Angola's tormented path to petro-diamond led growth

Mr. Marcelo Gomes, Admininstrative Director de Catoca

Sociedad Mineira de Catoca Lda.

Interview with

Mr. Marcelo Gomes,
Administrative Director
SMC is Angola's most important diamond mining company in terms of output. The company was founded in 1995, with a paid out capital of $24 million. In 1997, Dalmonty of Israel added another $5,3 million to SMC's capital. What were the determining factors that prompted Dalmonty to come into SMC's capital?

In 1997 we saw a delay in the completion of the treatment plant and the beginning of our production was delayed by almost one year. So we went to the market, looking for an additional $25 million dollars which was our necessity at the time.

Dalmonty proposed coming into SMC's capital and supporting a $10 million loan and paying a good will of around $10 million dollars.

Were there any incentives proposed by the Angolan government to encourage Dalmonty to take this decision?

No. At the time, our partner Alrossa of Russia who was already one of Dalmonty's partners in Russia, presented Dalmonty to Oderbrecht and other shareholders of Catoca.

Did Dalmonty introduce any changes in the management of SMC in Angola?

Within the new shareholding structure, Dalmonty assumed the financial management of SMC. They brought to SMC the financial facilities they have in the European market. For example they provided us with a new insurer.

The issue of financing activities in Angola is an interesting one because the country is considered to be a high risk area by creditors and investors. How difficult is it to raise funds to invest in Angola?

Nowadays I think it is different but at the time, in 1996/7 the UN peace keeping force was here. It was thought that Angola was heading towards a lasting peace and a period of stability.

Today, Catoca has the strongest cash flow of non oil sector companies in Angola. Our gross turnover is running at about $160 million dollars per year so we are self financing our investments. We are investing between 15 and 20 million per year in increasing our production capacity. Today we are producing 2 million carats per year and through these investments, we will have the capacity to produce 4 million carats per year in 3 years time. This will represent between 3% and 4% of the world's rough diamond production.

You say Catoca is now producing 2 million carats per annum. This is way above your official forecast of 940.000 carats / annum for 2000.

In the beginning Catoca's production was divided in two phases. In the first phase we were to explore kimberlite pipes down to 100 meters deep with an annual production of about 1.000.000 carats.

In 1997 we decided to invest in increasing our production capacity. Operating in war conditions imposes extra costs for example we have to airlift all our production and procurement. We fly about four Boeing 727 cargo flights per day between Luanda and the mine. We cannot use the roads. These kinds of cost are only possible in diamonds, it impossible to think of any other commodity that could be profitably exploited with such high operating costs.

So because of high transport and security costs we decided to invest in more production and that is why we are now producing 2 million carats per annum. $120 million dollars have already been invested in SMC and we are investing another $50 million over the next two years to increase our output to 4 million carats.

How long will existing reserves last at such a level of production?

At 4 million carats per year it is estimated that known reserves will last between 35 and 40 years.
At current market prices, what is the dollar value of 2 million carats of rough diamonds?

Today it is worth about $145 million. At the moment the market is unfavourable but we are investing over the long term.

We have covered finance and production, we would now like to move on the issue of conflict diamonds. As someone working inside the diamond business do you feel affected by the media hype surrounding conflict diamonds?

You have to differentiate kimberlite diamonds from alluvial alluvial diamonds. We produce kimberlite diamonds. We do not suffer from poachers mining on our concessions. In my personal opinion, the Angolan government has been creating good solutions to mitigate the risk of conflict diamonds leaving Angola.

Is the area of the country were you operate affected by UNITA activity?

Yes it is. The province of Lunda South is a conflict area. Although we are not involved, there are a lot of rivers in this region which is where the alluvial diamond deposits are found. We are suffering a lot from this.

What exactly do you mean by suffering a lot? Your production plan has gone according to plan.

We are suffering because we are providing security for the area. We are providing food for the Angolan army (FAA). Small rebel groups are active in the communities around us. The families of our workers are suffering from this and we are suffering together.

We also have to consider the risk of a land mine on the roads. Act of terrorism against our trucks or our electric power supply can also be a threat.

Despite the exposure to terrorism, you are very committed to your investment in Angola. The war has been on and off since 1956 and yet the Angolan diamond industry is growing and has reached production levels beyond pre independence levels. Does it not seem that the war is an obstacle that can be overcome.

For kimberlite production the war is not so much of an obstacle because we operate in much smaller areas that are easier to safeguard. For alluvial production it a lot more difficult and they are suffering a lot.

However, next year we are planning to have access to our mine by road because it would be impossible to increase our production to 4 million carats / annum and continue airlifting it. We also need an electric power plant on the Chicapa river to supply the necessary energy to increase our production up to this level. We know that there is an agreement between the government and Alrossa of Russia to build a hydroelectric dam on the Chicapa river.

To finish off, why do you expect peace to return to South Lunda province and what is your outlook for the investment climate in Angola?

We are informed that the government is making a huge effort to bring stability to the area. We rely on this to develop SMC because we need a road to bring in certain components for the development of our plant and we need the government to go ahead with the construction of the Chicapa river power plant.

The diamonds sector is so profitable that despite the difficulties it is possible to run a profitable business. However, since a kimberlite plant lasts thirty to forty years investment regulations and taxation laws must be long lasting and stable.

The fact that large multinationals are coming to Angola is a good sign. In the mining sector alone you have De Beers, Lev Leviev of Isreal, Souternera of Shouth Africa, Oderbrecht of Brazil. Angola is a country of opportunities but you have to be aware of the risks and figure out how to mitigate them in order to make your investment profitable. SMC has succeeded in doing this.

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© World INvestment NEws, 2002.
This is the electronic edition of the special country report on Angola published in Forbes Global Magazine. February 18th, 2002 Issue.
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