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24 July 2014
 
Consultancy Africa Intelligence (CAI) is a South African-based research and strategy firm with a focus on social, health, political and economic trends and developments in Africa. CAI releases a wide range of African-focused discussion papers on a regular basis, produces various fortnightly and monthly subscription-based reports, and offers clients cutting-edge tailored research services to meet all African-related intelligence needs. For more information, see http://www.consultancyafrica.com
 
 
   
 
 
Article by: Consultancy Africa Intelligence CAI
 
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The Northeastern and Central regions of Angola, notably the Lunda Norte and Lunda Sui provinces, boast extensive diamond reserves. Diamond production constitutes a significant source of all (foreign and domestic) revenue and generates in excess of US$650-million annually. The exact amount – and the potential – of profit from diamond mining, however, is unknown due to illegal diamond mining and smuggling, and inhibited by the difficulty in attracting foreign investment because of corruption, alleged human rights violations, and smuggling.

Earlier this year, the Angolan Government started to promote investment in the sector, and both China and South Africa, in particular, are eager to increase their access to Angola’s diamond reserves.
Angola’s mining sector

Angola is the seventh largest country in Africa, but one of the poorest in the world.(2) In addition to diamonds, the country’s other – main – resource is oil, which contributes 85% of the country’s Gross Domestic Product (GDP).(3) Diamond reserves, in the form of both kimberlite and alluvial fields, have been estimated at between 180 million and 200 million carats.(4) At present, however, it is believed that Angola only exploits 40% of the total potential of its diamond sector, leaving much still to be tapped into.

In response to the significant impact the global financial crisis (commencing in 2007) has had on the country’s diamond sector in terms of falling prices, job losses, and closure of mines, the Angolan Government is intent on diversifying the mining sector away from merely extracting diamonds to include other previous minerals. Exploring and mining copper, iron ore, manganese, and gold are among the projects that will be undertaken.(5) One of the biggest of these involves the construction of a copper mine that is estimated to produce approximately 20,000 tonnes per month. In 2008, AP Services and Genius Minerals, two Angolan firms, started prospecting the area of Mavoio in Uige province. Exploration is set to begin before the end of 2011, and the mine made operational in a few years. Additional resources and potential sources of revenue include bauxite, feldspar, phosphates, and uranium.(6)

The diamond mines

There are three big diamond mines in Angola: Catoca, Fucauma, and Luarica. The Catoca diamond mine is the fourth largest diamond mine in the world and extracts diamonds from a kimberlite pipe. The mine was established in 1993 and has acquired several other alluvial concessions in the country over the years. Catoca and the other (alluvial) concessions (7) account for nearly 70% of Angola’s diamond production. The mine is owned by Endiama, with a 32.8% stake, and a consortium of international mining companies, including Russia’s Alrosa which owns 32.8%, Brazilian Odebrecht Mining Services with a 16.4% stake, and (Bukharian-Israeli) Lev Leviev’s Daumonty Financing Company with 18%.(8)

This diverse ownership of the Catoca mine indicates that various countries are interested in Angola’s diamond reserves. More countries, including China and South Africa (as will be seen in the following sections) are also eager to gain a foothold in the sector.

The Fucauma diamond mine is still under construction in the Lunda Norte province of Angola. The mine is also owned by a consortium of companies: the two largest stakeholders being Endiama with 40% and Trans Hex Group with 35%. Endiama and Trans Hex also have two large stakes in the Luarica mine, 38% and 32% respectively. This indicates that the Angolan state is a major stakeholder in diamond mines, with the remainder of the ownership in the hands of a few international companies.

The financial crisis and recovery

Angola is the fourth largest diamond producer in the world after Russia, Canada, and Botswana by order of production. The world financial crisis has caused the gem’s prices to drop by up to 60%, significantly cutting into the country’s diamond profits and culling its ability to invest these in development. Two mines have closed, five others are idle, and mining giant BHP Billiton has pulled out of Angola altogether.(9) This has resulted in job losses and a decline in state revenue, motivating the Government to buy diamonds in a bid to steady prices.

Then, according to the Africa Report, “a glimmer of recovery came in May [2010] when Trans Hex Group became the first company in three years to sign a deal with diamond parastatal Endiama [Empresa Nacional de Diamantes de Angola].”(10) Endiama holds a monopoly over diamond exploration in Angola and was awarded a 39% stake. Trans Hex Group, a South African company, was granted a 33% stake in the Luana diamond project. The remainder is held by three privately-owned Angolan firms, namely Caxinji, Wenji, and Za-Kufuna. Antonio Carlos Sumbula, Chairman of Endiama, has described the agreement on the Luanda concession “as a sign [that] the industry was recovering from a crisis.”(11)

In another sign of recovery, in 2010, several mines reopened, including the Sociedade Mineira do Lucapa in Lunda Norte. This project has an estimated production life of another six years. In July 2010, the Luxinge project in Cambulo (also in Lunda Norte) was launched, expecting to produce 4,000 carats per month for a period of six years.(12) Financing for the project is being carried by the Angolan state (90%), along with investments from Scandinavian International Gold Exploration (IGE) Resources, and an Angolan consortium, including Compesa, Traid, Sheffield, and Suntechron.(13)

Reluctant cooperation (?): Angola and South Africa

Angola is in the process of rebooting and promoting investment in its diamond sector. Evidence of this was on display at the South African-hosted Mining Indaba in February 2011. At the conference, Joaquim David, Angolan Minister of Geology, Mining and Industry, stated that in 15 to 20 years, Angola’s diamond sector could rival its oil industry. Projects in the Lunda provinces were prominently mentioned, including the Catoca mine.

South Africa has a particularly strong interest in Angola’s diamond sector.(14) Road infrastructure is very important to South Africa in its attempt at furthering its foothold in Angola’s second largest industry. In a not too altruistic move, the South African-owned Development Bank of Southern Africa’s (DBSA) loan to be used for the construction of new roads would facilitate the operation of a more efficient supply chain network by incorporating parts of Angola into the rest of southern Africa.(15)

At present, the lack of infrastructure between Luanda and the mineral-rich region impedes the fuller development of the area. While Angola has proposed to rehabilitate roads throughout the country, the high costs of reconstruction make this difficult. South Africa does not need to concern itself with the reconstruction needs in Luanda and can thus concentrate its commercial interests in the Lunda provinces. Luanda would be bypassed and traffic and commerce (including diamonds) would be channelled into South Africa’s sphere of influence, where the extracted diamonds would be cut, used for jewellery, or exported further.(16) A proposed extension of the North-South Road will also link to Northeastern Angola, where the country’s diamond resources are concentrated.

While Angola has much to gain by allowing South Africa to increase its presence in the diamond industry, “Luanda is still concerned that Pretoria could end up exerting such dominant influence over the diamond-producing areas that Luanda would get bypassed in the mining-to-market supply chain in the future.”(17) As a result of Angola’s caution (and concern), South African companies, which have much expertise in mining engineering and operations, have not yet been able to establish a strong stake in the country’s diamond sector.

Enter China

In the 1990s, Lev Leviev, a real estate magnet, acquired an 18% stake in Angola’s Catoca diamond mine for US$20 million. In 2010, Catoca made US$527 million in profits from rough diamonds and reported a net profit of US$111 million. In May 2011, Leviev sold its stake to China’s Sonangol International – a joint venture between Angola’s state oil company Sonangol and private Chinese investors in the China International Fund – for US$400 million. With the signing of the final deal in June 2011, Sonangol became the first Chinese company to own part of a diamond mine in Angola.(18)

Business leaders in Luanda are baffled by the Chinese deal. Africa-Asia Confidential has reported that officials from Beijing responded to the deal with “an embarrassed disavowal and an insistence that it is purely a commercial entity.”(19) However, the think-tank’s research reveals that Sonangol’s corporate structure has evident links to the Chinese Government and its related agencies. By acquiring the 18% stake in Catoca mine, China is further winning political influence in Angola, in particular, and Africa, in general, and diversifying its interests in the countries in which it has a presence.

China’s presence on the African continent has grown considerably in the past decade, mainly due to China needing – and finding - resources for its own growing market economy. In one stratagem, invoked to extract resources and gain mining licences, the Asian country promises to (re)build infrastructure, also desperately needed by African countries. By allowing China to enter and develop its extractive industries, these countries’ infrastructures are reconstructed, their economies’ growth boosted, (ideally) also with the employment of local labour.(20) Where China has not obtained mining licences, it makes its presence known by forming joint ventures with state-owned firms, or in the case of Angola, Beijing buys stakes in already existing mines to feed its resource needs.

Both China and South Africa (among other countries) are seeking to increase their presence in mineral-rich countries. China is only initiating its presence in Angola’s diamond industry by buying stakes in a mine; South Africa, which already owns stakes in several projects, is hoping to strengthen its presence in Angola once the road infrastructure is operational.

Conclusion

Both China and South Africa want to increase their presence in Angola’s diamond-rich regions, the sector, and the potential profits to be made. These two countries already have a small foothold in the diamond mining sector: South Africa in the form of the Trans Hex Group and China through Sonangol International. While South Africa is banking on new road infrastructure to increase its presence in Angola’s diamond industry, it remains to be seen what China’s next move will be to likewise strengthen its interests in the region.

NOTES:

(1) Contact Denine Walters through Consultancy Africa Intelligence's African Industry & Business Unit ( industry.business@consultancyafrica.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it ).
(2) ‘The truth about diamonds’, Global Witness, 2006, http://s3.amazonaws.com.
(3) ‘Country at a glance: Angola’, Focus Africa, 2010, http://focusafrica.gov.in.
(4) ‘Redvers, L., ‘Mining: Diamonds see revival’, The Africa Report, 26 January 2011, http://www.theafricareport.com; ‘Diamond mining in Angola – Overview’, Mbendi Information Services, 2011, http://www.mbendi.com.
(5) Ibid.
(6) ‘Country at a glance: Angola’, Focus Africa, 2010, http://focusafrica.gov.in.
(7) There are a total 145 alluvial concessions in Angola.
(8) ‘Angola|Asia: Shine on you crazy diamond’, Africa-Asia Confidential, May 2011, http://www.africa-asia-confidential.com.
(9) ‘Redvers, L., ‘Mining: Diamonds see revival’, The Africa Report, 26 January 2011, http://www.theafricareport.com.
(10) Ibid.
(11) Ibid.
(12) Total diamond production in Angola totals 6 million carats, while diamond sales reached US$1.1 billion in 2006. No recent figures are available.
(13) Ibid.
(14) ‘Angola, South Africa: Reluctant cooperation in the diamond sector’, Stratfor, 14 February 2011, http://www.stratfor.com.
(15) Ibid.
(16) Ibid.
(17) Ibid.
(18) Moise, T., ‘Leviev sells Angola diamond mine stake’, Globes, 29 May 2011, http://www.globes.co.il; ‘Angola|Asia: Shine on you crazy diamond’, Africa-Asia Confidential, May 2011, http://www.africa-asia-confidential.com.
(19) Ibid.
(20) While China promises to use local labour in its projects throughout Africa, this is not always the case. Chinese labourers (sometimes just as unskilled as their African counterparts) are often times imported from China, violating certain African countries labour laws much to the dismay of local citizens.

Written by Denine Walters (1)

Edited by: Consultancy Africa Intelligence CAI
 
 
 
 
 
 
 
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