Something odd is going on in Botswana. Only a few days after the publication of a tender for the lucrative position of Government Diamond Valuator (GDV), Ponatshego Kedikilwe, the Minister of Minerals, Energy and Water Resources, suggested that he “is reviewing whether or not to withdraw the tender given the preliminary results of a strategic review study of the mineral sector which were presented to his ministry on March 17.”

The very articulate minister was quoted as saying “withdraw;” he didn’t use the terms “postpone” or “delay.” The initial reaction among some people close to the contract was that the minister may wish to review some of the time-honored practices connected to the GDV contract. Change is in the air.

This reminds me of an event that took place in a court room in South Africa in March 1997 where De Beers explained that it is not the task of the GDV to value diamonds, despite the title. The role of the GDV was then eloquently defined by L.A. ‘Bertie’ Lincoln, a senior De Beers director, speaking under oath at a governmental judicial inquiry, as follows: “A Government Valuator does not value diamonds. He is like an auditor, he approves whether the assortment of the diamonds is correct, according to the Central Selling Organisation’s standard assortment. That is all he does. The value really is the price which is in the Price Book. So the government valuator has got no input into the value of a diamond.”

Except that the Central Selling Organisation is now called Diamond Trading Company, that statement is as true today as it was then. The Botswana tender announcement, published on March 20, states that the “main function of the GDV is to check, on behalf of the Government, the sorting and valuation of the diamond production of Debswana Diamond Company.” That language is clear to insiders, while probably confusing to others. Is it the task of the Government Diamond Valuator to actually put a price on the production? The answer is a definite “NO” – in capital letters.

Historically, De Beers is the price setter of its productions – which clearly was the case in the cartel period, when De Beers was selling some 80 percent of world production or more. Has the time come to change that practice? That is hard to say, there are sound arguments in both directions. On balance, I would certainly suggest that a revision is in order.

In the current contractual arrangements between De Beers and the government the time-honored practices remain unchanged. The DTC Botswana has committed itself to sort and value the mine output in accordance with the DTC International Price Book, also called London Price Book. In fact, the sorters use a “sample parcel,” which is a reflection of London’s Standard Selling Assortment (SSA). The Price List refers to that assortment – and the prices are referred to as Standard Selling Values (SSV).

Thus, the task of the Government Diamond Valuator is to certify that the parcels are sorted accurately in terms of the price list. But the price (the value) of that parcel is determined by the London Price List (the SSV), over which the GDV has no say whatsoever (except for the large specials, where the GDV negotiates the price with the DTC.)

So what happens if the rough market prices changes? Nothing changes until De Beers changes its Standard Selling Values. And what happens if De Beers changes the composition of its Sight boxes? It is agreed that in such instances a new Sample Parcel that reflects the modified Standard Selling Assortment will be prepared, which will then be valued through a modified Price List. Thus, essentially, it is exactly as ex-De Beers Director Bertie Lincoln testified 12 years ago: A Government Diamond Valuator does not value diamonds – at least not if the diamonds were produced by a De Beers mine.

There is an absurdity here that has always bothered me. In Namibia, for example, the job description of the GDV states clearly that the Namdeb (i.e. De Beers) production must be valued in accordance with SSV. Other productions, however, must be valued in accordance with market price. Over time, the differentials run in the range of 30 percent – with other productions always higher than the valuations for the De Beers output.

A Joint Government and De Beers Decision

What the GDV in Botswana does is giving comfort to the host government that the mine production is accurately valued – that the carats produced are exported at the values set by the Price Book. That is no simple task in any event. The current GDV employs a nine-member team, which includes two local Batswana. It is time-consuming and extracting work. The reward, however, is not bad – the current GDV earned $37.6 million over a seven-year period, or roughly $5.3 million a year. It is not clear whether a next contract will be higher or lower.

I haven’t seen the actual tender documents yet and I hope that they will provide full disclosure and transparency. In all fairness, the documents should point out that the Botswana government has contractually committed itself to consult the DTC in London in respect to the skills and general suitability of any person who is considered for the coveted position of GDV. If my information is correct, the Botswana government is contractually obligated to give considerable weight to the views of the DTC.

In practice, any person who according to the DTC may have conflicting other business interests, or may in any way shape or form clash with the interests of Botswana, of the DTC in London or with De Beers, may be disqualified as being unsuitable for the job. Essentially, if you are conflicted with De Beers, forget it. Stay home. Don’t apply.

What are the reasons behind these limitations on the GDV? Rough diamond pricing is extremely difficult. The rationale underpinning rough diamond pricing evolved over time, and certain elements have become permanent features.

Rough diamonds have always been sold by producers in standard parcels (series). The basic valuation of the rough was historically determined through a price formula and related to the average carat values for varieties of stones in the series supplied by the mines to the DTC, its predecessor, or to the open market.

In any pooling arrangements of producers with dissimilar productions, inevitably there were some inequities in the division of quotas and sales revenues. This may constitute less of a problem when the mines involved have identical ownership, but is more problematic when participating mines are not wholly-owned by De Beers – which is the situation in Botswana. Essentially, one production may in effect be subsidizing another production. The current system tries to minimize that possibility. The ‘master sample’ and SSA and SSV mechanism is used to maintain the various uniform and internationally applied standards and thus guarantees that mining output in South Africa, Namibia, Canada or Russia is valued in an identical way.

The Minister’s Dilemma

I haven’t the foggiest notion about what kind of problems Minister Kedikilwe has with the GDV tender that prompted him to make statements on its possible withdrawal. Maybe the perennial discussion on “sustainable market prices” and “spot prices” has come up again, as it does every decade or so. Reportedly, there is pressure on the minister to agree to a tender/auction system for all or part of Botswana’s output, in order to check the mine’s selling prices to De Beers. This would require redefining the GDV’s tasks – possibly requiring him to set a reserve price and/or value in accordance to market.

Changing the system would probably trigger a renegotiations of various agreements between Botswana and De Beers – and, by itself, there is nothing against that. However, moving away from the system of SSA and SSV would “uncouple” the valuations of productions of Botswana from those of other De Beers mines. The shareholders of mines in one country might not get the same value for identical goods than those obtained by other producer countries. Again, in itself, there may be nothing wrong with that – though one wonders whether now is the best time to make changes.

Sir Ernest Oppenheimer, the architect of the modern rough pricing and distribution system, once remarked that he would challenge anyone claiming they could determine the exact value of a single rough stone. At best, one can value within a 5 percent margin. Therefore, he said, trade must take place through larger parcels as the individual valuation errors would then balance out to correct averages. Indeed, a number of peculiarities of diamonds and the diamond industry itself have coalesced to evolve into the present rough distribution and pricing system.

In one of my books, I have reflected that “part of the attraction of diamonds is the illusion that diamonds are items of lasting love, value and prestige. These illusions would be damaged if the price of diamonds was seen by the consumer to fluctuate sharply. Such fluctuations would also attract the attention of speculators who, by buying and selling for investment purposes, would add supply-side volatility to the market. Rough diamonds are produced in a volume and a mix of categories that does not always match the demands of the market. However, it is not possible to selectively mine just the categories in demand. The production of all categories must continue, and somewhere in the distribution chain there is a requirement to stockpile any surplus.”

That’s what I wrote some yeas ago. I am the first to realize that times have changed. Though the mines are, in fact, again stockpiling some of their current output, as a general policy they sell what they produce. De Beers' role in marketing has fallen from 80 percent to 40 percent. And the traditional reluctance to outside speculators and outside investors participating in the trade has fallen away. In fact, it is De Beers itself that is now actively seeking outside investors – as we reported a few weeks ago on De Beers Managing Director’s Gareth Penny sales/marketing mission to the United Arab Emirates.

Maybe changing the time-honored valuation system might well be an essential prerequisite to attracting outside investors to our industry.

The new GDV contract will run for five years. The minister may have some new thoughts about diamond pricing and the optimization of revenues for Botswana. We don’t know – but if he actually withdraws the tender, it is clear that change is in the air. When Kedikilwe talks, diamond people better listen. I certainly do.

Have a nice weekend.