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Why Botswana chose not to raise stake in De Beers?

20 august 2012

Anglo American agreed last year to buyout the Oppenheimer family's 40 percent stake for $5.1 billion in cash.

The Botswana government, under the terms of the agreement, had pre-emptive rights to lift its interest in De Beers to 25 percent from 15 percent.

However, Botswana decided not to exercise its rights late July, ending months of speculation.

The Mmegi newspaper reported that had Botswana exercised the right, the decision would have not only pushed back the restoration of balancing the budget but drained the country's international reserves on top of raising the government debt to GDP ratio.

The total debt portfolio for Gaborone was BWP20.5 billion ($2.7 billion) as at June 30, 2012 while external debt stood at BWP14 billion ($1.8 billion), constituting 68 percent of total debt.

"Such a purchase would have raised the government debt to GDP ratio thus precluding the government from raising additional debt in the international markets for other projects,” said the government of Botswana in a statement.

"However, we look forward to building on the excellent relationship we have with Anglo American, both through our ownership of De Beers and through the Debswana joint venture, and to sharing in De Beers' highly attractive long term prospects."

Analysts had also said last June that the southern African country would unlikely boost its shares in De Beers, as there was little strategic rationale in Gaborone spending over $1 billion to increase its stake in the diamond company.

“… we are of the view that there is little strategic rationale in [the government of Botswana] spending $1.26bn to increase their stake in a business that they already effectively ‘control’,” Miningmx quoted Kieran Daly, an analyst for Macquarie Research as saying.

RBC Capital Markets analyst Des Kilalea also said that Botswana government already had control of its stake in Debswana so it may not make sense to follow its rights.

Botswana and De Beers had 50 percent stakes each in the diamond company (Debswana), regarded as the world’s leading gem producer by value.

Gaborone also benefited from tax and royalties contributed by Debswana from its diamond operations to the country’s Treasury.

They also cited the new sales agreement between Botswana and De Beers as another reason Botswana could not up its stake in the group.

Under the agreement, De Beers’ Diamond Trading Company (DTC) will relocate its Sights and sales operations including professionals, skills, equipment and technology from London to Gaborone by the end of 2013.

DTC will also aggregate production from De Beers' mines and its joint venture operations worldwide and sell to international Sightholders.

Diamond Trading Company Botswana (DTCB) will continue to sort and value Debswana's production before selling it on to DTC.

In addition, the agreement provided for an independent sales outlet for the Botswana government.

Although Botswana could not take up its 10 percent allocation of Debswana's run of mine production for the year 2011, this will continue and even go up to 15 percent over a five year period.

"To us, that leverage is extremely important because we won’t be depending solely on De Beers to do the marketing,” Minerals minister Ponatshego Kedikilwe (now Botswana vice president) said last June on the sidelines of a mining conference in Gaborone.

He said the government had established a company known as the Okavango Diamond Trading Company to market its gems.

Meanwhile, DTC chief executive Varda Shina said the first auction for sightholders in Botswana would only be held at the end of the year as a test run for the $6 billion-a-year business.

The first full-scale auction was set for January 2013.

“We believe it will be a great catalyst for Botswana and southern Africa – much bigger than anything that has ever happened before in Africa,” she said.

“It will lead to a massive inflow of expertise, technology, people and business sense. Some of the world’s top experts from China, India, Europe and Israel will be coming here, because it will become an extremely important hub.”

Botswana sees this as a major move towards its country’s economic development and no amount of shares in De Beers would equate this drive.

So with Gaborone opting not to increase its shares in the diamond group, Anglo said it will acquire an incremental 40 percent interest in De Beers, taking its total interest to 85 percent.

"The innovative partnership between Anglo American and the Government of the Republic of Botswana (GRB), as the shareholders in De Beers, is a clear demonstration of the level of commitment of the GRB to the long term prosperity of the world’s leading diamond company,” said Anglo chief executive Cynthia Carroll.

The deal was set to be concluded by next month if not this August and it also remained to be seen how Anglo will transform the diamond group at a time the industry is facing weak demand from its traditional and emerging markets.

In a nutshell it should be said that Botswana made a wise decision not to up its stake in De Beers for this would have militated against its efforts to reduce the country’s budget deficit in the next 17 months.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished