Angola Mining Report Q4 2011

Includes 3 FREE quarterly updates

Production Figures Disappoint

Preliminary production figures released by the US Geological Survey estimate that total diamond production in Angola remained flat over 2010 at 8.1mn carats, equivalent to the output level seen in 2009, and below the 8.91mn carats produced in 2008, before the onset of the global economic downturn. Further confirmation of weak y-o-y growth in diamond output was revealed by production figures released by Angola's largest diamond mine, Catoca, in July 2011, which showed a slight drop in output at the facility in 2010 on a y-o-y basis. The mine produced 6.741mn carats, equivalent to a 4.5% decrease y-o-y. These production figures form the basis for BMI's mining sector forecasts. Despite the likelihood of weaker-than-expected growth for 2010, we are confident of an increase in the rate of growth across Angola's mining sector going forward. An increase in diamond production, driven primarily by state-owned mining group Endiama, is likely to see the country's overall mining output increase by 9.9% y-o-y in real terms in 2011, while the industry's value will grow to AOA32.6bn (US$3.7bn). Looking further ahead, we project mining output to grow by an annual average of 4.9% yo- y between 2011-2015, reaching a value of AOA564bn (US$7.5bn) in 2015.

Diamond Sector Hotting Up

A recovery in global diamond prices has led to a surge in overseas interest in Angola's diamond mining sector. In July, it was reported that Russian mining company Alrosa, which has owned a 32.8% stake in the Catoca mine since 1990, was planning to expand its operations in the country. Alrosa's vicepresident Sergey Pushkin said the company was refusing to rule out the possibility of acquiring a further concession in Angola.

Meanwhile, June 2011 saw speculation mount surrounding China Sonongol's interest in the Catoca mine, with the company rumoured to be moving nearer to becoming the first Chinese firm to have an active presence in Angola's diamond mining sector. Sonongol is expected to purchase a 32.8% stake in the mine, which currently belongs to Israeli LLI Holding. The scale of the expansion of Angola's diamond sector over the past few years is illustrated by the growth in value of the stake which is rumoured to be worth about US$400mn, compared with the original price of US$20mn when purchased in the 1990s.

Regulatory Environment

There are ongoing efforts to draw up a new mining code, which it is hoped will create mining regulation that will better represent the needs of Angola's mining sector. One of the government's main concerns is that tax contributions from private mining practices across the country have been stifled due to high levels of expenditure on projects resulting in narrow profit margins. In a speech in November 2010, Angola's Minister of Geology and Mining Joaquim David said that the new law would seek to establish a common limit one expenditure for all mining firms active in the state. Furthermore, companies would be required to contribute more to social and community ventures in the regions where they operate.

David also said that the concession process for mining licences in the country would tighten, to favour firms with better organised finances and more efficient operations.

Key Players

Angola's mining industry is dominated by diamond exploration and production. Major reserves of diamonds are located in the provinces of Lunda Norte and Lunda Sul. Local firms dominate the market, with state-owned Endiama the exclusive concessionary of mining rights for diamond-mining in Angola. Sociedade Mineira de Catoca (SMC) operates the Catoca mine, the world's fourth largest kimberlite facility. SMC is 32.8% owned by state-controlled Endiama, 32.8% by Russian concern ALROSA, 16.4% by Odebrecht and 18% by Israeli company LLI Holding. There is increasing interest from overseas firms, with companies such as Trans Hex Mining, a South Africa-based miner, making entries into the market in recent years. The company has a stake in the Luana, Luarica and Fucauma mines.