Rapaport Magazine

A New Dawn for Angola

The African nation is trying to shake off its troubled past to establish itself as a major global diamond hub.

By Avi Krawitz

In an unlikely location just under 600 miles east of Luanda, Angola is laying the foundations for its burgeoning diamond trade. By Western standards, Saurimo is a small town with a relatively quiet and laid-back atmosphere. Its quaint, somewhat undeveloped central district has a landmark church tower and colorful buildings that are a testament to its Portuguese influence, both past and present.

On the outskirts of the city, along the road toward the Catoca diamond mine, lies a business park with partly occupied buildings, numerous empty plots of land and a power station, all of which have sprung up over the past two coronavirus-ridden years. For the government — particularly Diamantino Pedro Azevedo, the energetic, aptly named minister of mineral resources, petroleum and gas — this new diamond development complex is a statement of intent. So was the inaugural Angola International Diamond Conference (AIDC) that took place there in November 2021.

“This event in this venue shows our willingness for quick social and economic development of this province boosted by diamonds,” Azevedo said in his opening address to the conference. “We want to boost all diamond activity to ensure development of the value chain.”

Indeed, the minister and AIDC organizers made no secret of their objective: Angola is looking for investors to help expand its mining output, raise its cutting and polishing potential, and establish rough trading in the country.

Production boost

Angola’s diamond potential stems from its rough production, according to industry veteran Peter Meeus, who serves as a special advisor to the ministry. It is what separates Angola from traditional trading centers such as Antwerp and Ramat Gan, and newer ones like Dubai, he explained at the AIDC.

Angola was the seventh-largest diamond producer by volume in 2020 and the third by value, according to Kimberley Process data. The country’s output fell 15% to 7.7 million carats for the year and dropped 20% in value terms to $1.02 billion, with the average price sliding 5% to $132 per carat. These declines were mainly due to disruptions resulting from the pandemic. Production has since bounced back, with projections of 9.1 million carats in 2021 and 10.1 million in 2022.

The goal, then, is to ramp up to 20 million carats within the next five years, said José Manuel Ganga Júnior, CEO of state-owned miner Endiama, in an interview with Rapaport during the AIDC.

While some conference attendees whispered that 20 million might be a bit ambitious, they couldn’t dispute the fact that Angola is among the few countries with growing production. The country has 14 core producing mines, though most are small in scale. Four of them are kimberlite operations, and 10 are alluvial projects. Of these, Catoca — in which Endiama and Russian miner Alrosa have a 41% stake each — accounts for over 90% of production by volume and 61% by value.

Endiama is now seeking investors for its other mining ventures, including $200 million for the Luaxe deposit, which is already in the trial-mining phase, and $250 million for the development of the Sangamina kimberlite. The company also requires $30 million for the Luachimba alluvial project, said Ana Maria Feijó, Endiama’s executive director for geology and mining development, during a presentation at the conference.

Of these, Luaxe is expected to provide the biggest boost to the Angolan diamond-mining sector. The deposit is projected to generate about 2.9 million carats in 2022 and over 4 million carats in subsequent years. Sociedade Mineira de Catoca — the parent company of the Catoca mine — has a 50.5% stake in Luaxe, with Endiama and Alrosa each holding 13%. The remaining shares belong to local companies: Cecadiam holds 9%, Chela Group 6%, and Kamen and Reform 4% each.

World-class goods

It’s not only the promise of large volumes of diamonds that could entice investors to Angola. It’s also the quality of those stones, according to Herman Grütter, principal geologist at SRK Consulting.

“Angola’s diamond quality is better than the global average and similar to the southern Africa region,” he said during his address to AIDC delegates, adding that the gem and jewelry industry was becoming increasingly focused on higher-price-point diamonds. “Catoca and the Luaxe development form a base for a world-class diamond industry.”

While those two assets are built on commercial-quality kimberlite pipes, others — such as Camútwe and the Lulo alluvial mine — present higher-value production. The latter is famous for its large type-II stones. Lulo’s owner, Lucapa Diamond Company, is on a quest to find the kimberlite mother lode of its alluvial production. But it’s a painstaking process. The company has identified hundreds of anomalies and assessed just a few of them in the past decade.

Angola recognizes that it has to be patient, even as it seeks investors to take its immediate projects to the next phase. In fact, it has 41 mining schemes at different stages of development, presenting potential backers with multiple opportunities to finance “high-potential brownfield and greenfield” exploration projects, said Feijó.

These are drawing interest from some of the bigger names in the diamond-mining space. In October 2021, Rio Tinto acquired a 75% stake in the Chiri exploration program in a joint venture with Endiama. De Beers, too, has applied to conduct exploration in northeastern Angola, responding to the “substantive reforms in the national diamond sector.”

Necessary reforms

Such high-profile partners would not have been an option just a few years ago, before the government implemented its reforms, noted one conference participant.

The July 2018 legislation — which came less than a year after President João Manuel Gonçalves Lourenço was sworn into office — aims to decentralize Angola’s diamond sector to the point that future mining projects can go ahead without Endiama’s involvement.

Previously, the parastatal company was responsible for all aspects of the local pipeline, including issuing licenses and concessions, exploration, production, and trading. Under the new regime, the government has appointed it to serve as concessionaire. This means it is still authorized to undertake the exploration, reconnaissance, mining, cutting and marketing aspects of the process, but it is now subject to a series of legal obligations that limit its absolute control.

Crucially, a new trading policy has been developed to ensure fair value and price transparency going forward. Angola’s diamonds were historically undervalued due to the activities of Sodiam, the Endiama sales subsidiary through which all Angolan producers were legally obligated to channel their finds. Sodiam would sell the goods at below market value to unnamed “preferred customers,” who allegedly included the eldest daughter of former long-serving president José Eduardo dos Santos.

Today, Angola’s mining companies are mandated to sell only 20% of their production to Sodiam and the same amount to local manufacturers. They are then free to sell the remaining 60% to the broader market. For the goods that sell through government entities, the producer company must agree on a base price with Endiama, Sodiam and an independent appraiser.

Both buyers and mining companies working within the new framework — some of whom attended the conference — have noted that Sodiam’s prices are now in line with those of the international market.

Bourse ambitions

Having restructured its former system, Sodiam is currently set up to sell to long-term clients on a regular basis via contracts of one to three years. It is also holding tenders for special stones above 10.8 carats. The firm concluded its fourth such sale in November 2021, raising $19.5 million from 21 diamonds weighing a total of 1,012.90 carats. Six of the stones were from Lulo, and 15 were from Catoca.

Some 29 companies participated in that tender, with viewing in Luanda and bidding online. In the future, the Sodiam tenders will be central to establishing a diamond bourse in Luanda. Between Saurimo and Luanda, the government is hoping to establish Angola as a global trading center in the image of Antwerp and Dubai, and aims to attract international tender houses to facilitate rough sales at the proposed exchange.

“We are currently analyzing what would be the critical mass needed for this to be successful,” Meeus said. “The main ambition of the Angola Diamond Exchange will be to provide the platform that will put [the country’s] enormous flow of diamonds under one roof.”

While the bourse project is still in its infancy, Meeus outlined some of the steps that would accelerate its development. Suggestions included sorting and aggregating production from different mines to enable bulk selling, and integrating a deep-boiling facility into the exchange to add value to goods prior to their sale. He also advocated training, suggesting that the bourse should offer courses on diamond grading as well as rough valuation and sorting.

“We are putting in place the...physical, social, political, environmental and legal framework to create a favorable business environment”

Beneficiation burden

Endiama has already established a training academy to bring locals into its structure, and a separate cutting and polishing academy has been launched to provide manpower for the factories the government hopes to set up within the Saurimo diamond hub.

There are 26 plots of land available for factories in the industrial section of the complex, with three facilities already in operation — including those of Indian companies KGK Group and Kapu Gems. Another two are being built by local companies, while a further seven factories are scheduled for completion by the end of 2022, according to an official at the AIDC.

In the most heated panel discussion at the conference, however, foreign manufacturers expressed frustration over the lack of incentives for establishing facilities in Angola. Representatives from both KGK and Kapu appealed for discounts on rough, considering the investment they had already made and the risk involved in being the first overseas companies to move into Saurimo.

Minister Azevedo is reportedly considering tax breaks as a solution for existing and prospective international investors. Part of setting up the exchange will also be the creation of a tax-free zone, Meeus noted.

Reputation matters

Azevedo is confident that Angola has the product to woo more of the industry to Saurimo. He is drawing on the experience of southern African countries such as Botswana and Namibia, which have managed to add value to their rough production through beneficiation programs.

But Saurimo is somewhat remote. A 1.5-hour flight from Luanda, it also lacks some basic amenities. For example, Indians require vegetarian food, which is not so easy to come by, noted Kapu Gems CEO Kalpesh Vaghani.

Furthermore, Angola has reputational issues to shake off from its past. There is still the notion that Endiama represents the whole of Angola’s diamond pipeline, Ganga Júnior acknowledged. As a result, there is a lingering perception that it lacks transparency. The country’s association with blood diamonds, stemming from the civil war of 1975 to 2002, may still resonate with US consumers as well.

Additionally, Angola continues to face accusations about its mining practices. In July 2021, a leak purportedly containing toxic by-products from the Catoca mine’s tailings operations contaminated a tributary of the Congo River, infecting residents in the neighboring Democratic Republic of the Congo (DRC). The spill allegedly killed 12 and left 4,500 people ill, Reuters cited DRC Environment Minister Eve Bazaiba as saying.

Catoca refuted claims that the toxins had come from the tailings leak. A study it conducted following the incident showed that the tailings basin contained only mixtures of natural rocks and did not hold external chemical components, management said.

Some have also raised concerns about conditions in the artisanal mining sector. An April 2021 report by Maka Angola — an initiative that aims “to fight corruption and defend democracy” in the country — described security guards torturing illegal miners at the Cuanga mine. As of press time, the Ministry of Mineral Resources, Petroleum and Gas had not responded to requests for comment on the incident.

The scale of artisanal mining in Angola is largely unknown. Part of the problem is that there are few civil society groups in the country that monitor this sector and are able to give a firsthand account of what’s happening there, explains Hans Merket of IPIS Research, who specializes in the links between natural resources and human rights.

However, there is a sense that the government is starting to understand the risk associated with reputation issues, says Stéphane Fischler, a board member of civil society group Resolve, which started working with artisanal diamond miners after incorporating the Diamond Development Initiative (DDI) into its portfolio last year.

“It’s still tough, but the government is enacting reforms and is aware that it will have a problem if it fails to avoid abuses,” he asserts. “They understand that currently some of the big American brands don’t want Angola diamonds.”

The future of diamonds

At the conference, Ganga Júnior pointed to Angola’s long-standing involvement in the Kimberley Process to dismiss the conflict-diamond misconception. He expressed confidence that attitudes would change as the new structure became entrenched and more companies invested in the country’s programs.

Fischler echoes that sentiment, noting that the willingness of companies such as Rio Tinto, De Beers and Alrosa to invest there is a positive development. De Beers, for its part, says it adheres to ethical supply standards, operating in line with the Organisation for Economic Co-operation and Development’s (OECD) Due Diligence Guidance for Responsible Supply Chains.

“We believe that responsible foreign investment by the private sector can be an important catalyst for social change in countries working to reform their economies,” said CEO Bruce Cleaver in November regarding the company’s intention to reestablish itself in Angola.

Today, Angola has social, economic and political stability that may have been lacking in the past, Feijó stated at the AIDC. Ultimately, the country believes the steps it is taking to advance its diamond sector will resonate abroad as its production grows.

“We are putting in place the infrastructure, [the] physical, social, political, environmental and legal framework, to create a favorable business environment,” Ganga Júnior said. “The future of diamonds will go through Angola.”

Image: Shutterstock

Article from the Rapaport Magazine - January 2022. To subscribe click here.

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Tags: Avi Krawitz