DIAMONDS ARE BOTSWANA'S BEST FRIEND

UNCLAS GABORONE 000514


DEPARTMENT FOR OPIC: C. COWAN; ABUJA FOR H. MERRITT
USAFRICOM FOR STRATEGY PLANS AND PROGRAMS (MC) SOUTHERN
BRANCH

E.O. 12958: N/A
TAGS: ECON EMIN BC
SUBJECT: DIAMONDS ARE BOTSWANA'S BEST FRIEND

REF: JUNE 4 2008 EMAIL FROM E. PELLETREAU


1. Summary. With the opening of the Diamond Trading Center
(DTC),Botswana has successfully moved up the value chain in
the diamond industry. No longer just a raw producer of
diamonds, Botswana is now host to all steps in the diamond
industry - from mining and producing to sorting, cutting, and
polishing to aggregating and selling to the world market.
The country will reap the benefits from the DTC in terms of
revenue and job creation well into the future or as long as
Botswana's diamond mines continue to produce high value gems.
End Summary.

Economic Effect
--------------


2. Despite efforts to diversify, diamonds still drive
Botswana's economy and have underpinned its economic growth
from one of the poorest countries at the time of its
independence in 1966 to its current middle-income status. As
former President Festus Mogae said at the opening of the
recently completed Diamond Trading Center in Gaborone,
"Botswana is what it is because of diamonds."


3. For the 12-month period ending June 30,2007, diamonds
accounted for 67 percent of total exports (down from a high
of 84 percent in 2003/04) and 28 percent of GDP (based on
current prices in pula). Diamond mining, however, is capital
intensive and only accounts for approximately five percent of
employment.

Debswana
--------------


4. Debswana, a 50-50 joint venture between De Beers and the
GOB, operates the four active diamond mines in Botswana,
including the Jwaneng mine, the world's richest diamond mine
by value. According to the Debswana 2007 annual report, the
four open pit mines account for 27 percent of the world's
diamond production by value, making Debswana (and Botswana)
the world's leading producer of diamonds by value. In 2007,
Debswana produced 33.8 million carats, down slightly from
34.3 million carats in 2006 but 2007 revenue was 18 billion
pula (approximately US$ three billion),a 3.5 percent
increase from 2006.


5. Debswana is faced with many challenges to contain costs in
the future. Inflation has increased its operating costs,
regional and local power shortages are affecting its
productivity, and the shortage of construction equipment,
especially tires, due to worldwide demand is affecting its
operations. Production and profits will also decline as
production moves underground and costs rise, which is
expected to happen in 2020.

Other Diamond Mining Companies
--------------


6. The success of Debswana has attracted other hopeful
entrants to the diamond mining sector in Botswana. Unlike
the Debswana mines, however, the ones expected to open will
be much smaller than the existing mines, have a relatively
short life, and are unlikely to be nearly as profitable as
the Debswana mines.


7. Boteti Exploration Company, a joint venture between De
Beers (66 percent owner),African Diamonds Plc (29 percent
owner),and Debwat (a joint venture between De Beers and Wati
Ventures; 5 percent owner),began mine construction in April
2008 of a mine in central Botswana near three of the Debswana
mines. The diamond pipe was discovered in 1969 but was
considered uneconomic until new technologies revised the
estimated size of the pipe and further sampling indicated
higher grades than originally thought. The mine, which the
company hopes to have ready by the last quarter 2009, has an
expected life of 10 years and an estimated reserve of 11.1
million carats.


8. DiamonEx, an Australian-based diamond exploration company,
through its Botswana subsidiary is the sole owner of the
Lerala Diamond Mine, located in eastern Botswana with an
estimated reserve of 3.7 million carats. The company expects
to begin production in July 2008 and to produce 330,000
carats per year. DiamonEx also owns 15,000 square kilometers
of mineral rights in Botswana, which it is actively exploring
for diamonds.


9. Gem Diamonds, a London stock exchange listed company,
through its wholly-owned Botswana subsidiary Gope Exploration
Company, has plans to develop the Gope mine located within 20
miles of the eastern border of the Central Kalahari Game
Reserve (CKGR) by 2010. However, the mine's location inside
the CKGR (which is the home of the San indigenous people)
make this project highly sensitive and it will require
additional consultations with the GOB and civil society. If
successful, the company believes the mine will produce one
million carats annually with an estimated life of 15 years.

Diamond Trading Company Botswana
--------------


10. In exchange for extending the Jwaneng mining license
another 25 years, De Beers agreed to enter into a joint
venture with the GOB to operate the Diamond Trading Center
Botswana (DTCB),the rough diamond distribution arm of De
Beers, in Gaborone. The DTCB was the fulfillment of former
President Mogae's goal to move up the value chain in diamond
processing by developing sustainable post-extraction diamond
industries in Botswana.


11. The US$75 million state-of-the-art sorting and valuing
facility opened in March 2008 with 500 employees, although
not all are in the cutting and sorting areas. Eventually
DTCB expects to have 3,000 employees. The facility with its
three sorting floors and 39 modern sorting machines is the
biggest diamond sorting facility in the world.


12. DTCB has the capacity to sort and cut 45 million carats
per year. Any shortfall from Debswana, which currently
produces around 34 million carats per year, will be made up
by production from new mines in Botswana or through
aggregating diamonds from other countries such as Canada and
South Africa.


13. DTCB expects to supply close to US$550 million worth of
diamonds to 16 local sightholders by 2009. DTCB has already
completed two sales in April and June 2008 and it expects to
sell US$375 million worth of diamonds in 2008. Once fully
operational, DTCB plans to conduct 10 sales per year.


14. DTCB will concentrate on the upper and middle ends of the
supply chain in order to stay competitive in the global
diamond cutting and sorting business. Botswana cannot
compete with other cutting centers because its labor force is
too costly -- approximately five times higher than that in
India or China -- and inexperienced compared to others.
DTCB, therefore, will focus on larger, more expensive stones
for which the labor component is a smaller proportion than
for lower value gems, which will remain a specialty of India.


15. In addition to the direct jobs created, the DTCB should
create additional jobs in downstream activities like banking,
security, insurance, IT, and others. Stanbic Bank Botswana,
a leading South African bank operating in Botswana, has
already announced that it will use its proceeds from a US$300
million bond offering to support the downstream diamond
beneficiation industry including financing of working capital
for the 16 diamond cutting and polishing companies in
Botswana and international banks such as ABN AMRO have
expressed an interest in opening in Botswana.

DTC International
--------------


16. De Beers also has announced that it will bring its
aggregation business (DTC International) to Botswana by the
middle of 2009. DTC International combines US$ six billion
worth of diamonds sourced from various producer countries
including Russia. Aggregation is currently done in London,
but producer countries will now sort their diamonds and than
send them to Botswana to be mixed and sold. With the opening
of DTC International, Botswana will now play host to all
steps in the diamond industry - from mining and producing to
sorting, cutting, and polishing to aggregating and selling to
the world market.

Sightholders
--------------


17. As part of the requirement to buy from DTCB, sixteen
sightholders have set up polishing, sales, and marketing
businesses in Botswana. Four have been in business in
Botswana for many years, but the remaining 12 are still
ramping up operations due to the opening of DTCB. The
sightholders are well-known diamond businesses with
headquarters in Geneva, Israel, Belgium, India, and
elsewhere. U.S.-based sightholders who have established
local operations include Ascot Diamonds, Lazare Kaplan, and
Leo Schacter.


18. With the opening of DTCB, the sixteen sightholders have
been aggressively setting up operations in and around
Gaborone. Steinmetz Diamonds Group, a Swiss-based
multinational diamond company with activities that include
rough diamond sourcing, trading and marketing, diamond
manufacturing and cutting, polished sales and marketing, as
well as jewellery creation and retail, invested US$ nine
million in building a factory, which will accommodate 220
employees. Pluczenik Group, a veteran De Beers sightholder
from Belgium, invested US$ three million in a plant that it
expects to employ 400 people. H and A Cutting Works from
Belgium opened in January and now employs 170 workers with
plans to increase to 500. Other sightholders are making
similar investments.


19. With De Beers, the GOB, and DTCB holding all the cards,
the sightholders have little choice but to express optimism
that they will be able to overcome the high labor and
transport costs, low productivity, and power problems
associated with doing business in Botswana. Many have
mentioned the cost saving of setting up and sourcing their
diamonds locally as compared to sourcing their diamonds in
London as had been previously done. At a news conference at
its Botswana opening, the chairman and chief executive
officer of the Pluczenik Group said they intended to use
advanced cutting technology and sophisticated machinery to
reduce costs.


20. However, not all are happy, as Dalumi Diamonds Group
(DDG),an Israeli cutting and polishing firm, has already
publicly complained about the high transport costs in
Botswana and is experiencing labor problems as employees went
on strike over wages. In a newspaper interview, the DDG CFO
also complained about the lack of tax incentives found in
other diamond cutting and polishing countries and the lack of
competition among Botswana cities and provinces to attract
businesses that is normally found in other countries, which
usually drives down operating costs for the company.

Comment
--------------


21. The GOB has played its diamond cards well to get De Beers
to open the DTCB, which should provide long term benefits to
the country in terms of revenue and job creation, and make
tiny Botswana an even bigger player in the diamond industry.
It remains to be seen if the sightholders can be profitable
in the Botswana business environment but they have little
choice but to try to make it work so long as Botswana's
diamond mines continue to produce the diamonds they want and
need. Until the mines play out, diamonds will continue to be
Botswana's best friend. End comment.


CANAVAN