Underpricing costs Angola’s diamond gem millions

13 June 2018 | Business

The current marketing process, where diamonds are sold to 'preferential buyers', destroys the value for the producer and the government. Catoca presentation

Stephen Eisenhammer – Angola's Catoca, the world's fifth largest diamond mine, estimates it lost US$464 million over the past six years due to a government-imposed marketing system that obliged it to sell production below international prices, a company presentation seen by Reuters showed.

The figure was presented during a private meeting in March between the diamond industry and the minister for natural resources and oil, Diamantino Azevedo.

President João Lourenço has vowed to reform Angola's secretive diamond industry in order to increase production and improve returns as Africa’s second largest oil producer looks to diversify its economy.

Despite being the world's fifth-largest producer of diamonds, major international miners have largely shunned Angola due to unattractive investment terms.

All production in Angola must be sold through state-owned diamond trading company Sodiam, which makes the stones available to buyers of its choosing.

‘Preferential buyers’

Two industry sources with knowledge of the matter have told Reuters that under the previous government of Jose Eduardo dos Santos these "preferential buyers" were often politically connected and able to negotiate prices below fair value.

Producers are not able to sell their diamonds independently.

"The current marketing process, where diamonds are sold to 'preferential buyers', destroys the value for the producer (less revenue) and the government (less tax)," the presentation dated March 16 said.

Angola's state diamond company Endiama, of which Sodiam is a subsidiary, did not respond to telephone and email requests for comment.

According to the presentation, diamonds from Catoca were on average sold for 24% below market prices over the last six years up to and including 2017.

A spokesman for the ministry of natural resources and oil confirmed the presentation had been made to the minister.

"The minister declared the necessity to find a more balanced model in which everyone wins and the producers are not the most impaired," he said in an emailed response.

The spokesman declined to comment on allegations that preferred buyers were often politically connected individuals.

Shareholders

Russia's Alrosa and Angola's state diamond company Endiama each own 41% of Catoca, which produces three quarters of all Angola's diamonds. LL International Holding B.V. owns 18%.

Alrosa did not immediately respond to a request for comment. Reuters was unable to reach LL International Holding B.V.

"It does not stimulate producers to increase their production or invest in exploration," the presentation adds of the marketing system.

Last week, on a visit to the diamond trading city of Antwerp in Belgium, Lourenço said Angola would shortly unveil a new business framework for the sector that would help to attract investment and overhaul the current marketing arrangement.

Since taking power in September, Lourenço has moved to open up sub-Saharan Africa’s third largest economy, pushing a new investment law through parliament and introducing attractive new terms for the oil and gas industry.

Much of the country's diamond prospects remain under-explored due to 27 years of civil war and a closed, difficult business environment since fighting ended in 2002. – Nampa/Reuters

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