Botswana Mining Report Q3 2009

Exploitation of rich mineral reserves, especially diamonds, has been a significant driver of Botswana’s rapid economic growth. Notably, the mining sector of Botswana contributes in double digits to the country’s GDP. Diamonds, along with copper and nickel, are the major focus areas in metal and mineral exploration, and earn more than three-quarters of the country’s export revenues. The authorities of Botswana have an impressive track record in garnering the maximum benefit from the production of diamonds, and we expect this trend to continue over the coming decade.

Diamonds currently dominate the economy – contributing approximately 36% of GDP, 75% of merchandise exports and 45% of government revenue – but with output set to decline, the government has enacted a number of measures to ensure that revenues are used to aid diversification. For example, a fiscal rule has been adopted which states that mineral revenues must be used to expand the economy’s productive base, rather than fund consumption expenditure. Thanks to this rule, and other initiatives enshrined in successive six-year National Development Plans and the long-term policy Vision 2016, growth in the non-mining sectors is burgeoning. The worldwide financial crisis has had a severe impact on Botswana’s mining sector. A slump in the global jewellery market and the cutting and polishing industries is forcing diamond producers such as Debswana – a 50:50 joint venture between Botswana’s government and De Beers – to cut output and layoff workers. In Q408, global demand for diamonds fell and Botswana’s exports fell to virtually zero. Although the situation is likely to be temporary, lower consumer demand and reduced credit will mean that sales are unlikely to return to pre-crash levels for some time. As a result, the performance of the diamond sector in 2009 is expected to be weak. In June it was announced that Botswana is to receive a US$1.5bn loan from the African Development Bank in order to make up a budget deficit estimated at 13.5% of GDP for the current year. The budget gap has increased as a result of lower-than-budgeted commodity prices, particularly for diamonds. Also in June, figures from Botswana’s Central Statistics Office showed that first-quarter mineral production was down slightly.

Copper-nickel matte production (from the BCL mine in Selebi-Phikwe) stood at 10,199 tonnes (down from 14,331 tonnes in Q108). Coal output stood at 219,559 tonnes for Jan-Mar 2009, with soda ash output standing at 49,389 tonnes. Most strikingly of all, the figures from the CSO showed that there was no diamond production within Botswana over Q109 as demand for the gemstone fell sharply. Global Overview On page 9 of this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector and what this means for the industry moving forward. Industry Forecast The diamond sector has served the country well in recent years, having delivered healthy current account and fiscal surpluses. However, falling diamond prices are expected to retard the mining sector in the short term, with exports slumping in Q408. Sales are expected to remain weak in 2009. Indeed, in 2008, BMI estimates that the mining industry shrunk by almost 6% in real terms, with a further contraction forecast for 2009. By the end of the forecast period, however, the sector should be returning to growth. By 2013 we expect the industry to reach a value of US$6.32bn, up from US$3.39bn in 2009. Meanwhile, a fall in output in 2009-2010 will extend the lifetime of discovered deposits, as will a decline in the rate of investment over the same period. Diamond output is predicted to decline sharply after 2021 as deposits are exhausted, forcing the government to concentrate on the development of other sectors in order to maintain a robust growth trajectory.