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Perfect storm brewing between ALROSA, Angola

23 september 2019

A storm is brewing between ALROSA, one of the largest shareholders of Sociedade Mineira de Catoca (41%), and its Angolan partners over the rough stones purchased by the former from the company.

Impeccable sources privy to the goings on told Rough & Polished that ALROSA purchased four lots of rough from Catoca in March and April this year.

ALROSA first evaluated the lots of rough ear-marked for sale using its own experts at Catoca in Saurimo.

It made a purchase offer to SODIAM and then went on to purchase the rough through its Dubai subsidiary, Alrosa East DMCC.

The Russian diamond giant then claimed in July that its re-evaluation showed the rough it purchased were swapped.

These claims were made at a general meeting of shareholders of Catoca, as well as in letters to Catoca, SODIAM and the relevant ministry.

However, Catoca and SODIAM said that ALROSA made the claim three months after the initial evaluation of the goods.

They argued that a buyer completes the final assembly of any lot and its evaluation only in Luanda at SODIAM, after the goods have been delivered from the producer, in this case from Catoca in Saurimo.

They insisted that when such suspicions (swapping of goods) are raised all operations with diamond goods are suspended, all participants in the transaction are notified and a commission is created to clarify the circumstances.

Technically, it is extremely difficult to substitute stones if the identity of weight parameters is observed.

At SODIAM, a final set of goods is subject to evaluation by experts from all participants in a transaction from the Angolan side (including experts from SODIAM and the diamond producer, as well as an independent expert from the government of Angola) to determine the base price, which is strictly confidential and cannot be transferred to potential buyers before negotiations.

Below this price, the sale of goods is not carried out and viewing of goods by experts of buyers is carried out after this procedure and it is this diamond set configuration that is final.

This procedure is the same for everyone.

Sources said the problem could have arisen, inter alia, due to the extremely high price at which ALROSA purchased Catoca diamonds in March and April.

According to some SODIAM customers, ALROSA was offering prices that “were guaranteed to result in a loss for a buyer in the current environment.”

“Nobody considered it reasonable to compete with them [ALROSA] and we were not ready to buy goods at such a price [offered by ALROSA] given that one single lot cost over $20 million,” said one buyer who preferred to remain anonymous.

“ALROSA is a powerful company, it is not just a buyer, but also the actual co-owner of Catoca, and this is their internal decision, but we are completely dependent on the market and current conditions.”

The Angolans insist that ALROSA bought and fully paid for two lots of rough produced by Catoca through its Dubai subsidiary in March.

These goods were re-sorted and partially offered to the market.

Then ALROSA acquired two more lots of rough in April.

After the conclusion of the agreement and even before the payment from the buyer was received, Catoca made the required payments to the country’s treasury in accordance with the law.

However, this was followed by ALROSA’s substitution of diamonds claim and its refusal to pay for the goods purchased in April.

As part of its claims, ALROSA asked Catoca for a discount of about $ 800,000 for the already purchased goods.

However, Catoca said that all the necessary proofs had been provided to ALROSA and it completely rejected the fact and the technical possibility of substituting diamonds.

Catoca argued that no change in price is possible since it had already made all the required payments to the state treasury after the conclusion of the agreement with ALROSA and the existing situation has put the company in a difficult financial position.

Currently, ALROSA is insisting on the creation of a special commission to resolve the situation.

Another source said having ALROSA acting as diamond miner and seller simultaneously is uncommon.

Theoretically, buying a product at a price clearly higher than the market price could be explained by a desire to squeeze out competitors and at the same time increase Catoca's revenue, which in linear logic would allow to receive higher dividends.

“Something needs to be done with the goods too: either put them into stock in the hope of a strategic price increase or sell at a discount,” said the source.

“A tough fight with competitors by way of pricing works in a very short term, as it simply cannot be done suffering losses for a long time.”

As a result, this conflict created a stalemate.

On the one hand, ALROSA does not want to pay the price it has offered and asks for a discount arguing that it changed its position due to the substitution of stones, which, in its opinion, took place.

On the other hand, Catoca strongly disagrees with this, citing proofs in its favour and saying that if ALROSA had any complaints, it was necessary to stop any operations with the lot immediately and demand a hearing.

It is hard to say how this story will end, but one thing is known for sure – these diamond goods are kept at SODIAM and this requires payment for each day of storage of the contracted, but not paid for products.

Mathew Nyaungwa, Rough&Polished