The Swaziland Dilemma: A New Sandbox, Old Issues

Imagine a small country with tight centralized government that is just joining the roster of diamond producing countries. Try a small exercise: because the situation is rather fresh, you have the opportunity to set this country's diamond policies from scratch. What would you do?

The African kingdom of Swaziland is in this situation. A Kimberlite deposit was discovered in 1975 and Trans Hex operated an open pit diamond mine on the site, Dokolwayo, from 1984 to 1996. It was closed because it was uneconomical to mine, not because it was depleted, and reportedly produced up to 76,000 carats a year.

In 2010, as demand for rough increased and prices headed upward, the mine was re-opened and it is expected to start production later this year. Annual production is expected at around 80,000 carats.

Here is the first important question: What should the kingdom demand in terms of royalty payments? Swaziland is tucked between South Africa and Mozambique, and just a few hundred kilometers from Lesotho. Let's assume, and this is a wild figure, that the country's goods are worth some $200 p/c, which translates to sales of some $16 million a year. Whatever the country will charge, even it its 50% of total sales, it won't be a whole lot in terms of a country's annual budget, and will contribute only about $6 a year per capita nominal GDP (which was about $2,907 in 2009).  Not pocket money, but this is something that can be easily invested in education.

Second question: do you require local polishing? This is a form of beneficiation, created to require some of the mined goods to stay in the country for that purpose. The upside is job formation and additional local taxes. The downside is how do you compete against India? You can’t, really. Not with its financing, existing skills, and stable labor pools at lower cost.

This is a dilemma that Swaziland the country now faces. Diamond traders, always starved for a new and fresh source of rough, would of course want to see the goods come out. In a way it makes sense… find out what you have and can do best, and then do it. Compete where you have a niche, not where others already have all the advantages (know-how, financing, economies of scale, etc,).  There is already pressure on Swaziland's government to take that route, being told recently that local manufacturing does not create value, it destroys value.

This is a theoretical exercise on our part, imagining that we are in our private sandbox. These and many related questions will need to be addressed soon by King Mswati III and his advisors. Whatever his decisions are, we can only hope that it will create benefits for his country and the global diamond industry.

Have a peaceful weekend.