The Way Forward for Diamond Beneficiation

1. The Way Forward for Diamond Beneficiation Keith Jefferis Diamond Beneficiation Pitso April 4th, 2011

2. Outline • Objectives of beneficiation • What determines the location of mineral beneficiation? • Building sustainable beneficiation in Botswana • Some views on Debswana • Policy recommendations

3. Botswana’s Diamond Beneficiation Objectives • Short-term objectives are clear: • Establish downstream diamond-related activities (diamond cutting and polishing, jewellery manufacturing, diamond trading) and related support services • Increase local value added, create jobs, increase exports, diversify the economy • An embryonic cutting & polishing industry has been established • Botswana has used its leverage as world’s largest producer of rough diamonds • Manufacturers have located in Botswana in order to secure access to rough • Botswana’s diamond production, at scale, will last another 15-20 years on current projections • Clarity needed on longer-term objectives – beyond dominant position in diamond mining

4. Key Beneficiation Questions for next 15-20 years • Do we want a sustainable diamond processing and manufacturing industry beyond that time – or are we just intending to maximise processing over that period? • If we want the latter, then the industry will gradually wind down as our leverage over rough supplies declines, and it may also be difficult to expand significantly beyond current levels. • If we want the former, we have to change from “be here or else” to “be here because this is a globally competitive location for diamond manufacturing activities” • In other words, we need clarity over whether are the longer-term policy objectives are: • To secure additional value added from Botswana’s primary raw material resource – diamonds mined within the country, or • To build comparative advantage in diamond-related activities that will be sustainable when diamond deposits are depleted

5. Beware the Value Chain! Most VA is in mining – must keep perspective over VA in cutting & polishing – and beware the industry does not cost more than we earn

6. What Determines the Location of Beneficiation?

7. Minerals Beneficiation: What Determines Location? Beneficiation involves combining raw materials (minerals) and other inputs, into a process product, for sale to an (industrial) end user Raw materials (minerals) End User (Industry) Beneficiation Other inputs Location: beneficiation can in principle take place where the minerals occur, where the other inputs are available, where the final market is, or somewhere independent – hence a choice of four (or more) locations Utilities Taxes Skills Finance Land The most important single determining factor of location is transport costs Economic environment

8. Aluminium Production: What Determines Location? Aluminium production involves combining raw materials (bauxite) and other inputs (primarily electricity), and refining Bauxite Jamaica Aluminium production Industrial Users Other inputs Mozambique USA, Europe, Asia Location: determined by the availability of low cost electricity – bauxite and aluminium can be transported easily and cheaply; electricity cannot Mozambique Electricity Taxes Jamaica cannot beneficiate its bauxite because it does not have complementary inputs and cannot easily obtain them

9. Diamond Beneficiation: What Determines Location? Rough Diamonds Cutting & polishing Jewellery manufacturers Other inputs Location: the cost of transporting diamonds is effectively zero, and hence in a competitive market – where rough diamonds can be readily bought and sold at transparent prices – the location of raw materials would not determine the location of beneficiation. In such a market there would be no intrinsic economic advantage in beneficiating diamonds where they are mined. Utilities Taxes Skills Finance Land Economic environment In general, diamonds are not beneficiated where they are mined

10. Diamond Beneficiation: What Determines Location? • Diamonds are not beneficiated where they are mined: • Suggests “other factors” are more important in determining location • The location of beneficiation is not static – Israel, Belgium, India, China etc. have all built beneficiation activities over time • Efforts by producing nations to build sustainable (unsubsidised, competitive) beneficiation industries have not generally been successful – why not? • Botswana is not yet globally competitive in diamond cutting & polishing – how can we be different?

11. Characteristics of the Rough Diamond Market • Market is not fully competitive • Product is highly differentiated • Pricing is not transparent • Global supplies are running out • Supply chains – and security of supply - are important Eg, in comparison with LME copper Hence producers (mining nations) have leverage in the market

12. Building beneficiation - Stage 1 • Use leverage to “persuade” beneficiating firms to locate • Works while country has control over supplies, especially if global shortage • Reinforced by subsidies (explicit or implicit) • But also makes a country highly vulnerable to “flight” as control over supplies diminishes • Not enough for long-term sustainability

13. Botswana’s beneficiation industry • “Diamond cutting costs $12 to $25 per carat in India, $20 to $30 in China, and $60 to $65 in Botswana” • “Companies agreed to forego some profits to gain supply in a sector where new mines are scarce and ensuring a steady stream of top quality diamonds is difficult” • “Everybody recognises that profitability will be less than in India or China, but it’s a strategic choice to secure supply” [DTC official, 2006]

14. Building beneficiation - Stage 2 • “Moving from leverage to competitiveness” • As influence of raw materials (rough supply) declines then “other factors” become crucial • Need to work on making those “other factors” globally competitive if we are to have a sustainable industry • Made more difficult by “Dutch Disease” problems • well-established process whereby mineral exporters find it very difficult to build competitive manufacturing industries • Need to work on all the factors that drive location – not just control over supplies • Control over supplies gives a “window of opportunity” to make that shift

15. Key long-term determinants of competitiveness • The workforce is key: • General education • Job-specific skills and training • Productivity • (unit) labour costs • Work ethic • Labour relations • Work permits • Government, firms and unions/workers all have responsibility

16. Key long-term determinants of competitiveness • Support / complementary services • Specialised diamond-specific services (brokerage, security etc.) • Finance • Tax regime • Hotels • Air travel • Telecoms/internet • Reliable and clean power

17. Policy imperatives to support the shift from leverage to competitiveness • In the long run, its not about control over diamond mining, its about competitiveness – price and non-price • Focus on the cost base • Invest in skills • “Open door” immigration policy for the industry: • expatriates create more jobs than they take • current work permit and visa regime is not supportive • Improve quality of telecoms, power, hotels • Air connections – “open skies” to attract international carriers • Supportive government institutions • Competitive tax regime

18. Some views on Debswana

19. A Strange Fish • Debswana is an “unusual” mining company • What does a “normal” mining company do when faced with declining reserves? • Exploration • Expansion outside of its home base (other countries) • Move into related activities (other minerals?) • Debswana does none of these • Mainly functions as a fiscal machine for GoB • GoB’s share not managed as an investment with an eye on the long-term • Structure & tax regime does not provide De Beers with incentives to bring exploration and expansion within Debswana • Hence Debswana’s long-term future post-Jwaneng/Orapa is not assured

20. Debswana long-term solutions • Explore and expand – if necessary outside of Botswana • Manage GoB shareholding as an investment • Needs clear distinction between 3 roles of govt – shareholder/investor, tax recipient, and industry regulator • Reconsider relationship with De Beers • Split? • Fold Debswana into De Beers? • with a significant increase in GoB share • to secure real influence over development strategies, and access to long-term opportunities • Debswana valuation is key • Move into synthetics • Likely to become increasingly important as supplies of natural diamonds decline • Can be done anywhere • A way of maintaining dominant supply position

21. Some policy suggestions

22. Policy Suggestions • Clarify objectives: maximise value from rough production or build long-term sustainable capacity, beyond mining • Develop strategy accordingly: leverage or competitiveness • For long-term competitiveness: • Focus on costs – closing the gap with India - not job numbers alone • Build skills, productivity, competitive workforce • Beware cost impact of well-meaning policy changes • Encourage joint ventures – citizen involvement in industry • Encourage innovative financing mechanisms • Work with unions – they must understand how business works • Be open to global economy – encourage expatriates and alternatives to Air Botswana • Build necessary infrastructure (power, telecoms) – at globally competitive price and quality

23. Thank You Keith Jefferis Econsult Botswana (Pty) Ltd www.econsult.co.bw keith@econsult.co.bw