Botswana: Revival of the Mine-to-Finger Model
May 26, 22
The fog of the Russian-Ukrainian war has hidden a major diamond battle that rages thousands of miles south-west to the Russian war zone. The President of Botswana, Mokgweetsi Masisi, speaking at a gala dinner in Gaborone, declared that "he no longer wished to operate under any model other than the one set up by Lucara and HB Antwerp." (Africa Intelligence April 7th, 2022).
President Masisi referred to the seemingly endless, five-year negotiations between De Beers and Botswana about prolonging their joint sales operations, that were not finalized till today. His decisive declaration means that either De Beers would follow Lucara - HB's model, or we could be surprised soon by an historic move by HB, that might take over a substantial and the most prestigious chunk of De Beers' diamond sales.
If this Mine-to-Finger business model proves successful, it may have a much broader impact on the world diamond industry, and hold the potential to reshape some of its fundamentals. HB and Lucara already have a signed co-operation agreement with the French luxury conglomerate LVMH, that commits to buy some of the polished stones originating from their partnership. But would the Lucara - HB model really succeed where so many have failed?
Canada, Alrosa, some junior miners, and even De Beers itself, tried in the past without success to convey the source-to-finger diamond story, aimed at igniting the imagination of many end-users. Only the Natural Diamond story-of-origin was successful, but the rest have failed to impress many clients including the Presidents of Botswana.
The New Mine-to-Finger Model
HB management politely and understandably declined to share their trade secrets, but on the other hand, Lucara is a public company and a careful review of its financial statements (FY 2021), reveals the basic outlines of Lucara and HB's business model.
What is so special then, in the Lucara- HB model? How resilient is it to tough challenges? The main reason why the UK refrained from replacing the pound with the Euro, was the missing clauses regarding 'Rainy Days'. The agreement between Lucara and HB was signed in July 2020, during the tough rainy days of the COVID-19 pandemic. But those difficult times actually triggered the motivation for both sides to sign the partnership agreement. During the first half of 2020, when diamond prices dropped drastically, Lucara looked for ways to avoid losses. It made a lot of sense to polish most of their valuable stock of rough diamonds and sell them later as polished stones, hoping for a market recovery.
On the other hand, HB, a young and promising private partnership in 2020, did not want to speculate while navigating their ship in the early, rough pandemic waters. Therefore, the ideal business opportunity seemed to be selling services for a fixed fee, without risking their own capital. HB offered Lucara its polishing and sales expertise for a fee that probably included a certain bonus for delivering beyond targets. However, HB is not responsible when polished diamond prices lead to lower results than the original rough diamond evaluations.
Close to 70% of the value of the run-of-mine of Lucara's Karowe mine is in the 'specials' segment, i.e. rough diamonds larger than 10.80 carats and fancy colors. The agreement gives HB, which specializes in these large sizes, the first-hand exclusive right to choose the diamonds for polishing. The rest of the stones, the cheaper part, is left for Lucara to sell through their regular quarterly tenders.
In its 2021 financial reports Lucara showed over 80% increase in YOY revenues and price per carat, but actually, which diamond company didn't make staggering results during 2021? Even when "cleaning out" the roller-coaster market impact on these results, the basic rationale of Lucara - HB's business model simply makes sense. HB offers Lucara a share in profits that normally belong only further downstream.
Back in 1994, when I became the advisor to the then-democratic Russian government, Minister Bychkov, who oversaw all the precious minerals of the newly created Russian Federation, handed me over the copies of the agreements signed between the Soviets and De Beers in 1990. "They gave us a one-billion-dollar loan and we gave them diamonds in collateral, but they don't let us re-evaluate our diamonds." Arranging a $550m loan, to refinance the balance of De Beers' loan was one of the highlights of my advisership. My upcoming book covers several chapters on this fascinating time in my life.
Despite the difference in time, the spirit and fundamentals of the Botswana and Russian agreements with De Beers, remain the same: how to share the pie of billions of dollars' worth of diamond sales. If President Masisi signs with De Beers or with HB, only time will tell, but one thing is sure, he is on the right road to benefit the people of Botswana.