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

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

3. Botswana’s Diamond Beneficiation Objectives Short-term objectives are clear: Short-term objectives are clear: Establish downstream diamond-related activities (diamond cutting and polishing, jewellery manufacturing, diamond trading) and related support services 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 Increase local value added, create jobs, increase exports, diversify the economy An embryonic cutting & polishing industry has been established An embryonic cutting & polishing industry has been established Botswana has used its leverage as world’s largest producer of rough diamonds 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 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 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 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? 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 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” 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: 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 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 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? Raw materials (minerals) Other inputs Beneficiation End User (Industry) Beneficiation involves combining raw materials (minerals) and other inputs, into a process product, for sale to an (industrial) end user 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 Skills Taxes Economic environment FinanceLand The most important single determining factor of location is transport costs

8. Aluminium Production: What Determines Location? Bauxite Other inputs Aluminium production Industrial Users Aluminium production involves combining raw materials (bauxite) and other inputs (primarily electricity), and refining Location: determined by the availability of low cost electricity – bauxite and aluminium can be transported easily and cheaply; electricity cannot Electricity Mozambique Taxes Mozambique Jamaica USA, Europe, Asia 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 Other inputs Cutting & polishing Jewellery manufacturers 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 Skills Taxes Economic environment FinanceLand In general, diamonds are not beneficiated where they are mined

10. Diamond Beneficiation: What Determines Location? Diamonds are not beneficiated where they are mined: Diamonds are not beneficiated where they are mined: Suggests “other factors” are more important in determining location 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 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? 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? 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 Market is not fully competitive Product is highly differentiated Product is highly differentiated Pricing is not transparent Pricing is not transparent Global supplies are running out Global supplies are running out Supply chains – and security of supply - are important 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 Use leverage to “persuade” beneficiating firms to locate Works while country has control over supplies, especially if global shortage Works while country has control over supplies, especially if global shortage Reinforced by subsidies (explicit or implicit) Reinforced by subsidies (explicit or implicit) But also makes a country highly vulnerable to “flight” as control over supplies diminishes But also makes a country highly vulnerable to “flight” as control over supplies diminishes Not enough for long-term sustainability 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” “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” “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” “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” “Moving from leverage to competitiveness” As influence of raw materials (rough supply) declines then “other factors” become crucial 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 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 Made more difficult by “Dutch Disease” problems well-established process whereby mineral exporters find it very difficult to build competitive manufacturing industries 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 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 Control over supplies gives a “window of opportunity” to make that shift

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

16. Key long-term determinants of competitiveness Support / complementary services Support / complementary services Specialised diamond-specific services (brokerage, security etc.) Specialised diamond-specific services (brokerage, security etc.) Finance Finance Tax regime Tax regime Hotels Hotels Air travel Air travel Telecoms/internet Telecoms/internet Reliable and clean power 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 In the long run, its not about control over diamond mining, its about competitiveness – price and non-price Focus on the cost base Focus on the cost base Invest in skills Invest in skills “Open door” immigration policy for the industry: “Open door” immigration policy for the industry: expatriates create more jobs than they take expatriates create more jobs than they take current work permit and visa regime is not supportive current work permit and visa regime is not supportive Improve quality of telecoms, power, hotels Improve quality of telecoms, power, hotels Air connections – “open skies” to attract international carriers Air connections – “open skies” to attract international carriers Supportive government institutions Supportive government institutions Competitive tax regime Competitive tax regime

18. Some views on Debswana

19. A Strange Fish Debswana is an “unusual” mining company Debswana is an “unusual” mining company What does a “normal” mining company do when faced with declining reserves? What does a “normal” mining company do when faced with declining reserves? Exploration Exploration Expansion outside of its home base (other countries) Expansion outside of its home base (other countries) Move into related activities (other minerals?) Move into related activities (other minerals?) Debswana does none of these Debswana does none of these Mainly functions as a fiscal machine for GoB Mainly functions as a fiscal machine for GoB GoB’s share not managed as an investment with an eye on the long-term 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 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 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 Explore and expand – if necessary outside of Botswana Manage GoB shareholding as an investment Manage GoB shareholding as an investment Needs clear distinction between 3 roles of govt – shareholder/investor, tax recipient, and industry regulator Needs clear distinction between 3 roles of govt – shareholder/investor, tax recipient, and industry regulator Reconsider relationship with De Beers Reconsider relationship with De Beers Split? Split? Fold Debswana into De Beers? Fold Debswana into De Beers? with a significant increase in GoB share with a significant increase in GoB share to secure real influence over development strategies, and access to long-term opportunities to secure real influence over development strategies, and access to long-term opportunities Debswana valuation is key Debswana valuation is key Move into synthetics Move into synthetics Likely to become increasingly important as supplies of natural diamonds decline Likely to become increasingly important as supplies of natural diamonds decline Can be done anywhere Can be done anywhere A way of maintaining dominant supply position 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 Clarify objectives: maximise value from rough production or build long-term sustainable capacity, beyond mining Develop strategy accordingly: leverage or competitiveness Develop strategy accordingly: leverage or competitiveness For long-term competitiveness: For long-term competitiveness: Focus on costs – closing the gap with India - not job numbers alone Focus on costs – closing the gap with India - not job numbers alone Build skills, productivity, competitive workforce Build skills, productivity, competitive workforce Beware cost impact of well-meaning policy changes Beware cost impact of well-meaning policy changes Encourage joint ventures – citizen involvement in industry Encourage joint ventures – citizen involvement in industry Encourage innovative financing mechanisms Encourage innovative financing mechanisms Work with unions – they must understand how business works Work with unions – they must understand how business works Be open to global economy – encourage expatriates and alternatives to Air Botswana Be open to global economy – encourage expatriates and alternatives to Air Botswana Build necessary infrastructure (power, telecoms) – at globally competitive price and quality 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