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03 august 2015

The diamond mining agreement signed by De Beers and Botswana in 2011 was widely seen as a landmark decision. And its implications are now being felt further afield, with Namibia looking for similar provisions in its new diamond sales and marketing agreement with the mining giant. And it seems that De Beers, like it or not, will have to accept most of the demands of the Namibian government.

That means an agreement in which the South-West African state will be able to sell a portion of its diamonds to third parties outside of the long-standing traditional arrangement of selling through De Beers channels at a time and price decided by the diamond firm. The deal would be similar to that in which Botswana now sells 15 percent of the diamonds mined by the jointly owned Debswana via the Okavango Diamond Company.

Media reports suggest that Namibia will retain 25-30 percent of its rough production for local beneficiation and sale compared to 10 percent currently.

The new agreement between De Beers and Namibia is currently in the process of being finalized, according to comments by various government officials. De Beers CEO Philippe Mellier even visited the Namibian President, Hage Geingob, in June to discuss the deal in the making. The Namibian firm which will sell Namdeb stones independently is likely to be called Nore /Uis, said the Namibian Minister of Mines and Energy, Obed Kandjoze, in a local media interview.

De Beers enjoyed a ‘delivery entitlement’ clause in the previous agreement relating to Namdeb to regulate the flow of Namibian rough diamonds out of the country which decided when they would be exported, and the quantity and quality, as well as at what price to buy Namibian diamonds.

“That clause is out of the new agreement, meaning De Beers will not set the price as was provided by the clause," Kandjoze said. "We will not be obliged to do business along those lines anymore,” he said.

“The agreement opened a window on the market that enables government to buy a portion of rough diamonds and sell them through alternative channels,” the minister said.

He pointed out that /Nore /Uis would not compete with the Namibia Diamond Trading Company (NDTC), which sells to the local diamond cutting and polishing sector.

In addition to jointly owning Namdeb with the Namibian government, De Beers has a 70-percent share in De Beers Marine Namibia.

The De Beers deal with Botswana loosened the decades-long firm grip on its relations with diamond-rich Africa countries. De Beers' diamond sorting and aggregation, which took place in London for 70 years or so, was transferred to the Botswana capital, Gaborone, as a result of the 2011 deal. Botswana's negotiators and politicians – all the way up to the president – insisted that De Beers would have to accept its conditions or face losing the country's diamonds. Since Botswana is the leading source of rough diamonds for De Beers, with output then of around 30 million carats – compared to South Africa in second place with 15 million carats – the mining giant had little choice but to capitulate.

“The delivery entitlement provision that allowed De Beers to choose not to buy mine production during depressed market conditions poses high risk for mining operations because Namdeb bleeds while they scout the markets. They used to call the shots, this is not the case anymore,” Kandjoze said.

“If the market is bad, De Beers will opt not to buy and Namdeb will be forced to stockpile at its own cost until the market improves. Namdeb runs losses while waiting for the markets to improve because they have to stockpile while De Beers runs no risk at all,” he said.

Meanwhile, Mellier told journalists after meeting with President Hage Geingob at State House: “We are happy, we are all smiling and negotiating together. We will invite you when we are going to sign the agreement." Mellier's visit followed the Namibian Cabinet's approval of the terms of the new diamond sales and marketing agreement.

"I came to introduce myself. We are 50/50 partners with the government of Namibia. It is well known that we are negotiating the new sales agreement," Mellier said of his visit to State House, which he said was to brief the Namibia Head of State on developments in the diamond industry.

Whether De Beers really is happy with the agreement, however, or has been forced to accept a much tougher agreement than in the past and is simply putting a brave face on it, remains to be seen.

Mellier said the diamond market is not performing well since the slump experienced in November last year, but De Beers is optimistic that the diamond market would soon recover. He also told Geingob that mining operations from the seabed are progressing well, recovering between 1.2 million and 1.3 million of carats per year.

The significance of his visit was emphasized by Mellier being accompanied by De Beers' Resident Director in Namibia, Daniel Kali, and its Director for Strategic and Corporate Affairs, Bruce Cleaver.

As with Botswana's high-quality diamonds, Namibia's marine-based diamonds are also high-value goods, meaning that De Beers is therefore unlikely to want to lose out on them and is prepared to go to great lengths to ensure a deal is signed.

It is clear that both sides need each other, and don't have any other options. However, there is evidently a power struggle going on between them with both parties checking where the borders lie. Namibia was heavily influenced by the Botswana deal several years ago. It clearly believes that its right to beneficiate its diamonds is just as strong as that of its neighbor. Diamonds are a major foreign exchange earner, generating 30 percent of Namibia's export earnings. For Botswana, the figure is more than twice as high.

But it's ironic that the deal is being put together at a time when Botswana is running into strong headwinds regarding its diamond cutting and polishing sector. Clearly, producer countries have the right to beneficiate their own diamonds – but is it financially viable? Establishing a diamond-polishing infrastructure is extremely expensive – and at a time when the diamond business is facing reduced consumer demand, it is even more complicated.

Kandjoze said that despite the successful negotiations, more still needs to be done to ensure that the country's rough stones benefit the local economy. He also pointed out that the government saw the new deal as a way of showing foreign multinationals that the country wants to change the rules of the game as far as the mining of its natural resources is concerned.

Kandjoze was appointed by the president to the position earlier this year due to his mining background. Although there are some provisions that could have been negotiated differently, he is content with the deal that is likely to be agreed.

“You must remember that we are in partnership and therefore we cannot expect everything to go our way. Investors are very important in this equation. The government is happy with the terms,” he said.

The new terms for diamond sales and marketing agreement would also increase the supply of rough diamonds to the local diamond cutting and polishing industry.

Currently the industry is supplied with 10 percent of the value of local rough diamond through the NDTC, which has previously said the amount is not sufficient to sustain the local diamond cutting and polishing industry.

The Ministry of Economic Planning, in its submission of new terms of agreement to Cabinet, said that all the terms of reference given to the negotiating team were met.

The terms are of "a significant increase in local supply for rough diamonds to the cutting and polishing industry" that is to be negotiated between 25 percent and 30 percent, the ministry's submission stated. The terms also include "a window on the market to enable government to buy a meaningful portion of Namdeb Holdings' rough diamonds and sell them through alternative channels."

The new terms aim to ensure that the entire range of special stones be made available for sale and manufacturing in Namibia without any limitation. Further, the new agreement also speaks of "protecting Namdeb by reducing or eliminating disproportional risks in the agreement, such as the 'delivery entitlement' clause in the agreement."

Namibia's negotiating stance and demands were also made clearer by comments from the country's Information Minister, Tjekero Tweya, who said at a news conference about previous mining agreements signed with De Beers: "We are a little bit wiser than we were then, 10 to 20 years ago."

By our Israel correspondent Abraham Dayan