We’re on right side of history, says De Beers Penny

We’re on right side of history, says De Beers Penny

Gareth Penny, architect of year-on-year diamond industry growth since 2000, speaks of Africa's potential as one of the greatest suppliers of natural resources to a world that he anticipates will be hungry for resources for the next “20, 30, 50 years”.

As the reshaper of world’s largest diamond company, Penny also foresees a reshaping of the economies of Africa, as the continent looks to add value to its metals and minerals.

The Rhodes Scholar and Oxford philosophy, politics and economics master calculates that diamond beneficiation will equate to 5% of gross domestic product (GDP) in Botswana and Namibia by 2010, and points to Botswana’s current GDP of $6 500 per person per annum as a success story.

De Beers, he says, is putting in situ capacity into all the African countries where it is exploring, which is shortening exploration turnaround times from a year to three months.

These are questions Mining Weekly put to Penny:

What impact is Africa's resource nationalism having on the diamond industry?

Resource nationalism is firstly not an African issue on its own. You see resource nationalism in South America, places like Russia and even in North America. We have similar issues in Canada where, as part of our permitting agreement, we had to agree to supply a local factory.

Africa probably has a greater resource nationalism focus and, rightly so, because Africa is on a growth path. Africa is looking to find ways to lift its GDP growth and find new economic opportunities.

Botswana, which provides a particularly good illustration, has gone from being one of the poorest countries in the world to a middle-income country, and now needs to find ways to create further development. It does not have a great number of competitive advantages to do that. It can do some tourism and there are service-sector opportunities, but its greatest opportunity in the view of policy makers there is to see the extent to which it can add value to its natural resources.

How can the global diamond industry help Africa put its hand up?

This has very particular relevance for De Beers because diamonds are seen as a national treasure. Today diamonds are the most beneficiated of any natural resource on this continent. In South Africa, more than 50% of diamonds by value are provided to the local industry for cutting and polishing. I am not aware of any other metal or mineral that South Africa has produced that is beneficiated here to an extent of more than 50%.

What De Beers is doing is ensuring that its strategies are aligned with the national strategies in each country. In Botswana and Namibia, the value of diamonds that will be provided for local beneficiation by 2010 will be equal to 5% of GDP. So this is like an incremental 5% being added to GDP in terms of the potential availability and the opportunity to beneficiate that production.

Can the so-called “hopeless” continent continue to show better growth rates than Europe and US?

I am an absolutely emphatic Africa optimist. I really believe that there is enormous potential. I actually think that we are on the right side of history in the sense of what is happening now. My own view is that there is going to be a prolonged natural resource boom. It will have its ups and downs, but if you look at the long-term trend over the next 20, 30, 50 years, there is going to be upward pressure on the availability on all manner of different metals and minerals because of India and China.

There are hundreds of millions if not billions of people being added to the world economy. They will have sustained demand for all manner of natural product and Africa is the greatest provider in many instances of those resources.

As you look at Angola and the Democratic Republic of Congo (DRC) and other parts of Central Africa and Southern Africa, there are great opportunities to be on the right side of history. That commodity boom will create opportunities for economic growth. You are seeing it already in the statistics of the last few years. Africa is now growing faster than America and faster than Europe and, provided we follow sensible policies at government level, we will continue to do extremely well in the years ahead.

How can beneficiation help Africa optimally?

The reason that we believe that beneficiation has to succeed is that we are going to be providing billions of dollars of rough diamonds into cutting factories in Southern African in the years ahead. This is not just about the diamond producers and the downstream cutting industry. For this to be win-win, producers, customers, regulators and all of us collectively have to work together in a very coordinated way.

If you do that, you can succeed. The skills are there. The willingness is there. It has some very interesting consumer dimensions as well because today consumers are very ethically focused and want to know that the product they are buying contributes positively to the welfare of the country from which it comes. Again that is not peculiar to diamonds, but is pretty universal. There are opportunities, but we have to make sure that we do it properly and effectively.

How much are you spending in Africa?

We have a very intensive capital programme world wide, which is a sign of the confidence that De Beers has in the diamond business globally. We are investing heavily in mines in Canada and projects and opportunities all around the world. But our major focus is in Africa. More than half of De Beers’ exploration expenditure of between $100-million and $140-million is in Africa. The principle focus of our exploration activities is in Botswana, Namibia, South Africa, DRC and Angola.

We are finding lots of kimberlites, but finding diamond mines is very challenging. There is probably one significant new diamond mine found every decade. There are only something like 30 operating diamond mines of significance around the world. It’s a challenging business to be in diamond exploration, but we are making really good progress. We are is putting in situ capacity into all the countries in which it operates, which gives the company short turnaround times.

In Angola, we have gone from a year’s lead-time, from the time we have drilled to the time we have a result, to three months. We are putting the capacity into the environment rather than flying things in and out, which takes up far more time and creates far more room for error. That’s the approach we are adopting, a country-by-country in situ capacity approach, which will shorten lead times and make us far more competitive and effective.

We have a number of big new projects in Africa, two in South Africa. It’s the first time we’ve had a ship in the sea in South African waters. Peace in Africa is a very significant vessel, a billion rands worth of capital, absolute state-of-the-art technology and many firsts in it, including a female captain. Other big projects are Voorspoed in the Free State, again R1-billion worth of capital, very interesting project, really running well. The South African Sea Areas project was launched ahead of schedule, which is unique in the current environment, and Voorspoed is probably running a month ahead of schedule. In Botswana is the AK6 project, which has been submitted for a mining licence. In Namibia are ship upgrades and a lot of money has been invested in new plant in Elizabeth Bay. At this stage there is nothing on the table in Angola and DRC, but we are optimistic that there will be in due course.

What about the shift of diamond activities from London to Gaborone?

The new $83-million diamond building in Gaborone will be, by far and away, the most advanced diamond sorting and valuing facility anywhere in the world. This is not only an Africa first, but it is a world first. We are relocating the diamond activity that we have in London into Botswana. It makes sense, because 60% of our production emanates from Botswana. We are shortening the pipeline a lot. We are avoiding duplication. We are saving time and doing things more efficiently. We’ve built a building bigger than we need and we accept that and the reason we have done it is because we are assuming success. We are assuming we will find another major mine and, in ten years time, when we have significant new caratage, we will have capacity.

The current Botswana Diamond Valuing Company building is sorting 33-million carats of Botswana production and we have designed the new building for 50-million carats of Botswana production, which is a testament to our confidence in the future. There is state-of-the-art sorting equipment, there are colour machines, shaping machines and all the leading technology is being applied to the Botswana project. It’s going to perform the function of supporting the factories of Botswana. It won’t just be sorting and valuing. The whole selling and marketing function for Botswana will be operated from there.

There will be fewer people in London. We are going to sell No 19, which is the other building that we have there. That’s on the market now. We are going to focus London on the sorts of activities that are appropriate to have in what is one of the most expensive cities in the world, most notably various of our corporate functions and our marketing functions to international consumers, which clearly is appropriate to be conducted in that kind of building, but with a very significantly reduced number of people there and a much more focused operation. The diamond side of what we are currently in London will all be done in Botswana.

How will beneficiation benefit Africa?

In Botswana, 3 500 jobs will be created and in Namibia 1 000 jobs. Because South Africa has had a cutting and polishing industry already, the incremental number of jobs will be less pronounced.

Much more importantly there will be an inflow of technology, wider entrepreneurial opportunities. Diamantaire are extraordinarily entrepreneurial people and they relocate parts of their businesses into Southern African countries, the multiplier effect, and the flywheel effect, will be very significant. When I go into restaurants in Gaborone, I see diamantaire there now. I have conversations with people who are thinking of investing in other parts of the economy. We have a client who is looking at ecotourism opportunities and other downstream opportunities.

You have the Gemmological Institute of America setting up in Botswana and you have banks that are looking to create facilities. There is a multiplier effect that is in many ways more important than the actual numbers of people who are physically holding a polishing tang in their hand.

Botswana’s credit rating has improved because of De Beers’ decision to put aggregation there. Moody’s has said that if De Beers is prepared that kind of money, locate that part of their business into Botswana, we will reevaluate Botswana’s credit rating. The implication of that in the wider economy is to lower the weighted average cost of capital when making a financial decision into a country and the like.

I cannot pretend that just beneficiation or just what De Beers is doing is going to have, on its own, an overwhelming impact on any particular economy, but it’s all part of a fabric that will have a positive impact.

Are we seeing the centre of diamond gravity moving to Africa?

There is undoubtedly a shift, but this is a win-win if done properly. The traditional cutting centres still have an enormously important role to play. There isn’t that much cutting in any event that is going on in places like Belgium today. Most of what they are going are other activities like computer-aided design, banking and other things. In many instances it is the same diamantaire that is also setting up factories in Africa. Far from these strategies alienating the traditional cutting centres, we would say to the people of Antwerp, New York and wherever, that they should se how they can create opportunity out of this. Create the win-win, look for the marketing angles, the new ideas and the ways of creating consumer interest.

India is unlikely to be affected because the vast majority of the caratage is being cut in India and China because of their very competitive polishing costs, which is unlikely to change.

Are there signs of established world willingness to partner Africa’s new aspirations?

There are, entrepreneurs coming in are largely from the traditional centres, plus India. But there are going to be some who will find this brave new world challenging and difficult and some people don’t like change. There are conservative and traditional elements, who try to hang on to the past and who don’t see change as being positive.

The diamond industry is changing, but I don’t think it is any different to any other industry. I had a get together with a group of 25 CEOs from all sorts of different companies and the question of average product or service lifecycle arose. Going around the room, your average time was 18 months whereby people were required to find a new competitive angle or new design. This is a highly competitive very fast changing world and if you want to be part of it, you’ve got to be prepared to be part of that mindset. The only constant is change.

Is there an African awareness that wrongdoing damages the diamond business?

The industry has made enormous progress and, in De Beers, we are all enormously proud of the role that diamonds play. Diamonds are for development and they are for good. You look at the correlation between democracy in Africa and the presence of diamonds and it’s almost one-to-one. Liberia, Sierra Leone, Angola, DRC, Namibia, Botswana and South Africa are all making enormous progress politically and economically. The diamond industry is acutely aware of the need to ensure that it has its house in order and that it operates in a way that is “up to diamonds”.

Today diamonds are the most regulated minerals in the world. The Kimberley Process involves 74 sovereign governments and over 100 non-governmental organisations. Nobody is claiming that the Kimberley Process is perfect and the discussion every year centres on how to improve it. De Beers has provided training to countries like Liberia where we don’t even operate.

What this is doing is giving consumers enormous confidence that when they buy diamonds they are actually doing something that makes a positive contribution to Africa. That’s the hand up, not the hand out. This is a really meaningful contribution that is sustainable. It is not about one off donation. It’s about a genuine sustainable long-term contribution that actually makes a big improvement to people’s lives.

What risk to diamonds is Botswana running by seemingly failing to reconcile with the San people?

The Botswana government has come a long way in sorting out the issues. It’s a great testament to Botswana that the issue goes to court, there is a ruling and government abides by that ruling. Clearly it continues to be an issue that will challenge, but I believe there is an acceptance that the issue needs to be resolved and it has been moving forward over the past year and I think it will be resolved.

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