A Century of Angolan Diamonds

Angola, the world's fourth-largest diamond producing country by value and sixth by volume, could reclaim record production levels relished before 2002 owing to its new mining law and higher quality diamonds, says a new study. Analysts at the Sinese economic geology consultancy and the sub-Saharan investment bank Eaglestone, foresee a growing Asian luxury goods market that would enhance Angola’s diamond production. Angola’s diamond industry, which originated a century ago under Portuguese colonial rule, is efficaciouslyevolving from anextensiveera of striving as a result of a civil war that ended in 2002.

The country’s production volume has remained relatively stable at 8 million carats per year since 2006.After a new mining code premeditated to draw foreign investment and improve exploration for diamonds and other minerals was presented in late 2011, there has been an amplified interest in the country’s industry, reports Luis Chambel of Sinese(with contributions by Luis Caetano from Sineseand Manuel Reis of Eaglestone). (Diamond World brings you some excerpts of the report.)

2012 is the year in which Angolan diamonds turned one century old. Since the discovery of the first diamonds in 1912 in the Mussulala River Lunda Norte, Angola has rapidly grown into a major producing country. This report celebrates that fact and describes the Angolan diamond industry’s current situation, its future perspectives and opportunities.

Reasons for investing in Angolan diamonds
Angolan diamonds have been known for 100 years. These diamonds are famed for their high quality and high value and have attracted expert buyers from all over the world, from the giant De Beers (the exclusive buyer for many decades) to the smaller scale traders. The country is endowed in both kimberlites and alluvial diamond deposits; many of those deposits still await development. Probably many more deposits still need to be explored and discovered in a territory with a huge potential for diamond.

There is still a road to walk but the last ten years have seen an increasingly stable and growing economy in Angola, with successive elections being certified as free and fair by international organizations and a growing diversified media sector. The business environment has improved and a new mining code has been approved. Transport infrastructure is also being either rebuilt or erected from scratch.

Angola is a land of many opportunities for diamond investors. It has a special business environment and specific risks and challenges; we will guide you through them in this report. We will also discuss the current situation of the international diamond markets and its future trends and the impacts they may have on the Angolan industry. In the end, we hope this report will help you establish a successful venture in this land of promise.

1.2
Main characters, old and new
Many people and institutions have been involved in the Angolan diamond industry during the last 100 years; places and natural features unknown until then have fallen under the spotlight of the industry. Among those involved, some had a leading role. The reading and analysis of this report benefit from an early introduction to those entities.

DIAMANG discovered and developed the Angolan diamond deposits over a period of sixty years. Four decades after its demise, there has been not a single deposit exploited in Angola that hasn’t been found by this company. Until 1971, DIAMANG had a monopoly to explore for and mine diamonds in Angola. It exploited alluvial deposits with unparalleled success and discovered the kimberlite clusters that are today’s backbone of the Angolan industry– Catoca, Camatchia and Camútuè just to name a few.

ENDIAMA is the Angolan State’s diamond company. Created after the end of DIAMANG, it’s the single most important reference in the industry in the last three decades. Its role has had nuances over this period; ENDIAMA is, however, the main source of power and knowledge in the Angolan industry.

CONDIAMA was a joint venture between DIAMANG and De Beers active in the exploration of the Angolan territory between 1971 and 1975. Despite its short life, this company explored most of the country’s territory, kimberlites being its primary target. Its efforts were cut short by the turmoil associated to the transition between the colonial regime and independence. During the four years campaign, this joint venture company discovered many new kimberlites and alluvial occurrences and amassed an impressive volume of early stage exploration data.

De Beers has had an almost continuous direct presence in the Angolan diamond mining industry since the early 70’s and before that as the exclusive production buyer. The results obtained have been discrete; despite the investment done in exploration the company still didn’t develop a single kimberlite (perhaps this will change in the near future). De Beers’ importance in the Angolan industry can’t however be measured by exploration success only; the company has a special role in Angola, providing technical and marketing expertise.

Catoca, ALROSA and Odebrecht. A kimberlite, Catocais currently the most important diamond mine in Angola. The mine is owned by Sociedade Mineira do Catoca, whose main partner is Russia’s ALROSA. This company is also involved in several other kimberlite projects in Angola, being one its shining stars. Thiscompany’s successful activity in the country is also asymbol of the long lasting special relationship between Angola and the Russian Federation. Odebrecht, a Brazilian conglomerate, is also one of the original Catoca partners. This company was also involved in other diamond mining projects in Angola.

SMLis a joint venture between ENDIAMA and the Portuguese SPE–Sociedade Portuguesa de Empreendimentos S.A. Established in 1992 with a 35.000 km2 concession to explore and mine diamond deposits in the Luachimo and Chicapa rivers (from their headwaters to theDRC border), it was prey tounder funding and mismanagement in a very difficult operational environment. The company is still formally alive; legal disputes between its partner splace a huge question mark over its survival. The importance of its historicalrole derives from its capacity to operate in an especially difficult period when other operators didn’t dare.

ITM’s technical expertise and modern management practices (with their workers’ generous bonus scheme, dependent on results) made it the most(perhaps only) profitable diamond mining company during the years of civil strife in Angola. Its activity showed that profitable mining operations could be done even during the most extreme conditions,paving the way to the boom of the Angolan diamond of the early XXI century.

ESCOMM ininghas been involved in several exploration and mining projects, both primary(kimberlite) and alluvial, namely the Chimbongo (alluvial) and Camatchia (kimberlite) mines. The huge investment in exploration (arguably the largest diamond exploration company in 2007-2008) resulted in the discovery of many new kimberlites; some of these prospects are mineralized, awaiting further work to determine their feasibility.

TheCuango, Luachimo, Chicapa, Chiumbe, Luana andLuembe rivers: Angola diamonds earned the irreputation from their alluvial sources. The rich alluvial deposits of those rivers (running S–N, flowing from the center of Angola into the Kasai River in Congo) contain a very high proportion of gem diamonds.These rivers also cross or border many of the country’s kimberlites, e.g. the Camatchia, Camafuca Camazambo and Sangamina, adding to their importance.

1.3
The Angolan diamond industry
First as a route of Indian diamonds to European markets and then, in the last three centuries,as the heart of diamond production, the South Atlantic has had a central role in this industry for half a millennium. On the South Atlantic margins, AustralAfrica (primarily) and South America hold, still today,some of the world’s most important diamond deposits.

Angola is one of the main world diamond producers. In addition to its historical importance (a producer since early 20th century) and to its present production levels, Angola is also one of the world’s main diamond reserves and has huge potential (undeveloped or undiscovered) resources.

The Angolan diamond deposits have different natures:
Kimberlites (with volcanic origin), of which 1.000 (estimate) have been identified. Among these, many are mineralized and a handful has been exploited since the 70’s: Catoca, Camatchia, Camagico, Camútuè, Sangamina. The widely accepted classical emplacement theory of the Angolan kimberlites argues that they erupted during the Cretaceous, contemporary to the early stages of the South Atlantic formation. Other additional (previous and later) stages of kimberlite emplacement have also been suggested. Diamonds produced from these sources vary widely, each deposit with its typical diamond signature, the large volume mine at Catoca fetching diamond prices lower than (the Angolan) average.

Old alluvial deposits, formed immediately after the main kimberlite eruption stage in Cretaceous times.The conglomerates at the base of the Calonda Formation (also known as the Calonda Group or Kwango Group) collected the diamonds released from the then recently erupted kimberlites.

Modern alluvial deposits, along or with close relation with modern river basins. In a simplified model, the diamonds contained in these deposits derived from either kimberlites (continuously being meteorized and eroded), from the Calonda Formation conglomerates(the main, earlier, alluvial diamond collector) or from other modern deposits. Alluvial diamonds were for many decades (until the late 90’s) the main Angolan production source. Its average price is well above the world production average.

Although much remains to be done to turn Angola into a first rate investment target, especially in what concerns infrastructure rehabilitation, local work force training and legal environment, the quality and volume of its diamond resources and, in recent years,peace and political stability have inevitably placed this country into the mining investors’ agenda.

1.3.1
Evolution of diamond mining in Angola
Angola is a carbon-based economy, oil being the country's main drive and diamond deposits the multipolar centres of economic activity in the country’s hinterland. The volume and high gem content of itsdiamond production turned Angola into a key playerin the rough diamond world market for most of the 20th and into this century.

For one century, Angolan diamond exploration and mining has had a major role in the country and in the world industry.It has been an eventful history:

Discovery and development (1912-1975): The first years of the 20th century witnessed the discovery of the first Angolan diamonds (1912) in the wake of earlier discoveries in the Democratic Republic of Congo (then Belgian Congo). Key points in the first stage of the industry’s development include the discovery of the first kimberlite in 1952–Camafuca Camazambo, 1958 and 1969, the first years in which 1 Mct and 2 Mctwere successively produced. This period ends with a succession of major events:

• The death of DIAMANG’s historic chairman,Comandante Ernesto de Vilhena in 1967.
• The end, in 1971, of the de facto monopoly of DIAMANG over Angolan diamonds, with the reduction of its exclusive area from the previous 1.000.000 to 50.000 km2.
•The April 25, 1974 Portuguese revolution and subsequent Angolan independence in November 1975.

Turmoil (1975-2000): The Angolan independence in the sequence of the Portuguese revolution of 1974 was a disruptive event for the Angolan diamond industry. A new Government was established, withradically different protagonists and policies, not without conflict. A violent power struggle (a bloodyproxy of the Cold War between the U.S. led western democracies and the USSRled communist block)erupted between the three existing nationalist movements (FNLA, one of the contenders, waned into political and military irrelevance and oblivion duringthis process).

This conflict continued for almost three decades, with a brief peace period in 1992.The former (colonial) diamond mining industry structure (based on ade facto DIAMANG monopoly)was one of the first economic casualties of the independence process and the following strife.Important events following Angolan independence included: the nationalization of Portuguese DIAMANG shareholders, DIAMANG’s bankruptcy and its replacement by ENDIAMA, the loss of both the financial capacity and technical expertise and the demolition by war of the country’s logistical infrastructure.

This led to a marked decrease of diamond production.In a later stage of this period (1992 and onwards), the Government passed legislation that eased restrictions on diamond trade and mining. This led to the emergence of Garimpo as an open activity. Later efforts (including the compulsory sale of diamonds to a single official channel) were never completely successful in eradicating it up into the present.

Recovery, growth and globalisation (2000-2011): In this stage, kimberlites are now, increasingly, the backbone of the Angolan diamond industry, with the Catoca mine as a predominant force. This phase has seen the flocking of international companies (both major players, e.g. De Beers and BHP Billiton, and junior companies) to Angolan diamond fields, with variable success. Recent years have also seen the emergence of bona fide junior Angolan mining companies. News of a continued expansion of the industry’s production capacity– from 5 to 19 Mct in four years– fail however to fully materialize.

Peace and high oil prices ignited the Angolan economy. The country is booming, with a multitude of new projects, both private and public, being announced or started. One of Angola’s traditional economic pillars is diamond mining. This industry is also on the move, both with new prospecting and mining projects online and with increased activity in downstream industries until now either secondary or non existing (diamond trading, diamond cutting and diamond jewellery). In this stage, the diamond mining industry is extremely dynamic.

Diamond production volume and value increase dramatically. The industry’s growth is based in the Catoca kimberlite mine (currently the largest Angolan diamond producer by far). Although having lost some of its past importance, alluvial diamond deposits still are a major diamond production source in Angola. Despite the fact that this type of deposits will tend to be progressively exhausted in the future, important alluvial diamond reserves still remain to be discovered and exploited.

On the external environment, De Beers changes from a diamond cartel into a luxury products company, as the industry is reshaped. In the final years of this period, the global financial crisis (the antechamber of a new global order, with Europe stalling its way to irrelevancy and China, India and South America getting ever increasing roles) has a major influence in the development of the industry.

Internal forces also play a major role behind the industry’s restructuring:

• For several causes, ranging from their reasons to invest in diamond mining in Angola to local conditions, internation al companies have not been able to show a record of success in the Angolan diamond industry, which led them to paralyze or abandon their operations.

• Infrastructure, both physical and legal is improving but at a slower than needed pace. The new mining code (since December 2011) may solve many of the contract negotiation and investmentsecurity issues. Roads,railroadsbridges andtelecomare better than in the past but clearlystill need major upgrades; this is increasinglymore visible as you travel away fromthe coast.

•Local companies, still in small numbers, areemerging as investors in the early stages of theprojects, paving the way for, in later stages, larger foreign companies still needed for capital andtechnology (especially in kimberlite deposits).

•There are still difficulties in hiring expatriates,with scarce local force for specific roles.

•The local markets are much better supplied thanin the past, when virtually all items, from food tobolts, had to be imported; today’s logistics in thistype ofgoods is much smoother. The import ofcapital goods is still an issue, with long delaysbeing common (either due to customs and ormoney transfer restrictions).

Characteristics of Angolan diamond industry

• Having been based until 1974, in high value,highgem content, alluvial sources.

•After more than two decades of stagnation or, atbest, irregular growth (until 1997), in whichproduction was based on the exploitation of alluvial deposits, often outside the law, thecurrent production expansion is based onkimberlitic sources–Catoca, Camatchia, Camútuèandlikely other pipesin the futuresuch as Tchiuso, Chiri and Mulepe.

•Big mining companies, such as ALROSA, BHP, DeBeers and Rio Tinto, have a marked preferencefor primary deposits. These deposits’ mines arecapital and technology intensive; they are thusclosed to operators of lesser technological andfinancial capabilities. On the other side, bigmining houses are rigid, operationallyandculturally, lacking the flexibility for a successfulexploitation of alluvial diamond deposits.

•There are a great number of alluvial concessionsin Angola; the vast majority of those concessions’shareholderbaseisconstituted by ENDIAMA (typically, but increasingly less, themajorityshareholder), local partners and a foreign investor, responsible for the project’s financingand holder of the technical knowhow.

•Manyforeign companies involved in the alluvialprojects in Angola lacked the needed technicaland financial backing and are mostly focused onan attempt, unsuccessful most times, to obtain afast dollar. For that, they try to exploit alreadyknown resources or develop ill conceived andunderfunded exploration programmes generallywithout environmental or social concerns.

•As a result, most concessions paralyzed, either by lack of an active investor, either by the investorlacking technical or financial capability or, yet, bydisagreement between the shareholders,generally due to disappointment for notachieving the expectations of fast profits.

•The Angolangovernment aims to promote andrapidly increase the involvement of nationalhuman capital in the mining projects,restrictingwork visas for foreign citizens. This policy,associated to the scarcity of fully trained localhuman resources has led to a short-term lowproductivity of the projects.

• An Angolan policy for a diversification away frommining and trading of rough diamonds, with aneffort being made to include downstream valueadding activities, like diamond cutting, jewellerydesign and manufacturing. The establishment ofthese activities as profitable, self-sustained industries requires however a continued effort;only the future will tell if these intentions andattempts will ever achieve the desired results.

•Finally, as either an effect of theAngolan government policies or due to the increasingInternationalization of itseconomy, there is agrowing concern withenvironment protection.Thistrendisaccompanied by an increased focuson social responsibility and awareness ofthelocalcommunities and traditional authorities,theirimportancecompounded by the specificcharacteristics of their tribal ancestry, geographydistribution and politicalconnections.

1.3.2
Angolan diamonds: production, resources and reserves

The Congo (a.k.a. Congo-Kasai) craton is a major diamond metallogenic province with mining activity since the early 20th century. The province includes deposits such as the Mbuji-Mayi cluster of kimberlites (and derived secondary deposits) in D.R. Congo and the Catoca, Camatchia-Camagico, Camuanzanza, Camútuè and several other clusters of kimberlites and a multitude of high gem quality diamond alluvial deposits in Angola.

Both the DR Congo and Angola have witnessed a renewed interest in their diamond deposits in the last decade, generating an unprecedented volume of new geological information since colonial times. Despite this fact, there were no new major deposits online yet as a result of this renewed interest; all producing mines in these countries were the result of the continued exploration efforts during colonial times.

Angolan diamonds occur in both primary and secondary deposits. Up until the late nineties, most diamonds produced in Angola originated in alluvial deposits. With the start-up of the Catoca mine that situation started to change in the late nineties; the Camatchia mine of the Luó project and other projects may add to that trend.

Not withstanding the growing importance of primary deposits production, alluvial deposits still account for an important share of the total value, especially due to its high unit price. In addition to the currently producing alluvial projects, like Cuango, Chitotolo, Canvúri and Somiluana, many projects now on hold couldbe set to start production thus increasing the Angolan diamond production.

1.3.2.1
Production figures
The Angolan diamond industry is in the midst of a major restructuring. This event is the result of both external changes and internal forces. The 2008 financial crisis triggered the closure of several mines and exploration projects. As a result, the number of active operations is more limited than in the past.

The value of the Angolan production has fluctuated around 1.000 MUSD per year since 2005 with variations around the average being due to the level of production, its origin mix and the global price level of diamonds.

The volume of production has remained relatively stable at 8Mct per year since 2006. This behavior is explained by the stabilizing effect of the Catoca production, with the one originating into their projects varying considerably, both in volume and value.

The power house of the Angolan industry is increasingly the Catocamine that currently mines 5Mm3 and processes 10.5M tone foretop recover 6.7Mct worth 579MUSD with an operational margin 36 per cent of sales.

The Catocamine production is equivalent to 84 per cent involumeandjustbelow 60 per cent in value of the Angolan production (2012values). The average price of Angolan diamonds had a peak in 2005, with a value of 154 USD/ct. That value decreased since then, reflecting the larger proportion of the lower than average value of Catoca diamonds in the origin mix.

Additional fluctuations are due to global market price variations, with a sharp decrease in 2009 and a recovery in 2010 and 2011 (year in which the price reached the pre-crisis level), again falling in 2012 to 133 USD/ct (86 USD/ct for the Catoca diamonds).

1.3.2.2
Resources and reserves
Angolan diamond resources and reserves have not been compiled since 1975, leading to senseless discussion around the issue. The confusion derives from several factors:

Conceptual issues: One major problem concerns the informal (ab)use of “resources” and “reserves” in the Angolan context. Those words are precisely defined yet they are often incorrectly used in reports, apples being added to oranges.

Reporting issues: Companies holding mineral rights (especially those involved in alluvial mining) seldom, if ever, file detailed reports on their concessions to official authorities, many of them lacking the will or capability to do so. Official authorities don’t publish disaggregated figures.

Calculation issues: The computation of reported figures might be prone to several problems of which the following are quite:

• Senseless reconciliation: Reserves reconciliation is frequently done on a simplistic way, by subtracting the raw production values from remaining “reserves” figures. The repetition of this procedure leads to gross accumulated errors.

• Ignorance of the details: Old exploration data (hundreds of thousands of 2m2 section wells dug by DIAMANG) is preserved in paper maps and logs. In order to avoid calculation errors, it is necessary to know in detail the logging and reporting procedures used by DIAMANG.