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CATOCA. The Sirens of Angola

22 june 2020

Like the sweet-voiced Sirens, Angola has been attracting diamond seekers for over 100 years. But be vigilant, sailor - do not let yourself be deceived by the enchanting singing of winged nymphs.

The amazing creations of the ancient Greek genius would have certainly found what to do in this African country if they had the pleasure of visiting the Sociedade Mineira de CATOCA (CATOCA Mining Society).

Catoca is one of the largest diamond deposits in the world (fourth in reserves). CATOCA is Angola's most high-tech mining company, explored and built by Soviet specialists from the Yakutalmaz Production and Scientific Association (PSA) at the last stage of the USSR assistance to Africa. Brought to this area by military helicopters, guarded by paratroopers and working amid minefields, the geologists, miners, process plant operators, and builders from Yakutia guided by the designers of the Yakutniproalmaz Institute, led by the outstanding diamond industry manager Anatoly Kozeev, the curator of the CATOCA project, all those people completed additional exploration of the deposit, carried out design and survey works and started the construction of a mining and processing plant.

The results of this military-geological campaign were brilliant. On September 16, 1993 Russia’s ALROSA (as the legal successor of PSA Yakutalmaz), Angola’s ENDIAMA and Brazilia’s ODEBRECHT, signed a memorandum of association. The contribution of the Russian side to the authorized capital of CATOCA amounted to $ 9.6 million. After receiving a 51-percent controlling stake in CATOCA, ALROSA granted a commodity loan to the new company in the form of technological equipment in the amount of $ 55 million and financed construction work for $ 32 million through a financial agent, which was DAUMONTY FINANCING COMPANY B.V. The mining and processing plant was built within a shortest time possible and reached its design productivity in 1997.

For ALROSA, CATOCA being the last Soviet project in Angola was an extremely profitable legacy (according to Ernst & Young, 1% of CATOCA was estimated in 2016 at a point value of $ 9.3 million). Commodity and financial loans were repaid on time; the total amount of dividends received by ALROSA since 1999 amounted to more than $ 500 million.

Currently, CATOCA employs more than 2100 people, operates 2 processing plants with a capacity of up to 10 million tons of ore per year. The company’s annual production is 6.5-7 million carats of high-quality diamonds, annual sales revenue exceeds $ 600 million, annual net profit distributed among shareholders reaches $ 130-150 million. The mine will be developed as an open pit to the depth of 600 meters and mining operations will be stopped in 2034 in accordance with project documentation (a sharp drop in production after 2030); proven reserves for mining operations are confirmed in the amount of more than 120 million carats. One peculiar feature of the diamond pipe’s geological structure is that its average diamond grade and diamond quality will increase at lower levels of mining operations. CATOCA accounts for more than 80% of Angola’s total diamond output.

For reference: Sociedade Mineira de CATOCA consists of ENDIAMA E.P., the National Diamond Mining Enterprise of the Republic of Angola (32.8%); PJSC ALROSA (41%); LL International Holding B.V. (18%); and an undistributed share of equity (an option of 8.2% held by ALROSA, which it intends to use in 2020) - clarification is required regarding the nominal shareholder.

In 1995, the former head of the Yakut government, Vyacheslav Shtyrov became the president of ALROSA. In 1996 - 1998, ALROSA received a blow from where it was least expected. That was the “magic” period of the final sale of the Soviet legacy. For some reason known only to the Russian government it did not issue a diamond export license to ALROSA, and the company faced a real prospect of bankruptcy. The president of ALROSA instead of immediately using the political resource of the then President of Yakutia, Mikhail Nikolaev, who was Boris Yeltsin’s ally in the resistance to the Union Center at the end of the USSR, to resume export and prevent the collapse of the entire industry, for some reason sold part of ALROSA’s stake in CATOCA to Lev Leviev for a very symbolic price. After that, the Russian government immediately issued an export license to the national diamond mining company in a no less “magic” way. Thus, ALROSA’s corporate control over CATOCA was lost and its stake in it decreased from 51% to 32.8%. Nevertheless, more than 100 technical specialists from ALROSA continued to work at the enterprise in senior engineering positions.

After the “Soviet” CATOCA, other ALROSA projects in Angola were distinguished by high capital costs and negative profits. These include the Hydroshikapa hydroelectric station and the Camagia Camagico project. Overwhelmed by the contradictions between the two own shareholders, ALROSA finally lost the possibility to sell CATOCA rough diamonds independently by 2008.

The crisis of 2009 forced ALROSA to fully focus on internal issues. The company undertook reforms of its own sales system, developed and implemented a program for the construction of underground mines. ALROSA has evolved from a regional company into a full-fledged international public holding. The ambiguous situation around Angola required a solution, but having lost control of its own free will, it is extremely difficult for the company to re-claim its rights. Diamond sales in Angola were secretly supervised by Isabelle dos Santos, the daughter of the country’s president, and she did not express any intention to share her authority in any way.

Nevertheless, in 2013, ALROSA and ENDIAMA, which at that time preserved its integrity, signed an agreement for a joint venture in exploration. Essentially, it was about the Luaxe project, potentially the largest project in the modern diamond mining industry.

ALROSA President Fyodor Andreev, who signed this agreement from the Russian side, died of cancer after a year and a half and ALROSA entered a new era of change.

In 2016, it dawned upon the company that it was time to start M&A in its African business. So, it made an offer to purchase a 16.4% stake in CATOCA to Odebrecht Mining Services Inc., the Brazilian member of this mining society. To justify the transaction before its shareholders, ALROSA pointed to the need for indirect control over the Luaxe project, the synergy of all its assets in Angola and the consolidation of production and financial indicators of CATOCA for reporting under IFRS. The price of such “synergy” for ALROSA amounted to $ 150 million, the deal itself was made through a certain Angolan company, AMFIC, about which nothing is known apart from its name.

It is not even worth talking about the “strengthening” of ALROSA’s positions after this M&A transaction. Dr Ganga Junior was dismissed from the position of CATOCA’s CEO, to put it mildly, not in the most delicate manner, which fact apparently failed to make Angolans shed tears of emotion.

In 2017, Eduardo dos Santos, who still remembered his meetings with Leonid Brezhnev, the bright speaker of the 20th century, gave way to the position of Angola’s president to his comrade-in-arms and former defense minister João Lourenço. Diamonds are Angola's second source of income after oil. Obeying “the laws of the genre,” this sector faced an inevitable personnel reform.

Dr. Ganga Junior has now returned to the industry as President of ENDIAMA. This return was accompanied by a sharp increase in the price of CATOCA diamonds, a detached cold attitude to the impulsive Russian partner and the promise of a transparent long-term-contract system. The main idea was to offer contracts to those who are willing to invest in the extractive sector. However, this logic came into collision with the decision about a sharp rise in prices - it was strange to demand from the partner both the maximum price for goods and investments in the industry.

ALROSA was ready to invest in mining. Actually, for Angola, this is the most understandable partner, and ALROSA did not ask a lot in return: a proactive participation in the sale of diamonds, which you mined, is not a very steep demand.

However, many actions in our lives do not need any explanation, they just need to be taken as they are.

As a result of internal discussions about what is efficiency, the state diamond trader SODIAM was taken out of control of ENDIAMA. The competition between the two government agencies for the right to earn from the sale of diamonds has led to the emergence of a very intricate form of trading in CATOCA goods, similar to the shell game. The result of this “reform” is quite predictable – selling up to half of the monthly production virtually to one buyer at a price lower than it was sold by Carlos Sumbula under the “damned” old regime. The second half went into the hands of another buyer. All this is now said to be done due to coronavirus infection.

Angola never had and does not have a diamond sales system in its generally accepted form, which either would guarantee the stability of the mining sector from market volatility, that is, a system of long-term contracts, or maximize the price in a growing market, that is, its own auction platform.

Many still reassured themselves with the hope of an adequate sales system, but this hope disappeared with the latest sales of CATOCA products to two companies at a price of $73 per carat. A significant part of these diamonds will be sold already “from the second hand” to Indian companies at auction. This brings up the question: Why is SODIAM itself unable to conduct such an auction? The company may hire a technical operator, but why give away the title for goods? Why doesn’t it provide the market with clear rules for concluding a long-term contract for the purchase of its own goods and create a stable customer base, thereby minimizing market risks for its own diamond mining industry? What is the point in having a state diamond trader if it transfers its own functions onto the shoulders of two selected companies? These companies themselves are probably familiar with the experience of their predecessors and do not have illusions about the strength of such relationships. As such relationships are getting “stronger”, the willingness to overpay only for the sake of maintaining “happy synergy” tends to zero. If everything is not predictable, then the only sense in taking part in all this is high margin. But an excessively “greedy” partner may be replaced overnight, and another partner will have to “strengthen” relations with the sweet-voiced Sirens at the expense of its own margin. All this can work for a long time, while the Soviet-style CATOCA exists, but one will have to forget about new large investments in the mining sector. The experience of ALROSA clearly shows that without a 51-percent stake there is no reason to invest in such long-term projects as diamond mining, for all their apparent attractiveness.

It reminds an old joke about a test drive: “Many try it, many like it, but nobody buys.”

Sergey Goryainov, Rough & Polished