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Mining industry to be worth $7.5bn by 2018

Article - May 6, 2015

Angola is seeking to not only add more variety to the minerals that are mined commercially, but also to add value to its natural resources and build up a thriving industrial sector

Diamond mining began in Angola more than a century ago, but during the 27-year civil war between 1975 and 2002, mineral exploration and extraction, like much else in the country, largely ground to a halt. Since 2003, development of the mining industry, and particularly diamonds, has been a main priority for the government as it seeks to generate revenues from its mineral resources and diversify the economy away from oils.

“We have moved beyond oil to exporting diamonds and other minerals,” explains Angola’s Minister of Trade, Rosa Escorcio Pacaviria de Matos. “And we think that with the liberalization of the market and the increase in domestic production, we can move towards expanding our export balance.”

With less than half of the country having been explored so far, the country still holds big prospects for foreign investors.

“We have an enormous diamond potential,” says Dr. Antonio Carlos Sumbula, CEO of Endiama, Angola’s national diamond company. “Ninety percent of kimberlite diamonds remain to be discovered and I think that this alone should be a factor that will make any investor wish to come to Angola.”

Growing at an average rate of 5.3% a year, Angola’s mining industry is expected to be worth $7.5 billion in 2018. There has been increasing international interest from investors in new areas of mining, including iron ore, copper and phosphates, but diamonds have and will continue to be the main contributor to growth. The country is the world’s fourth largest diamond producer by quantity and value.

Investment in diamond mining dipped during the financial crisis of 2008-2009 as demand for precious gems fell. Big mining firms such as South Africa’s De Beers cut back operations, after a large investment in prospecting failed to bring results. “During that period the diamond price lowered beyond the breakeven and led to the shutting down of many mines,” explains Mr. Sumbula.

But the industry has since recovered. In 2014 production of diamonds reached a record 10 million carats, generating $1.6 billion in revenue. This figure includes production by both industrial and small-scale artisanal miners, whose output reached 8.75 million carats and 934,500 carats respectively. Revenues from diamonds helped to offset the impact of the rapid drop in oil prices in the second half of 2014.

Last year De Beers returned to the country and was granted a new diamond exploration license in April, while the country’s largest mining company Sociedade Mineira de Catoca (SMC) has stepped up production and continues to explore new areas.

A joint venture of Endiama, Alursa of Russia, Odebrecht of Brazil, and Israel’s Leviev Group, SMC is responsible for more than 75% of all diamond production in Angola. It operates the Catoca mine in the province of Lunda Sul, which is world’s fourth-largest diamond mine by reserves. While production at Catoca is expected to expand 6% this year, SMC is also exploring for gems at other sites, including the Tchiuzo project, which is expected to begin production in two years. The company also has a majority stake in concessions in Luemba, Gango, Quitúbia, Luangue, Vulege, Tcháfua and Luaxe.

Aside from SMC, Endiama is also a partner in the Sociedade Mineira de Chitotolo, which operates the Chitotolo mine in Lunda Norte Province. While cheaper kimberlite diamonds are mined at Catoca, the Chitotolo Mining Company (in which local companies ITM and Lumanhe are the other shareholders) extracts diamonds from alluvial deposits that fetch a much higher price.

According to the Minister of Geology and Mines, Francisco Queiróz, Catoca’s diamonds are valued at around $80 per carat, while diamonds from other alluvial mines such as Chitotolo are worth between $250 and $300. Chitotolo currently produces around 240,000 carats a year. The company aims to increase production by investing in further mineral exploration.

Endiama, ITM and Lumanhe are also behind another joint venture, the Sociedade Mineira de Cuango, which produces around 400,000 carats from alluvial deposits every year.

Up to now, both the government and investors have focused on the exploitation of diamond resources, but the Minister of Geology and Mines admits that there has been too much attention paid to these gems, while other mineral resources and diversification of the mining industry itself has been forsaken.

“In Angola the mining industry is still too heavily concentrated around diamonds,” he says. “This must change not so much for political reasons but rather objectively because the country has many more natural resources and minerals that can be explored.

“We need to map all those available resources, undertake a strong campaign to attract investment and invest in other minerals such as gold, iron, manganese, coal and still others such as phosphate and copper that the country has in abundance.”

Interest in Angola’s mineral potential has heightened since the introduction of the new Mining Code in 2011, which was established to attract foreign investment and boost exploration for diamonds and other minerals.

The new law ensures more protection for investors, with exploration and commercialization rights now granted under one license. State participation has been reduced from 50% to 10%, while royalties and taxes to be paid to the government have also been cut. “Our mining code stipulates that 5% of the revenues collected by the state should go towards directly benefiting the zones where mines are operating,” Mr. Queiróz comments.

While utilization of mineral resources has helped to lower Angola’s dependency on oil, the mining industry still only accounts for 5% of GDP. The government is aware that a truly diversified and dynamic economy cannot rely solely on oil and raw minerals such as diamonds, iron and copper. It knows it must also build a thriving industrial sector. 

“I know of no rich country that is not industrialized,” states Secretary of Industry, Kiala Ngone Gabriel. “We understand that by exporting unfinished products, we miss out on great opportunities of employment. In the last four years our manufacturing sector has been contributing to our budget with a percentage of 6.25%. This is unsatisfactory because we would like to have a share of around 15-20% since we do have the ability to transform and therefore add value to our product.”

Adding value to mineral resources by setting up local processing facilities is a key pillar in the government’s economic diversification agenda and an interesting prospect for foreign investors. Diamond processing and jewelry production are obvious opportunities highlighted by both Endiama CEO Mr. Sumbula and Minister Queiróz.

“It is not Angola that retains value, but rather those that perform the transformation abroad, which is why our policy foresees the opening of many diamond lapidating factories, and that is a domain where the American investor is very much welcome,” explains the geology and mines minister, while Mr. Sumbula says that establishing partnerships with companies in diamond cutting and jewelry  production is part of Endiama’s medium to long-term plan. Value addition through the processing of minerals such as iron ore and copper could also help to boost industry and create more jobs.

However, inefficiency and the lack of skilled and capable local workforce holds the industrial sector back, says General Kundi Paihama, current Governor of Huambo and former Minister of War Veterans. He stresses that education development and investment in the youth will be key to economic diversification and tackling the lack of capability in the industrial sector. “We are opening up more schools, universities, colleges, and always seeking to expand education,” he says.

Inefficiency is being addressed through investment in infrastructure. Roads, railways, ports and airports that were severely damaged during the civil war have been rebuilt, upgraded or newly constructed. Industrial development hubs are being built and connected to the upgraded power and transport networks.

The manufacturing sector is – slowly but surely – beginning to take off. Companies producing items such as cement, processed metals, detergents, gases for hospitals, foodstuffs, and beverages, are expanding and providing jobs for local communities.

One such company is France’s Grupo Castel, a beverage producer that has been operating in Angola since 1994. “At that time, in 1994, the capacity of production at the local level was limited,” explains Grupo Castel’s General Director in Angola, Philippe Frederic. “Pierre Castel (the company’s founder) was one of the first investors willing to invest outside the oil industry. This is probably the basis of his success; he believed in Angola earlier than many others that came much later. The beverage industry gives a lot of employment. We have got many local employees, and we train lots of people.”

Angola is hoping more foreign investors will share Pierre Castel’s belief in the country and come to invest in industry, be it in beverages or mineral processing. By doing so, investors could potentially enjoy the success that Castel has had in the country for more than 20 years.  

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