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Wednesday 16 January 2019
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The diamond deal

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Below is part of the verbatim interview between The Patriot and Minister of Mines and Energy Obed Kandjoze regarding the recently signed 10-year diamond agreement between Government and De Beers.
1.    Now that a new “Sales and Marketing Agreement has been finalized, when will Namibia Desert Diamonds (Namdia) commence operations and has a company head been appointed already?
The agreement is envisaged to commence at the end of August. The parties have given themselves 90 days from signature date (16 May 2016) to put their respective houses in order. The NDTC will use the 90 days to put in place a new system for allocating the U$ 430 million (N$6.7 Billion per annum) to local diamond and cutting factories (sightholders). The different sightholders would also have to put in applications for supply and a due diligence process will follow to ensure that NDTC clients meet the set standards and criteria and that they have the capacity to handle the huge volume of diamonds that would now become available come the end of August 2016. Similarly, Namib Desert Diamonds (Pty) Ltd (Namdia) is in the process of being established. An inter-Ministerial Government Task Team (GTT) is working around the clock to ensure that Namibia is up and running come end of August 2016 when it is envisaged that the new company will buy its first intake of its 15% entitlement for sale early in September. As you would imagine, setting up a new venture of this magnitude and scale is quite a daunting task, but what

I can say is that much of the items on the to do list have been ticked off and I am optimistic that we will meet our deadline. The board of Namdia would first have to be appointed before any key staffs are recruited. I will leave it up to the Board to decide whom the CEO should be, as will be the case with other key positions. No position has been promised to anyone. As per the now well-known procedures Ministers will have to consult Cabinet on the appointment of the Board, and I expect that Board to be in place as soon as possible so that it will be in position to dispense of all salient matters impacting on the establishment of Namdia.

2.    How will it operate? Will it be the supplier for local jewelers and are they assured of reduced prices in buying stock as opposed to previous situations where diamonds are exported only to be imported at a later stage at higher cost?
Namdia will mainly be in the rough diamond business. It is important I clarify that the main objective of Namdia is. From the vantage point of the initial objectives I see that a lot of the media are confusing the 15% window on the market with the now increased local supply levels. NDTC still remains the vehicle for supplying local cutting and polishing factories. In the current dispensation, only 10% of cuttables (diamonds that can be economically cut and polished in Namibia) have been made available for local beneficiation during the infant stages of the sector when the skills were still scarce and proficiency in diamond cutting low. That amount is now increased by some 87% from the baseline. Now some U$ 430 million (N$6.7 Billion annually or N$67 Billion over the term of the contract) of diamonds out of Namdeb Holdings’ current annual rough diamond production of U$800 million (N$11.7 Billion) are now available and will be offered for sale to local manufacturers. Also, even more important as this changes the economics and profitability of diamond factories, all special stones- that is all diamonds larger than 10.8 carats, and all exceptional stones (rare high quality coloured diamonds) will for the first time ever be offered for sale to local manufacturers. This would go a long way towards enhancing the viability and sustainability of our factories. This will be done through the NDTC. Namdia on the other hand is set up for entirely different sovereign strategic objectives. This means a greater proportional allocation of diamonds for local beneficiation than can be found in any producing nation around the globe- well over 50% of the value of diamonds mined in Namibia will now be allocated for local manufacturing.

Namdia has been created as a window on the market to test the appetite for Namibian diamonds. Currently our diamonds are used as a sweetener because of their unique high gem quality nature and high average value (some US$ 700 per carat relative to other global producers which are in the range US$ 35-200 per carat) So for the first time ever, Namdia would sell a minimum of US$ 150 Million or some N$ 2.4 Billion or a 15% representative cut-off of all Namdeb holdings entire range and quality of diamonds into the international market. It must be noted that for the first time Namibia will have its own direct presence in the global downstream market through this indigenous company- Namdia. This will not only increase Namibia’s profile as a key player in the global diamond pipeline but it would also generate additional revenue for the state. The knowledge gained from these downstream ventures would also support more effective diamond sector policymaking. More importantly, it also means a greater strategic ability to shape our destiny in a global diamond industry that is changing rapidly and that is beyond the ability of any single company- even one as strong as and knowledgeable as DeBeers- to control or safeguard. The critical mass of polished diamonds that will come from the increased supply by the NDTC to the local manufacturers would also ensure that certification services will be established in Namibia. The lack of these services is what creates a situation where diamonds have to be re-imported at a higher cost to our jewelers. We are engaging certification companies that now see that it is lucrative- with the critical mass of the new supply levels – to set up shop in Namibia.

Jewellers now have greater options to buy polished stones from local manufacturers at much better prices than they could ever source through wholesalers. This is indeed already happening but we expect the     diamond content of local jewellery to increase significantly and I have learnt through the Diamond Board and from the Jewellers Association of Namibia that they are quite excited by the new prospects and opportunities that this new deal presents. This is also why the Ministry of Mines and Energy through the diamond Board has invested in a massive campaign to advertise and market Namibian diamond Jewellery that you now see on billboards at our airports and throughout the country and also as promoted in the new book “Diamonds and Namibia- A Beautiful Journey” that we unveiled in November 2015 at the Second Diamond Omugongo Conference. The objective is to ensure that we maximize benefits from our diamond resource and that our diamond patrimony- the heritage of the Namibian people- contributes as much towards economic development and nation building, in line with noble Harambee Prosperity Plan.

3.    Now that the Sales Agreement is done, when will NDTC seek new Applications for sightholders status, since a new list of sightholders was supposed to be in place last year already?
The Agreement provides for a shareholders Forum. The shareholders’ forum will review the manner in which the NDTC will deal with sightholders going forward to ensure that we create a more robust system that speaks to the challenges that our sightholders have endured during trying economic times- in a declining commodity cycle. We want to ensure that our local manufacturing operations get sufficient quantities and qualities of diamonds to ensure their viability and sustainability. But we also want to ensure that the environment is enabling and supportive to the needs of our manufacturers that are competing in a cutthroat globally competitive environment. We are competing with established manufacturing low-cost centres of India and China, with low cost wages and that have a critical mass and overcapacity in skills, modern technologies and availability of financing for rough purchases. So we will look at all possible incentives that would give the necessary oxygen that this industry needs to ensure survival and to avoid Ramatex types of scenarios. The parties to the Agreement have given themselves 90 days from signature date (16 May 2016) to put in place systems and latest state of the art technology to ensure optimal allocation of boxes for sale to local manufacturers. The NDTC, working in consultation with the Shareholders Forum- and in consultation with my office – is busy putting its house in order and should be ready by mid to end of August 2016, and in due time will soon invite applications from existing and prospective potential sightholders.

4.    The renewal of this Agreement was supposed to be finalized in 2014, what accounted for the delay?
As you can imagine, the outcome of this new deal will result in a significant overhaul in the volumes, qualities and sizes of diamonds available for manufacturing locally. This was not an easy negotiation process. We wanted to ensure that the outcome of this negotiation creates the soundest and strongest foundations for diamond beneficiation and maximization of benefits for Namibia. Once the key principles were agreed to by the negotiation parties and endorsed by Cabinet, it all had to be reflected in legal language to capture the true spirit of the Agreement. Ensuring that the language was reflective of the key objectives and met the mandate set by Cabinet to the Government Negotiating Team (GNT) was an exhaustive and painstaking process because of the strategic significance of this milestone Agreement it was imperative that it was done right, with utmost care and attention to detail. Cabinet is confident that this Agreement meets the relevant thresholds and that it is in the best interests of the country, we allowed for a longer security of tenure of ten years. This kind of stable, long term operating platform is also good for Namibia in that it promotes investment and an orderly optimization of our mineral resource.

5.    What effect, if any, do you think that delay (in finalizing a new agreement) has had on the domestic polishing industry?
Ironically it has been a blessing in disguise that the signing of the Agreement happened only last month and its commencement in August would happen before the peak of the diamond market as diamantaires are gearing up for Christmas, New Year and Valentines. Why? Because if you would recall the past couple of years the industry was in dire straits because of declining commodity prices (polished diamonds) and the unreasonably higher cost of raw materials (rough diamonds) to manufactures that diminished margins to the point that precipitated factory closures and retrenchments throughout the global diamond pipeline.

6.    It has been claimed that Namdia will not compete with NDTC; will NDTC Sightholders be able to buy rough diamonds from Namdia?
You are correct. Namdia is not created to compete with the NDTC. The core objective of the NDTC is to sort of run mine diamonds from the mine into its 13,000 different categories and price points. The other key objective is to supply the local manufacturers. The NDTC currently supplies the local manufacturing industry with some 10% of what is referred to as “cuttables.”  Now, this new deal shall increase the volume of diamonds that are offered for sale to local manufactures by some 87% from the base case. And as already stated, some 54% of all Namdeb Holdings’ production will now, for the first time ever be offered for sale to local manufacturers. This is a massive increase and the injury is still out if the industry would be able to absorb this whole tsunami of diamonds that is about to flood the local factories come August. Namdia as opposed to NDTC was created as a window on the market to gauge the appetite for Namibian diamonds in the international market. Namdia was not created to be the supplier to local manufacturers. But it does have the option to sell some of its diamonds to local manufacturers at an arm’s length basis. It could therefore complement the supply from the NDTC. But you must keep in mind that the 15% allocation to Namdia is to achieve the sovereign strategic objective of price discovery and there the focus is on the alternative international diamond market. It would seek to optimize value in terms of selling a high quality Namibian box that is not aggregated together with lower quality stones from other diamond producing nations.

Therefore, Namdia should not be expected to sell diamonds at subsidized prices to local manufacturers. The NDTC remains the primary vehicle for supplying local manufacturers at 100% of the Standards Selling Value (SSV). We expect that Namdia would be selling a high niche product into a high niche market and therefore would generate further revenue for the state coffers.

7.    Will companies buying from Namdia be required to polish those rough diamonds in Namibia? Especially considering the fact that there are approximately 18 diamond polishing licenses but fewer than 13 NDTC sightholders?
As already stated, the volumes of diamonds to be supplied to the sightholders through the NDTC have been increased significantly through the new deal. Since Namdia would be selling to an entirely different clientele and market and to buyers that are in different jurisdictions of the global market it would be unreasonable to require that they polish those diamonds here in Namibia- although some of those diamonds might be cut and polished here.  However, Namdia’s clients will mostly have to travel to Namibia to do business here. This would increase business traffic and local spend. Namdia also has the discretion and option to collaborate with local manufacturers to cut and polish some of its rough diamonds on its behalf in order to test the prices for the polished outcome of its diamonds. But again, one must take into cognizance the core objective of Namdia- a window on the global market, and not for local supply. That is the domain of the NDTC – which would be heavily empowered by this deal through increase supply and the sale of bigger and better stones locally.
Due to space constraints, the last part of the interview will be published in next week’s edition.




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