In 1947 a young copywriter by the name of Frances Gerety coined the tagline “A Diamond is Forever”, and De Beers created what today we call the ‘Diamond Dream’; positioning natural diamonds as rare, the ultimate symbol of love and commitment; expensive yet elegant, a symbol of success and wealth, a vault to hold your emotional memories and to pass them on from one generation to the next, a store of enduring value.

If that message still holds true, then the natural diamond industry should be in rude health. After all, during the last 20 years global GDP has increased by 160%, a CAGR (compound annual growth rate) of 5% and personal luxury goods sales have risen by a CAGR of 5.6%. Jewellery sales by luxury conglomerate Richemont increased almost sevenfold, a stunning CAGR in excess of 10%.

Except by comparison the performance of the natural diamond industry has been dire. Over that same period, diamond jewellery sales have risen at a CAGR of just 1.3% but in real terms they have fallen by around 22% and the value of the polished diamonds sold in jewellery has grown at a CAGR of 1%, a fall in real terms of 26%. Even diamond jewellery sales in the largest market, America, grew by a CAGR of just 2%, which in real terms equates to diamond consumption falling by 6% over that period. Polished prices at the end of last year were 16% below 2003 prices; in inflation adjusted terms, they were 50% lower. The industry has failed to tell its own story and because of the cannibalisation of sales from lab-grown diamonds, it is also in oversupply, Its very future is by no means certain. These are the unpalatable facts that the industry ignores at its peril.

In some ways the market is worse than in the early 1980s, the difference being that back then De Beers controlled 90% of the market, so it was able to restrict supplies to the market, backed as it was by the balance sheet of Anglo American (at the time) the most powerful mining company in the world, and to drive new demand through its global marketing campaigns. However, there was also an additional ingredient crucial to both the industry’s survival and its success, its partnership with Botswana which ensured that the main producing company and the main selling company were one and the same; their interests were completely aligned. Few things in this world are predictable, but in the diamond industry one thing is certain; there is no zero-sum game; you don’t get a weak De Beers and a strong Botswana or vice versa, either both are strong and survive, or both are weak and wither on the vine.

And yet over the last two decades De Beers’ position in Botswana has got weaker and weaker. In partnership with the government, it owns 50% of Debswana, which operates the two largest diamond mines and funds 50% their (very significant) future capital expenditure but it only receives 19.2% of the pre-tax profit. It also gets paid 1% of sales for providing and operating the technology to sort and value Botswana’s huge annual production and a 9% ‘marketing fee’ on the 75% of Debswana’s production which it sells.

But as Botswana’s mines get deeper and costs continue to rise this investment is far more marginal than the ‘dripping roast’ it once was. Any profit from the marketing fee is split equally with the Botswana government, but while any diamond price upside is split 50:50, if prices fall, De Beers alone takes the full hit. The whole deal is heavily weighted in favour of Botswana, but this year the market is so weak that Botswana’s total sales will likely be less than $2bn (versus $4.6bns in 2022).

For that marketing fee De Beers spends tens of millions of dollars promoting (and defending the integrity of) natural diamonds, funding their sales operations around the world, R&D (e.g. synthetic identification equipment); grading laboratories, the IP costs associated with everything, the ‘Tracr’ diamond tracking system, its administration and head office costs – in 2023 the total on these came to over $700mns, financed primarily by its profits from Botswana, and to a lesser extent by its operations in South Africa, Namibia and Canada. All of De Beers’ partners benefit, but none more so that Botswana for whom diamonds represent 30% of its GDP. However, this comes at a heavy price; in the first half of this year, the whole De Beers Group reported an EBITDA (earnings before tax, interest depreciation and amortisation) of only $300mns with Botswana contributing just $177mns.

And those numbers were under the old De Beers/Botswana sales contract. Over a year ago, a new contract was agreed. During then negotiations, President’s Masisi made public his open dislike of De Beers, and it seemed that the only deal he would contemplate was one that was very damaging for De Beers, enamoured as he was by doing a sweat-heart deal with HB Diamonds. De Beers’ share of Debswana’s sales would decrease to 50% by the end of the 10-year contract and De Beers would also fund a ‘Diamonds for Development Fund’ with an upfront investment of $75mns to help with Botswana diversify away from diamonds. The progressively lower marketing fees each year, and the annual contributions to the new fund represented two huge financial hits to De Beers. The directors of its majority shareholder, Anglo American, were faced with a choice of caving in to a terrible deal or walking away: they caved in. Interestingly much anecdotal evidence suggests that had they been given the opportunity at an AGM, Anglo’s shareholders would have voted against their Board on this deal. That deal remains unsigned because President Masisi apparently insisted on adding further punitive conditions.

A month ago, President Masisi’s party were almost wiped out at the General Election and the newly elected President Duma Boko revealed where things really stood with De Beers, “As matters stand, [De Beers is] thinking of walking away, not signing at all” and he pledged to repair their damaged relationship. Both he and De Beers have since radiated goodwill and enthusiastically spoken of the need to work together for everyone’s benefit. But the unsigned deal, even without President Masisi’s final conditions, remains a bad deal for De Beers and therefore a bad deal for Botswana.

In my opinion the deal fails to recognise that De Beers paying such a large percentage of the capital costs for so little return is no longer an economically viable model, but more than that, the interests of the producer (Botswana) are no longer aligned with the interests of the selling company (De Beers). The answer would seem to be that De Beers needs greater control over the production and sales and in turn, Botswana needs more control over De Beers. This may be the once in a lifetime chance to push the existing arrangement to the side and to start again; for both parties to take out a blank piece of paper and agree how De Beers and Botswana are going to succeed together because if they don’t both win, neither of them wins.

That also ties into the question of who (if anyone) will buy De Beers (in which Botswana already owns 15%) and how much its worth. In 2001 Anglo American acquired 45% of De Beers with an implied value for the whole company of around $19.6bn. When Anglo American bought out the Oppenheimer’s stake in De Beers in 2012, the implied valuation of De Beers had fallen to $12bn. Talking to people in the financial markets, the consensus seems to be that Anglo will be fortunate to get $3bn for De Beers, maybe less (if listed that would only put it in the FTSE250!). There are of course external factors involved, but that may be the scale of the value has been lost under Anglo American’s stewardship, but a major part of that is also a reflection of what has gone wrong with the relationship with Botswana. For information, Anglo’s auditors signed off on De Beers being valued at $7.6bn.

Maybe at what seemed like one minute to midnight, evicting the last government and bringing in President Duma Boko, the people of Botswana have thrown a lifeline to a relationship that for fifty years has been the bedrock of the diamond industry, but any deal has to be a win for both parties. It’s time for the government of Botswana and De Beers to seize the day; the question is, do they have the courage to do it?

 

Richard Chetwode holds a number of non-executive roles in the diamond and property industry. He is a part-time journalist and is currently writing a book on the diamond industry in World War II. All the opinions in this article are his own but while efforts have been made to ensure the accuracy and reliability of the information provided in this article, neither can be guaranteed. and information in this article is strictly for informational purposes. It should not be considered investment or financial advice. Consult your investment professional before making any investment decisions. He is non-Executive Chairman of Namibian based Trustco Resources and has previously worked for De Beers, Harry Winston, Dominion Diamonds and Gem Diamonds.