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Wednesday 16 January 2019
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The diamond deal in detail

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…The billion dollar Namdeb/Government diamond deal

In this week’s edition, The Patriot brings you the final part of the exclusive interview with Minister of Mines and Energy Obed Kandjoze in which he explains the nitty-gritties of the recently signed diamond deal between Namdeb and Government. The first part appeared verbatim (questions 1-7) in last week’s edition. The billion-dollar deal is heralded by many as a landmark one that could catapult Namibia towards bigger returns and making its footprint in the global diamond avenue. Now that the 10-year agreement, which is due to officially commence in August has been sealed, Namibia will have its own direct presence on the global downstream market through Namib Desert Diamonds (Namdia).

The agreement also ensures that about 54% of all Namdeb Holdings’ production would be allocated for local beneficiation, this includes all special stones. “Altogether some 73% of all our diamonds will work directly for the Namibian economy (US$430 million through the NDTC and US$150 million through Namdia out of the total N$11.7 billion Namdeb Holdings production),” said Kandjoze.

8. Does Government expect that the possibility of buying Namibian diamonds from Namdia (if that should not require polishing them in Namibia,) will undermine the domestic industry (given that Namibia is a high “cost per carat’ production environment.

I do not see how that would be the case. About 54% of all Namdeb Holdings’ production would be allocated for local beneficiation, including, for the very first time, all special stones and all exceptional stones. This would be a massive boost and a major shot in the arm for our industrialisation ambitious, which should enhance the viability and sustainability of the sector.

Altogether some 73% of all our diamonds will work directly for the Namibian economy (US$430 million through the NDTC and US$150 million through Namdia out of the total N$11.7 billion Namdeb Holdings production). That is, the N$6.7 billion annually or NS$67 billion over the term of the contract that would be allocated to the local manufacturers through the NDTC and the NS$2.4 billion that would be marketed through Namdia (an entity that is 100% exclusively owned by the Government of Namibia.)

All these are new gains that were non-existent before the deal came to effect. Namdia is the sweetener to the cake and a key sovereign imperative. It should be viewed from the vantage point of an incremental real gain to the Namibia economy.

9. How does the new agreement fit into the Harambee Prosperity Plan?

This new deal is in conformity with many pillars of the Harambee Prosperity Plan. It ticks a number of the pillars of the plan. In the first place, it contributes towards Effective Governance. The deal entails a comprehensive restructuring of the diamond governance arrangements as well as having clawed back a significant aspiration of the ownership structure which is admittedly historic in itself.

Modifications to diamond governance arrangements would result in a progressive increase in the Namibianisation of the nation’s diamond patrimony, with corresponding increases in economic and financial benefits to the state. The fact that the bulk of the diamonds would now be sold and marketed in Namibia will increase accountability and transparency in our diamond pricing arrangements. Especially as all the big stones and exceptional stones must now all be offered for sale locally either through the NDTC or through Namdia.

The deal will also contributes towards Economic Advancement, another key Harambee pillar. This deal, it must be reiterated, is worth some NS$6.7 billion annually or N$67 billion during the term of the contract. This is equivalent to some 5% of GDP per annum or some 50% of GDP over the term of the contract. This excludes the N$3 billion that the upstream side of the business is already contributing to the state coffers in the form of taxes, royalties, Non Resident Shareholders Tax (NRST) and dividends from Namdeb Holdings’ profits. It must also be noted that diamonds do contribute about 90% of the Government revenue from mining, and by far the biggest contributor to state revenue than any other commodity.

This is a massive boost to the economy overall and by far surpassed the KPIs under the NDP4 plan that calls for an increase in local supply by 20%. This deal increases supply by some 87% from the base case. And in terms of the Social Progression pillar, will contribute towards job protection and job creation. Additionally, it is likely to increase the quality and diversity of diamond jobs in Namibia as the country becomes more proficient in the skills-intensive, value-adding sectors of the industry that can be found further downstream from diamond mining.

These downstream sectors developments can be expected to have an economic multiplier effect as new industries and jobs servicing these sectors develop locally. Specifically, this deal will contribute towards the reduction of hunger and poverty, and it will result in the transfer of valuable technical skills and transfer of state-of-the-art technology to Namibia.

10. Last year’s Diamond Omugongo saw calls by diamantaires (Diamond Polishers) for Government to subsidize rough diamond prices (from NDTC). Is Government considering that request?

As I said, the global diamond pipeline is in recovery mode and diamantaires are starting to see some positive margins in the diamond boxes. Subsidisation of the industry is not necessarily the panacea for all the challenges plaguing the industry. Much more is needed to ensure that this industry has sufficient oxygen to operate in a cutthroat global environment. The industry, for the first time is offered a critical mass to process than we have never seen before.

The challenge will now be to make the most out of this amazing opportunity, and it would require a collective mobilisation of resources and efforts from both the public and private sectors in order to leverage these opportunities. With the right business models and the facilitation of a conducive and enabling environment by the NDTC, the Shareholders Forum and relevant Government stakeholders our industry should be able to complete with confidence and create a vibrant downstream beneficiation sector.
11. Most companies operating in the diamond industry are subsidiaries of larger global groups. The insistence that 100% of supply is polished here despite the less efficient stage at which factories operate is said to create backlogs of unpolished diamonds. How is this issue being addressed in the new agreement?

This matter would be deliberated upon by the Shareholders Forum – as provided for in the Agreement – that is about to be established. Once the forum is in place I expect that body to advise me on these and other similar issues that impact on diamond beneficiation. So far we have been operating based on an 80:20 rule. We allow some factories to export up to 20% of the rough diamonds that are deemed not suitable or not economically viable to cut and polish in Namibia.

Flexibility is necessary as these are truly commercial decisions and it is unreasonable to be rigid and draconian in our dealings with sightholders, especially given the difficult environment in which they already are operating. But, of course, we expect the bulk of the diamonds to be beneficiated here in Namibia otherwise this would be a futile exercise and a charade. That flexibility would now even be needed now more than ever given the massive supply that is about to hit the industry in a couple of months.
All in all, we expect our sightholders to be honest and good corporate citizens that care about Namibia and that are truly committed towards our beneficiation agenda and we would try our level best to incentivise those companies that are doing the right things and helping to build Namibia.
12. In the past, De Beers Societe Anonyme had a “delivery entitlement” clause inserted in the Agreement, a move which experts in the industry said was meant to regulate the flow of Namibian diamonds into the diamond market, by deciding when, the quantity and quality and at what price to buy Namibian diamonds. This clause was part of the previous agreement but most of those with the knowledge about Namibia’s diamond sector opposed the inclusion in the clause. Has it been removed from the new agreement or is it still part of the agreement?
I am glad to say that it has been removed from the Agreement. This is a very important move as it protects Namdeb Holdings. This ensures that all Namdeb’s diamonds would be brought up and there shall be no stockpiling at Namdeb’s cost. This also protects Namdeb’s cashflows and guarantees revenue to the state. This is another real gain for Namibia.




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