Angola's diamond hype

Angola’s diamond hype
By: PolishedPrices 19.04.07

When looking at Angola’s diamond exploration it is hard to decipher from the hype where the actual potential lies.
Angola is no doubt one of the most promising diamond exploration areas in the world with vast claimed reserves. However, junior mining companies – though wary to speak about it openly - are struggling to get projects off the ground as a result of burdensome bureaucracy and significant cost pressures.
They cite the net impact of the government’s participation in the exploration stage as well as laborious decision making as a result of bureaucracy as key stumbling blocks for maintaining momentum during exploration and getting projects going.
“The (high level) of participation in the exploration stage is making decision making very laborious and time consuming. Even getting basic equipment into the country is logistically difficult and costly. Salaries that have to go to ENDIAMA appointees and the bureaucracy makes funding these projects quite expensive,” said an observer who asked not to be named.
As a result the burn rate for junior miners is considerable, they say.
Under Angola’s existing mining laws, the government, through the state mining company ENDIAMA, automatically acquires a 51% stake in every kimberlite project at exploration stage.
Historically, or in the case of Catoca, Angola’s only commercial kimberlite mine, the government holds a stake of around 32%. The remaining shareholders include Russia’s Alrosa, Brasil’s Odebrecht, and Lev Leviev.
The 51% requirement was introduced in March 2003 as an amendment to the 1994 diamond mining code. The wording in the law “recommends” a 51% share for Endiama, so in theory there is flexibility.
In alluvial mining, the government acquires a smaller stake - generally a 40% plus interest.
Although not an official requirement, juniors say they are encouraged to put serious efforts into alluvial exploration, in order to secure kimberlite projects despite the fact that many alluvial deposits have been exploited or are in areas with limited potential.
In addition, most projects include the involvement of several local minority shareholders.
An important question for junior kimberlite miners is how the 51% exploration stake is translated into an equitable mining participation under the current mining laws, or in other words to what extent ENDIAMA is prepared to fund it via their own resources, by reinvestment of the revenue proceeds, or by dilution.

Another issue, which also concerns larger diamond mining companies, is the government’s insistence to control the marketing over the country’s diamond production.

So far this issue has been left floating in the background as no large projects have yet come on stream. The mining houses seem to prefer a wait-and-see approach until they actually find something commercial.

Clearly, the criticism, or frustration, is not directed to the fact that government wants to protect its assets. However, the claim many junior miners have is that this should be on the back of creating a business friendly environment.

Analysts predict that Angola’s annual diamond production could exceed 12 million carats by 2010, although this is based on more diamond mines going into commercial production.
Under the government’s current methodology, break even point is raised to a level which appears to make exploration difficult rather than encouraging for juniors.
On top of its involvement in equity participation in the mining companies, the Angolan government generates income through SODIAM – the state diamond marketing agency, which buys and resells all Angola’s production – in the form of royalties (5%), marketing fees (2.5%) and mining company income tax of 40%.
“If you add all of that up you’ve got to get to 15,000 – 20,000 carats of good quality gem production a month to make a basic alluvial project feasible,” said a mining expert, implying this could very well destroy the seed corn of junior exploration in Angola.