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28 july 2014

henk_de_hoop_fullsize.jpgThe Rand Merchant Bank (RNB) said that it is not comfortable funding alluvial diamond mining projects as they are highly risky.

The bank’s business development director Henk de Hoop, who has an experience in funding diamond projects, told Rough & Polished’s Mathew Nyaungwa in an interview on the sidelines of the Botswana Resource Sector Conference held last month, in Gaborone that funding alluvial diamond operations is a “hit and miss affair”.

He said that although kimberlites are much easier to handle when compared to alluvial deposits, the bank prefers to invest in brownfields operations with existing cash-flows and several operations.

De Hoop said RMB had previously funded De Beers’ operations in Botswana, Namibia and South Africa as well as Petra Diamonds’ projects since it was a junior miner.

He said the bank is not interested in risky countries such as Zimbabwe, while investing in the Democratic Republic of Congo (DRC) is also not attractive as the country had predominantly alluvial diamond operations.

Angola, said De Hoop, has been a tough country to invest in despite its good and very rich kimberlites.

Below are the excerpts.
What is your experience regarding funding of diamond mining operations?

Banks normally like to have a lot of certainty upfront before they put money into a mining project and across diamond projects there is obviously a range of that certainty that you can provide.  You probably look at the least certain projects, which is alluvial mining. [They] handle enormous amount of volumes, very low grades and often the resource statement before a project gets started, is very difficult to actually handle as a bank. We often don’t trust them [alluvial diamonds], to be honest, because that is a little bit more of a hit and miss affair. You don’t move into kimberlite projects, which are far easier to handle because there is often a lot of drilling that has gone in, there is bulk sampling that has gone in; there is still a certain amount of risk but its underground bulk mining are open cast bulk mining with a predictable resource, which makes it easier.

On the least risk scale is when a mine had a history and is a brownfields operation that has existing cash-flows and preferably has several operations, so we don’t look at the risk of [a] single project, but a series of projects that de-risks the overall business. Obviously on the right end of the scale there is a very few companies out there. We obviously have De Beers, Petra Diamonds, but on the middle side where there are new kimberlites projects, it broadens a bit and alluvial mining has lots of small mining operators but in general we find those fairly un-bankable.     

Which projects have you financed so far?

We financed De Beers, obviously, in the past, we have particularly financed Petra Diamonds fr om a very junior company…, and we then funded them into acquiring some of the assets fr om De Beers. We also funded their [South Africa] black economic empowerment structures and at the moment we are looking at a new package for them as well but they have grown into a large company so there is a lot more sophistication that can go into the funding packages that looks at a company as a whole, as it has for example over the next two years, a heavy capital phase  but after that a very strong increase in cash-flows and we can actually sculpt our funding packages around those type of profiles fr om cash-flows.

What has been the level of interest from junior mining companies, in terms of funding?

I guess the phase wh ere we see a lot of junior mining companies, [is when they are] actually discovering and drilling out kimberlites. It’s often not easy to talk to the bank at all on that. Diamond mining … is a high risk venture because so few of the kimberlites are actually payable. So your high risk money is at the moment particularly going into the sector when it gets to a stage wh ere it’s proven up that a bankable feasibility study done and then we will look at how we can build this mine. Botswana, in particular, has a lot of these operating and being active. Botswana has also some of the better kimberlites out there; we also have a lot of faith in the outlook for diamonds. There is simply very few new mines that have been found, while we are looking at the amount of volume growth we can see, particularly, China and the potential that it still has, it makes for a pretty good price supportive picture. So as result we will be following a lot of these junior miners going into kimberlite mining very actively.

Has your funding been mainly in Botswana and South Africa or you have gone beyond these two southern African countries?

It’s mainly based on wh ere you find diamonds; Botswana and South Africa certainly has certainly been the core, but have also provided the bulk of the operational flow. We funded Namibia as well; we funded De Beers’ operations and some of the ships that they have off the coast recovering diamonds. Angola has been very tough for any funding not only diamonds funding. They have good deposits, very rich deposits but the regulatory regime, the  difficulties that the pioneers had in establishing operations, be it Russian, be it De Beers don’t make it a needy funding country. In the Democratic Republic of Congo (DRC), the quality of the diamonds is simply not good enough and we find that way too risky for us. In DRC, we only funded copper projects and it’s a very different story with diamonds because they are mainly alluvial. The Zimbabwean fields, we have not touched, I think a few have actually touched those.

The issue of Zimbabwe was my next question and since you have already made reference to it, can you shed more light on the reasons why you are not interested in Marange diamonds?

It’s simply the overlying country political risks. You can’t be comfortable at a company that you fund is able to hold on to its mining licence. You as a bank have nothing [you can do] if a company decides to stop paying you back because they have lost a mining licence. It needs to have that comfort; it’s one of the base rules and those base rules have been thrown out of the window essentially and the government has not been consistent in that message either. I think the final country that we had a look at in the past is Sierra Leone. We looked at Koidu deposits. It’s also one of the toughest jurisdictions despite having kimberlites. Some of the socials issues are quite tough around there, some the regulatory issues are quite tough. So I think for now Botswana and South Africa will remain the countries that will get the bulk of the funding.

So roughly, how much have you financed diamond operations to date?

It runs into billions of dollars but I wouldn’t know the exact figure.

Have you ever experienced any problems with the operations that you funded?

When you put a project financing in place there are always operational issues, there are always revenue issues, sometimes positive and a lot of them also negative. Spreadsheet is only a spreadsheet; a forecast spreadsheet is not a guarantee that everything will take a corner to the spreadsheet, so there are always changes. ‘Have we really lost money into diamonds?’ I don’t think we have but also that we probably in advance are very cautious. So by simply not lending projects we have no faith in them making it, saves you from lots of trouble. So we are stuck with quality names, quality products, quality projects and that has been a successful line of the business.

Are you also considering funding synthetic diamonds?

No we haven’t touched that, I also think that the industry is still very small but it’s unlikely that we will look at that as it requires a different approach of funding. We haven’t had any approaches yet so it’s unlikely going to be, not that we say its banned or we don’t touch it, I just don’t think that the scale of the business doesn’t really justifies looking at it from an RMB perspective.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished