R 260537Z JUN 08
FM AMEMBASSY GABORONE
TO SECSTATE WASHDC 5060
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
AMEMBASSY ABUJA 
HQ USAFRICOM STUTTGART GE

UNCLAS GABORONE 000514 
 
 
DEPARTMENT FOR OPIC: C. COWAN; ABUJA FOR H. MERRITT 
USAFRICOM FOR STRATEGY PLANS AND PROGRAMS (MC) SOUTHERN 
BRANCH 
 
E.O. 12958: N/A 
TAGS: ECON EMIN BC
SUBJECT: DIAMONDS ARE BOTSWANA'S BEST FRIEND 
 
REF: JUNE 4 2008 EMAIL FROM E. PELLETREAU 
 
¶1. Summary. With the opening of the Diamond Trading Center 
(DTC), Botswana has successfully moved up the value chain in 
the diamond industry.  No longer just a raw producer of 
diamonds, Botswana is now host to all steps in the diamond 
industry - from mining and producing to sorting, cutting, and 
polishing to aggregating and selling to the world market. 
The country will reap the benefits from the DTC in terms of 
revenue and job creation well into the future or as long as 
Botswana's diamond mines continue to produce high value gems. 
End Summary. 
 
Economic Effect 
--------------- 
 
¶2. Despite efforts to diversify, diamonds still drive 
Botswana's economy and have underpinned its economic growth 
from one of the poorest countries at the time of its 
independence in 1966 to its current middle-income status.  As 
former President Festus Mogae said at the opening of the 
recently completed Diamond Trading Center in Gaborone, 
"Botswana is what it is because of diamonds." 
 
¶3. For the 12-month period ending June 30,2007, diamonds 
accounted for 67 percent of total exports (down from a high 
of 84 percent in 2003/04) and 28 percent of GDP (based on 
current prices in pula).  Diamond mining, however, is capital 
intensive and only accounts for approximately five percent of 
employment. 
 
Debswana 
-------- 
 
¶4. Debswana, a 50-50 joint venture between De Beers and the 
GOB, operates the four active diamond mines in Botswana, 
including the Jwaneng mine, the world's richest diamond mine 
by value.  According to the Debswana 2007 annual report, the 
four open pit mines account for 27 percent of the world's 
diamond production by value, making Debswana (and Botswana) 
the world's leading producer of diamonds by value.  In 2007, 
Debswana produced 33.8 million carats, down slightly from 
34.3 million carats in 2006 but 2007 revenue was 18 billion 
pula (approximately US$ three billion), a 3.5 percent 
increase from 2006. 
 
¶5. Debswana is faced with many challenges to contain costs in 
the future.  Inflation has increased its operating costs, 
regional and local power shortages are affecting its 
productivity, and the shortage of construction equipment, 
especially tires, due to worldwide demand is affecting its 
operations.  Production and profits will also decline as 
production moves underground and costs rise, which is 
expected to happen in 2020. 
 
Other Diamond Mining Companies 
------------------------------ 
 
¶6. The success of Debswana has attracted other hopeful 
entrants to the diamond mining sector in Botswana.  Unlike 
the Debswana mines, however, the ones expected to open will 
be much smaller than the existing mines, have a relatively 
short life, and are unlikely to be nearly as profitable as 
the Debswana mines. 
 
¶7.  Boteti Exploration Company, a joint venture between De 
Beers (66 percent owner), African Diamonds Plc (29 percent 
owner), and Debwat (a joint venture between De Beers and Wati 
Ventures; 5 percent owner), began mine construction in April 
2008 of a mine in central Botswana near three of the Debswana 
mines.  The diamond pipe was discovered in 1969 but was 
considered uneconomic until new technologies revised the 
estimated size of the pipe and further sampling indicated 
higher grades than originally thought.  The mine, which the 
company hopes to have ready by the last quarter 2009, has an 
expected life of 10 years and an estimated reserve of 11.1 
million carats. 
 
¶8. DiamonEx, an Australian-based diamond exploration company, 
through its Botswana subsidiary is the sole owner of the 
Lerala Diamond Mine, located in eastern Botswana with an 
estimated reserve of 3.7 million carats.  The company expects 
to begin production in July 2008 and to produce 330,000 
carats per year.  DiamonEx also owns 15,000 square kilometers 
of mineral rights in Botswana, which it is actively exploring 
for diamonds. 
 
¶9. Gem Diamonds, a London stock exchange listed company, 
through its wholly-owned Botswana subsidiary Gope Exploration 
Company, has plans to develop the Gope mine located within 20 
miles of the eastern border of the Central Kalahari Game 
Reserve (CKGR) by 2010.  However, the mine's location inside 
the CKGR (which is the home of the San indigenous people) 
make this project highly sensitive and it will require 
additional consultations with the GOB and civil society.  If 
successful, the company believes the mine will produce one 
million carats annually with an estimated life of 15 years. 
 
Diamond Trading Company Botswana 
-------------------------------- 
 
¶10. In exchange for extending the Jwaneng mining license 
another 25 years, De Beers agreed to enter into a joint 
venture with the GOB to operate the Diamond Trading Center 
Botswana (DTCB), the rough diamond distribution arm of De 
Beers, in Gaborone.  The DTCB was the fulfillment of former 
President Mogae's goal to move up the value chain in diamond 
processing by developing sustainable post-extraction diamond 
industries in Botswana. 
 
¶11.  The US$75 million state-of-the-art sorting and valuing 
facility opened in March 2008 with 500 employees, although 
not all are in the cutting and sorting areas.  Eventually 
DTCB expects to have 3,000 employees.  The facility with its 
three sorting floors and 39 modern sorting machines is the 
biggest diamond sorting facility in the world. 
 
¶12.  DTCB has the capacity to sort and cut 45 million carats 
per year.  Any shortfall from Debswana, which currently 
produces around 34 million carats per year, will be made up 
by production from new mines in Botswana or through 
aggregating diamonds from other countries such as Canada and 
South Africa. 
 
¶13. DTCB expects to supply close to US$550 million worth of 
diamonds to 16 local sightholders by 2009.  DTCB has already 
completed two sales in April and June 2008 and it expects to 
sell US$375 million worth of diamonds in 2008.  Once fully 
operational, DTCB plans to conduct 10 sales per year. 
 
¶14. DTCB will concentrate on the upper and middle ends of the 
supply chain in order to stay competitive in the global 
diamond cutting and sorting business.  Botswana cannot 
compete with other cutting centers because its labor force is 
too costly -- approximately five times higher than that in 
India or China -- and inexperienced compared to others. 
DTCB, therefore, will focus on larger, more expensive stones 
for which the labor component is a smaller proportion than 
for lower value gems, which will remain a specialty of India. 
 
¶15. In addition to the direct jobs created, the DTCB should 
create additional jobs in downstream activities like banking, 
security, insurance, IT, and others.  Stanbic Bank Botswana, 
a leading South African bank operating in Botswana, has 
already announced that it will use its proceeds from a US$300 
million bond offering to support the downstream diamond 
beneficiation industry including financing of working capital 
for the 16 diamond cutting and polishing companies in 
Botswana and international banks such as ABN AMRO have 
expressed an interest in opening in Botswana. 
 
DTC International 
----------------- 
 
¶16. De Beers also has announced that it will bring its 
aggregation business (DTC International) to Botswana by the 
middle of 2009.  DTC International combines US$ six billion 
worth of diamonds sourced from various producer countries 
including Russia.  Aggregation is currently done in London, 
but producer countries will now sort their diamonds and than 
send them to Botswana to be mixed and sold.  With the opening 
of DTC International, Botswana will now play host to all 
steps in the diamond industry - from mining and producing to 
sorting, cutting, and polishing to aggregating and selling to 
the world market. 
 
Sightholders 
------------ 
 
¶17.  As part of the requirement to buy from DTCB, sixteen 
sightholders have set up polishing, sales, and marketing 
businesses in Botswana.  Four have been in business in 
Botswana for many years, but the remaining 12 are still 
ramping up operations due to the opening of DTCB.  The 
sightholders are well-known diamond businesses with 
headquarters in Geneva, Israel, Belgium, India, and 
elsewhere.  U.S.-based sightholders who have established 
local operations include Ascot Diamonds, Lazare Kaplan, and 
Leo Schacter. 
 
¶18. With the opening of DTCB, the sixteen sightholders have 
been aggressively setting up operations in and around 
Gaborone.  Steinmetz Diamonds Group, a Swiss-based 
multinational diamond company with activities that include 
rough diamond sourcing, trading and marketing, diamond 
manufacturing and cutting, polished sales and marketing, as 
well as jewellery creation and retail, invested US$ nine 
million in building a factory, which will accommodate 220 
employees.  Pluczenik Group, a veteran De Beers sightholder 
from Belgium, invested US$ three million in a plant that it 
expects to employ 400 people.  H and A Cutting Works from 
Belgium opened in January and now employs 170 workers with 
plans to increase to 500.  Other sightholders are making 
similar investments. 
 
¶19.  With De Beers, the GOB, and DTCB holding all the cards, 
the sightholders have little choice but to express optimism 
that they will be able to overcome the high labor and 
transport costs, low productivity, and power problems 
associated with doing business in Botswana.  Many have 
mentioned the cost saving of setting up and sourcing their 
diamonds locally as compared to sourcing their diamonds in 
London as had been previously done.  At a news conference at 
its Botswana opening, the chairman and chief executive 
officer of the Pluczenik Group said they intended to use 
advanced cutting technology and sophisticated machinery to 
reduce costs. 
 
¶20. However, not all are happy, as Dalumi Diamonds Group 
(DDG), an Israeli cutting and polishing firm, has already 
publicly complained about the high transport costs in 
Botswana and is experiencing labor problems as employees went 
on strike over wages.  In a newspaper interview, the DDG CFO 
also complained about the lack of tax incentives found in 
other diamond cutting and polishing countries and the lack of 
competition among Botswana cities and provinces to attract 
businesses that is normally found in other countries, which 
usually drives down operating costs for the company. 
 
Comment 
------- 
 
¶21. The GOB has played its diamond cards well to get De Beers 
to open the DTCB, which should provide long term benefits to 
the country in terms of revenue and job creation, and make 
tiny Botswana an even bigger player in the diamond industry. 
It remains to be seen if the sightholders can be profitable 
in the Botswana business environment but they have little 
choice but to try to make it work so long as Botswana's 
diamond mines continue to produce the diamonds they want and 
need.  Until the mines play out, diamonds will continue to be 
Botswana's best friend.  End comment. 
 
 
CANAVAN