Mineral Exploration
An Essential Survival Strategy
– Sheila Khama
Nov 2024
Background
On October 23, 2024, De Beers Group reported promising progress from the company’s exploration program in Angola. De Beers delivers promising progress with Angola exploration – De Beers Group. In response, @SpencerMogapi, Botswana’s veteran journalist posted a question on his X account, and asked ‘Is Angola eating our lunch?’ He was not alone, as his followers suggested that something was amiss. Others also questioned the move while speculating over De Beers’ motives. Some pointed a figure at former President Masisi and suggested that his repeated negative statements about De Beers had gone too far and the country was finally paying the price. So, convinced were some Batswana that when the former President lost a bid for a second term, his treatment of Botswana’s premier partner was cited as one the reasons he had gone.
Not surprising then that during his maiden speech following his party’s victory, @BWPresidency, His Excellency Advocate Duma Boko also chimed in. He struck an urgent tone suggesting the company’s investment in Angola was indicative of Botswana’s lack of competitiveness in attracting and retaining the interest of investors. He said, “we are competing on the international stage, and we’ve seen a shift toward Angola as the epicentre of diamond investment.” https://www.linkedin.com/posts/the-projects- magazine
Introduction
Just as the former President’s remarks were not taken lightly, those of his successor also should make the Botswana public think because in both cases the statements could influence the country’s policy direction. But while this is the case, a more circumspect response by both the journalist and current Head of State is nevertheless warranted. So, in the commentary below, I provide some context on what I hope might frame a more objective dialogue. I start with a look at the role of exploration in corporate strategy including De Beers exploration programs in the region and elsewhere in recent times. I use the analysis to raise and respond to a few questions. The most important question being should there be cause for concern? The second one is, in the big scheme of things, is Botswana less trade competitive and if so how and why? I also ask the question of whether the Botswana Government should perceive the move as a threat to the country’s competitiveness and offer a view on ways in which Botswana policymakers might respond. I opine on why De Beers might have chosen to return Angola when the company did and how that is consistent with the business in mining.
Exploration is a major part of a mining company’s business development plans. Through exploration and the discoveries of new mines, the strategy ensures business continuity. Business continuity is achieved through market growth based on additional sources of mineral supply and ensures future revenue streams. Collectively these factors enhance company competitiveness. As such, on thinking about a company’s portfolio, an ideal mix of projects comprises pre-mining projects, early-stage mining operations as well as matured assets. This combination ensures that mineral resources are continuously available for production as new operations replace older ones as the latter approach their end of life. However, because success is not guaranteed, among others, companies compliment exploration efforts with joint venture partnerships over existing assets or with start-ups looking for financial resources and marketing expertise. Others rely on mergers and acquisitions. Whatever the circumstances, companies prefer to operate in different jurisdictions as a way of spreading geographic risk.
Viewed through this lens, exploration therefore, is a must. It is akin to R&D in the pharmaceuticals and high-tech industries. Like these industries, the future of mining companies depends on continuously creating new opportunities to grow and diversify their portfolios. Specifics notwithstanding, De Beer’s exploration program in Angola is fundamentally driven by this commercial logic.
Here too the answer needs to be somewhat nuanced. It is true that in recent times, some commentary on the country’s competitiveness has not been as positive as has historically been the case. For instance, at the height of negotiations and tension with De Beers in May 2023, Richard Chetwode, an industry expert said, ‘the message to Botswana’s parliament and the whole country must surely be, it takes decades to build up the enviable reputation Botswana has; it only takes a few weeks to damage it permanently. Why is the government doing this? Why are they putting up a huge sign saying, “Botswana isn’t open for business”? – bne IntelliNews – COMMENT: The diamond industry is in crisis and Botswana is going rogue! His response was in part directed at uncharacteristically negative public pronouncements about De Beers and the relationship with Botswana by representatives of the last administration.
Though some were alarmed by negative comments as pertains to the image of Botswana per se were few and far between. Instead, Botswana continues to receive favourable reviews from influential industry watchdogs. For instance, according to the 2023 Annual Mining Survey Report produced by the Fraser Institute in Canada, using the ‘investment attractiveness’ measure, Botswana was number fifteen globally and out of eighty-six jurisdictions. In Africa, the country ranked number one a position it has held for many times. By contrast Angola was fourty-six globally and number seven in the Africa region with a significant gap between the actual scores of the two countries. (see fig 9 below). Interestingly, based on a comparison of each country’s score from last year’s report, Botswana’s score fell while Angola’s rose albeit with small margins. At regional level each did better as, Africa’s median score on investment attractiveness decreased by nine points. Fraser Institute Annual Survey of Mining Companies 2023. The study’s perception index is based on the views of exploration company executives who are responsible for advising companies on where to explore. The study’s methodology as relates to regulatory effectiveness, attractiveness to investors as well as perception of sovereign risk therefore offers credible insights to trade and mining policymakers.
Figure 9: Investment Attractiveness Index-Africa
Essentially, the thesis of the study assumes that all things equal, the greater a country’s geological potential, the higher its capacity to attract investment in mineral exploration and vice versa. So, based only on geological endowment alone, today Angola certainly has greater potential for a tier one (i.e., Orapa, Jwaneng size) diamond project than Botswana. However, viewed through the lens of political risk, and a track record of stability, Botswana fares much better. That said, legislators can improve Botswana’s prospects as relates to mineral fiscal policy because the current regime skews towards large and richer deposits. As such it undermines prospects for smaller and economically marginal projects to attract finance.
What Explains the Timing of De Beers’ Return to Angola?
The answer lies partly in the factors discussed in the preceding paragraph. However, in addition, it is worth reflecting on the history of De Beers’ exploration activities because in doing so, it becomes evident that the decision is consistent with corporate strategy. For instance, in anticipation of the depletion of deposits in De Beers’ largest mine in Kimberely, South Africa, the company’s exploration programs expanded into Angola, Botswana, DRC, Tanzania and later Canada, India and Zimbabwe. For decades, the Botswana exploration program was implemented intermittently having been started in the early 1930s. The resumption of that program in 1955 resulted in the discovery of the Orapa and subsequently Jwaneng mines and continued for decades. At its peak in the 1990s, physically exploration licenses secured by the company sprawled an area of up to 150,000km2 (about a quarter of the country’s landmass) and cost millions of BWP. So comprehensive were the exploration activities in Botswana at the time, that several aspects of programs in Angola and Zimbabwe were overseen by teams based in Botswana. The long-term goal was (and I suspect remains) to protect the company position as market leader in rough trade and ensure future revenues for the shareholders.
Importantly, as early as that same period, De Beers geologists believed that all things considered, Angola and the DRC would likely be the next home for larger diamond deposits of the order of magnitude that could parallel or surpass those found in Botswana. This notwithstanding, the company terminated operations in both countries due to the challenges of internal conflict, lack of security of company property and employees. An additional factor was reputation risk following an outcry by civil society and the United Nations over high illicit mineral trade that stemmed from internal conflict in both countries. The decision did not come easily and Group strategic deliberating on the matter, were aptly dubbed ‘tough choices.” The challenge was to weigh the risk of losing an opportunity of potential discoveries to competitors who may have been less wary of brand damage than De Beers. The outcome was a focus on Botswana, Canada, India, offshore South Africa, and Namibia as well as Zimbabwe. There were modest successes in Canada and Zimbabwe, but none had scale.
The October 2024 statement by the CEO of De Beers Group was a progress update on an original announcement made by his predecessor. In early 2022 the company had announced resumption of diamond exploration activities in Angola in the hope of securing larger deposits. The recent company media statement confirmed that ’two Mineral Investment Contracts (MICs) with the Government of Angola for license areas in north-eastern Angola.’ De Beers Group signs Mineral Investment Contracts with Angola – De Beers Group. The contracts are apparently for the award and exercise of mineral rights covering all stages of diamond resource development. This means, in case of discoveries, De Beers is guaranteed an uninterrupted progression from the exploration to the mining stage albeit with negotiated terms based on the economics of the projects (cost of mine infrastructure, fiscal conditions, market conditions, environmental and mine closure regimes). The duration of each license is 35 years. The two licenses are granted as separate legal agreements due to some important factors. For a start, any discoveries are not likely to occur simultaneously. Secondly, given that no two deposits are the identical, project economics would warrant different considerations leading to different terms and conditions of development agreements.
As such it stands to reason that each concession area is held by a separate joint venture company between De Beers Group and Angola’s state-owned diamond company, Endiama. The latter was incorporated in 1981 for the sole purpose of securing excusive concessionary of mining rights for rough diamonds. By arrangement, De Beers will hold a substantial majority in the new companies at the start of the partnership relative to Endiama. This a common arrangement based on the recognition the investor incurred upfront financial risks. But over time, Endiama can incrementally increase its equity stake, consistent with terms of the shareholder agreements and albeit that De Beers Group would still retain a majority share.
Should the Move Concern Botswana Government?
To answer the question, there are two useful points of departure. The first relates to Botswana as a sovereign whose goal is to manage perception of risk and to leverage its image to attract foreign direct investment relative to other countries. In this case, Botswana’s leaders should certainly not worry about De Beers’ investment in global exploration projects in Angola or elsewhere. But the authorities should worry about the impact of the actions of the country’s own leaders as relates to the views of investors. To the degree that such actions depart from investor friendly norms of the last five decades, the potential impact of this on the country’s reputation should indeed concern the authorities. This is especially true in the case of relations with De Beers because the joint venture arrangements are frequently cited as the model for mutually beneficial relationships. Indeed, it is this reputation that has secured support for gem diamond producers by influential voices. Speaking at a Town Hall meeting in Strasbourg, France 2009 on the onset of the economic crisis, former President Barak Obama said during a question-and-answer session, “You know, you have a country like Botswana, which is a well-managed country that has made enormous progress. But their main revenue generator is diamond sales. And they have literally seen the diamond market collapse, in part because they couldn’t get trade financing, in part because the demand in developed countries has dropped off. So, we started to make progress there. Our most important task right now is helping them get through this crisis.”
https://www.govinfo.gov/content/pkg/PPP-2009-book1/pdf/PPP-2009-book1-doc-pg413.pdf. Botswana would do well to prove the country’s friends right by maintaining its reputation because failure to do so poses a greater threat than resumption of an exploration program by De Beers in Angola.
In doing so, it would be wise for Botswana’s leaders to remember where the sentiment expressed by former President Obama stems from. There are many factors including Botswana’s governance record and specifically regard for the rule of law. In this context, the mainstay of governance is the country’s mining law. Among others, the law excludes discretionary powers by the minister responsible. Investors perceive this as proof of regulatory stability, protection of property rights and security of tenure. Yet in a bizarre move and despite possessing no such powers, in 2023, former Minister Lefhoko Moagi reneged on an extension of an exploration license to Tsodilo Resources without any legal basis. The Minister declined to approve the extension even after the courts ordered him to do so. This was a spectacularly ill-advised and damaging move to the country’s competitiveness. This is because in terms of investor confidence based on regulatory certainty, it is hard to imagine anything worse than a regulator’s disregard for the law and the judiciary. Moagi faces court contempt: Mmegi Online
A second way of pondering the question of how Botswana should view the move by De Beers is to consider the matter from the perspective of Botswana as an investor with significant interests in the diamond industry. Specifically, through Debswana, DTC Botswana, the Okavango Diamond Company, and De Beers Group itself (see figure below), the country is heavily invested in the natural diamond industry. Therefore, a De Beers that commits investment in natural diamonds (as opposed to lab grown ones) urges well for Botswana. Importantly, the investment points to long term commitment to the industry.
Lastly, as Botswana diamond reserves diminish and revenue declines proportionately, the additional revenue from potential discoveries in Angola will be a Godsend in a country that is yet to find alternative sources of public revenue. In the interim, as Botswana’s state-owned company, Okavango Diamond Company’s share of Botswana’s production grows and the portion of production sold to De Beers decreases, the unintended consequence is that the country’s leverage in with De Beers will lessen. Repositioning the country based on these eventualities deserves greater attention than De Beer’s move.
What Might be an Appropriate Response?
There is no silver bullet, but a few potentially impactful policy options are worth considering and all point to the need for Botswana’s leaders to be pro-active and forward looking.
For 50 years and in different ways Botswana has not only invested hugely in diamonds, but the country has also added positively to the reputation natural diamonds and De Beers. For the first four decades following diamond mining, Botswana became the poster child for good governance and responsible management of revenue from minerals. This and De Beers’ advertising helped drive consumer confidence and demand for diamond jewellry. Diamonds for Development | Council on Foreign Relations Therefore, resetting relations with investors to protect and enhance Botswana’s reputation as a worthy mining investment destination is paramount because failure to do so risks eroding the value created to date.
On the other hand, through revenue from Debswana, Botswana has contributed significantly to De Beers Group. This is especially true with respect to financial resources that enabled investment in development of technology by the Group. Case Study – Aquarium New Integrated Sorthouse. Some of the additional capabilities are deployed beneficially in Botswana and may be deployed in future operations elsewhere in the world. Botswana should welcome exploration activities beyond its borders by a company in which the country has equity but needs to position the country to reap any future benefits consistent to its historic contribution.
Additionally, while nothing suggests that the fundamentals of the diamond jewellry market have changed irreversibly, trends as relate to demand for lab grown diamonds are on an upward trajectory. When Will Lab-Grown Diamond Sales Be the Majority? The risk of Botswana losing her shine at a time like this adds to natural diamonds marketing challenges. Policies for restoring the ‘Diamonds for Good’ legacy are infinitely more urgent than any disadvantage of De Beers resuming exploration program in Angola. Therefore, consideration should be given to prioritize the former. Signet and De Beers launch captivating new natural diamond marketing campaign: ‘Worth the Wait’ – De Beers Group.
On the other hand, the pending sale of AngloAmerican shares in De Beers, presents an opportunity for Botswana to carefully consider the merits or demerits of increasing the country’s equity. If deemed appropriate, not only would an increase of shares deliver higher revenue in future, but it could avoid dilution depending on how a partnership between De Beers and Angola evolves. The key is to balance the downside with the upside.
Finally, addressing the challenge of Botswana’s fiscal regime as relates to poorer deposits might not only increase investment but, it might also lower entry barriers for citizen exploration companies whose chances of raising capital could improve. This and a strategy for the state-owned mineral investments holding company, Mining Development Company Botswana to partner with juniors, could also stimulate mineral exploration. It is worth noting that juniors are frontrunners and account for an estimated 50% of major mineral discoveries worldwide. Junior Resource Companies own the world’s future mines – Richard Mills – Ahead of the Herd.
Conclusion
There is a lot for the new administration to address urgently, but De Beers’s activities in Angola is not one of them.
However, The Commander-In-Chief’s call to action in order to repair the image of the country and restore the confidence of investors is spot on and timely. Importantly, words of reassurance coming from the very top will need to be followed with concrete actions at mining portfolio level. So, Botswana policymakers may want to reflect on developments to date and draw some lessons from these to enhance country competitiveness.
To Spenser Mogapi’s question of whether Angola is eating Botswana’s lunch an additional question might be did Botswana eat South Africa and Canada’s luncheons? However, I am inclined to think that a more pragmatic way to view De Beers’ presence in Angola is to perceive it as a necessary investment in the future of the company. This is vital because the company’s future is intertwined with that of Botswana as a shareholder and as a country reliant on natural diamonds. Hence just like Botswana’s image, the move is potentially mutually beneficial to all those with a stake in De Beers and the product.
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