations to diamantaires from other countries to come and you will welcome them. Don't you think De Beers will frustrate such attempts?

DM: Naturally De Beers has not always encouraged diamond cutting because of a belief that diamond mining countries should not be involved in the diamond cutting. I don't buy that idea myself. The annual worldwide production of rough is about $7 billion. The polished represents $12 billion and the diamond-set jewelry accounts for $52 billion. I believe that we will benefit [if we engage not only in producing rough, but also in manufacturing polished and jewelry] much more in terms of value. Because all along we are then creating employment, skills, and a better, well informed society.

CEZ: You are at the moment working with diamond valuers. Are you comfortable that you have a correct appreciation of the value of your output? Are you comfortable with the current system?

DM: Under the present circumstances, what else can we say? We depend on employing foreign diamond valuers. We rely entirely on their professional understanding of the rough values. In addition to that, we have our own people who have been diamond sorters and diamond valuers at the sorting level, but not at the rough marketing level. I cannot say that we are entirely confident, but under the circumstances we have to believe in our diamond valuers, because we pay them. We think we get value for our money, but we are only human beings.

CEZ: Russia enjoys a "market window," the ability to sell part of the output independently, to test the market and get good feedback on prices. The Russians call it their "control batch." Don't you also feel a need to have a "market window?"

DM: We have, indeed, been talking about the window. But it is unfortunate that if we would have a window, then we would again need someone else to sell for us. One of the views expressed by our government is that we don't yet have our people who can test that window. It means we will have to look for somebody else again, someone to exercise that test without our own people.

CEZ: What you are implying is that if you really want, you can have a market window, but because you don't have the means to administer it effectively, then you don't have it.

DM: Yes, that is really the answer. We employ a government valuer to value the diamonds that we sell to De Beers. If we had a market window, we would be forced to ask that same valuer to tell us what value the window is. But unless we have our own people doing that, separately from the diamond valuer, then we believe that a window doesn't improve the situation. But we renew our sales agreement with De Beers every five years, so the option is still there.

CEZ: I want to make sure I understand you correctly. You say that the agreement gives you the right to decide, at your option, whether you want to have a window.

DM: If we really wanted to have the window and we are ready for it, then we'll get it anytime. I don't see any problem.

CEZ: You are the government, De Beers is an international conglomerate. The best interests of the nation are not necessarily at all times fully compatible with the best interests of De Beers.

DM: Yes, these interests are not necessarily the same. Some of our interests are shared but some are different. We share the same goal but there are conflicts in terms of downstream processing. I see a conflict because De Beers is not in favor of training our people, particularly in marketing, and so far, it has not been forthcoming. In Botswana, De Beers' major operation is mining and there is very little related industry to speak of. De Beers in Botswana is not very well diversified. We, however, do diversify ourselves and revenues derived from mining are plowed back into the industry. As I have pointed out before, in instances where Debswana's interests come into conflict with those of other producers, especially producers in which De Beers has an economic interest, our interests may diverge. There is also an obvious potential conflict regarding how the Debswana mines profits are shared.

CEZ: You are greatly expanding diamond production, and you focus on increasing output of one of the medium quality mines. Is that in reaction to the Argyle "defection" from the single channel marketing mechanism? Are you demonstrating your belief that the cheaper goods have a good future and therefore you are expanding Orapa?

DM: Well the cheaper goods have always had a good future for different uses, but the Argyle perspective seems to indicate that there is much more to it. The Australian goods have always been regarded as lesser goods ­ valuewise. The Orapa mine produces many of these cheaper goods. If Australia has been doing well, then we can certainly improve on what we have.

CEZ: So there is a connection between the breaking away of Argyle and your decision to double the quality production of the mine.

DM: No. There is no relationship. Our view is that my country depends on diamonds. We have always looked upon our diamond production and the revenue it derives, from the perspective of being the only high class resource we have. If we have more revenue from our diamonds, we will be able to convert it into diversification of economic activities in the country. In other words, we have always seen diamonds, like all minerals, as a non-renewable resource and our view is to look for more economic activities which are sustainable for long periods. If there are other potential diamond mining producers [in the world] then it is better that we increase our production now in order to compete in the market, rather than delay more production, because others will come and take it.

CEZ: Isn't this inconsistent with single channel marketing philosophy, that calls for withholding goods from the market when there is oversupply? You say: others will be producing and marketing more goods and thus we must hurry to increase our capacity.

DM: Diamonds are like a game of marbles, the one who has more marbles is the winner. Therefore, this is an opportune time to invest in expansion rather than wait until others have come here and then we might get into a situation where we are fighting to get into the market instead of maintaining the momentum and the leadership. Hitherto Botswana has determined that its best interests lie with the single channel marketing of the CSO. We have a particular need for stability, predictability and sustainability. Under the present circumstances, the best chance of creating these conditions lies in committing our production to sale through a single channel, as long as it is transparent.

CEZ: You are expanding just after your sale of the deferred purchases stocks, which you had to keep in inventory because of oversupply. When De Beers bought these goods earlier this year, was that at a reduced price or the normal price?

DM: Although I haven't got the precise facts, I would say it was at the normal price. We have an understanding that if we have those stocks in stockpile, whenever the market allows its sale it is still at the same price, because they were valued at the same price. If the price is higher, we have to share the difference [with De Beers].

CEZ: And if the price goes down?

DM: No, it doesn't go down, because that is specified in terms of the marketing agreement.

CEZ: Could you be more precise on why you are expanding, while the industry is facing oversupply in the cheaper ranges?

DM: Other producers admit that they benefit from the activities of the CSO, but in practice give it less than full support or no support at all. Occasionally, our antennae pick up the sentiment that "Botswana is so dependent upon diamonds, that they'll pick up the tab." Let there be no mistake: Botswana is prepared to play a full role in the market management function, but it will not accept the burden of acting as the swing producer and buffer stock for the industry! That should answer your question.

CEZ: An entirely different question: Are you feeling comfortable with De Beers' agreement with the Russians? The Russians seem to be getting a much better deal than you have.

DM: I don't know the agreement as it stands at present. I haven't seen it. It is a 12-month agreement but I agree with you that the Russians have a better deal because De Beers recognizes that Russia should not only benefit from cutting and processing their diamonds and so forth, but it also recognizes that they could have a bigger window in the market. So that's where they have the advantage. This is in contrast with our situation. A recognition of Botswana's interest to develop the diamond cutting industry has never been in the minds of De Beers.

CEZ: You say that you are not familiar with the Russian contract. How is your relationship with other independent producers, the non-De Beers producers like Argyle and the Russians, do you have many contacts?

DM: No. We don't have many contacts. We have been in contact with the Russians and unfortunately the political developments in Russia in the last four years have not yet firmed up our relationship. With the Australians, very little contact. Let me just say that we have not firmed any relationship with any producer countries, mainly because they have relationships of one sort or another with De Beers, and De Beers being our partners means that we tend to have an indirect relationship with those countries. With the Australians for instance, we have not yet firmed any good relationship but after their presentation this afternoon [speech by Argyle's Mike Mitchell at the FT Conference], I think we can learn a good deal from them, even in terms of training our own people and probably opening our eyes in terms of what resources can be optimized.

CEZ: How much is your annual output? How much money does actually remain in Botswana?

DM: We produced 17.7 million carats in 1996. In terms of carats, this places Botswana in the top three or four producing countries. But in terms of aggregate values, Debswana's sales revenues in 1996 were just over $1.5 billion dollars. This places us first in the world by value, ahead of Russia, ($1.15 billion), Angola ($1.05 billion) and South Africa ($1.0 billion). Botswana's production was equivalent to about one third of CSO 1996 worldwide sales of $4.8 billion. When you consider our share of the profits, taxes, royalties, dividends, etc., we see as total Botswana revenues, anything between 60 and 70 percent.

CEZ: Do these arrangements seem equitable?

DM: These are our diamonds. Insofar as sharing of profits and taxes paid, this has been, until now, a satisfactory agreement. It is the linkages which may be missing here ­ the downstream ability. Maybe our people tend not to come into the management stream, to take responsibility and so forth.

CEZ: What is next? Are there more diamond mines in the planning?

DM: There is still more prospecting of diamonds by other companies besides De Beers, including Ashton, BHP, and others. Apart from them there is prospecting and evaluation of possible mining at a Botswana reserve. I recently commissioned the start of a small mine in the northeast of the country ­ a long area which consists of six small pipes still under evaluation. We are allowing Anglo a four-year trial mining so that we can evaluate and then proceed with it. We anticipate that there will be other mines. But, as you know, the Orapa mine and the Jwaneng mine will be operating for the next 30 years or more. So we are not in any hurry.

CEZ: If other mining companies commence operations in Botswana, is their output automatically channeled through the single channel marketing system?

DM: Other companies will be entitled to dispose of their diamonds as they want.

CEZ: What do you expect to be the diamond output ten years from now?

DM: Maybe in terms of anything between 25-30 million carats. Now we are one-third of the world production, maybe we will move to 40 percent, depending on how much the Canadians will bring out. In Angola there will be more discoveries, after having been involved in a civil war for a long time, obviously its full potential is not yet known.

CEZ: Minister David Magang, Thank you very much.

The full interview will be published in the November 1997 issue of Mazal U'Bracha, the international diamond magazine from Israel.

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