Angola 2007 - Diamond Development Initiative

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Private Sector PlayersSetting up a Joint VentureIn the formal sector, diamonds are exploited exclusively by means of anAngolan-registered joint venture partnership between Endiama, acting astrustee for the nation’s mineral rights, and a foreign company with the requisiteinvestment funds and technical expertise. In addition, one or moresmaller Angolan companies are normally included as minor partners.The process for creating a joint venture is now fairly standardized, if notespecially speedy. The foreign company presents Endiama with a letter ofintent. Endiama then evaluates the prospective company both for technicalcapacity and financial depth. If both are in order, negotiations turn toselecting a specific 3000 km 2 diamond concession.In recent years, Endiama has been encouraging foreign companies toshift their attention from the Lundas to areas along the Malange-Bié axis,as well as further south in Moxico Province. Of course, the foreigninvestor may already have an idea of where it wants to operate. A limitedamount of back and forth may thus ensue until a concession is agreedupon. Although not part of the formal process, in practice the investormay also request some modifications to the concession boundaries.The selection of a concession triggers the entry of an Angolan private sectorpartner. According to Endiama, there is an Angolan companyattached to every available concession. Though the legal basis of this linkageis somewhat dubious, it is apparently indissoluble.The actual percentage allotted to each participant is negotiable, withincertain boundaries. With alluvial projects, Endiama and the Angolan partnermust jointly own at least 50% of the partnership. Typically, Endiamatakes somewhere between 35 and 45%, the foreign investor takes thesame, leaving 15-25% for the Angolan partner. Some of the more powerfulforeign investors, including SPE of Portugal, De Beers and Brazil’sOdebrecht have managed to eliminate the Angolan partner entirely, splittingthe projects 50-50 with Endiama. More typical is the split reached onthe Chitotolo project, in which Endiama took 45%, ITM of Bermuda took40% and Lumanhe took 15%.For Kimberlite mines, Endiama must by law own at least 51% of the project.An exception was made for the Catoca mine, where Endiama traded18% of the project for a much needed cash infusion from a Lev Levievcompany, reducing its share to only 32.8%. On the Luô project, Endiamatook its full 51%, while foreign investors Escom-Alrosa (a partnership ofPortugal’s Esprito Santo bank and the Russian diamond giant Alrosa) took45%, leaving 2% each for two well-connected Angolan firms,Hipergesta and Angodiam.Endiama has a fairly standard joint venture contract, but in recent yearsforeign investors have been demanding the right to maintain managementcontrol of their project, no matter the division of shares in the partnership.The contract for the Cambuia Project between Endiama,Equatorial Diamonds (registered in the British Virgin Islands) and a troikaof Angolan firms – Miningest, Sambukila and N’Jula Investments – is fairlytypical in this regard. 8 While broad direction of the company is ostensiblyin the hands of a three-man council in which each of the parties hasa representative, the contract also stipulates that the general director andchief financial officer be indicated by the foreign partner, Equatorial. 9All investment, and all risk, is explicitly the responsibility of the foreigninvestor. For alluvial projects the minimum investment is US$5 million,while for kimberlitic projects, the minimum is US$10 million, and theaverage much more.As a final step, the project must then be approved by the Angolan government,either by the Ministry of Geology and Mines for alluvial projects,or the Council of Ministers (the Angolan cabinet) for Kimberlite projects.A new joint venture becomes official upon its publication in the governmentgazette, the Diário da República, and only then can field work canbegin. Average time from letter of intent to publication in the Diario isabout two years.The joint venture system might seem dauntingly disadvantageous for theforeign investor, who has to provide all the money and technical expertisein return for something less than a half share in the final enterprise.However, there seems no lack of mining companies eager to do businessin Angola, including most of the majors. Russian giant Alrosa, BHP Billitonand De Beers all have one or more concessions in the exploration stage.According to Endiama’s director of planning and investment, there are atotal of 156 concessions delineated in Angola, of which 12 are in full production,30 are in the early start-up phase of production, 15 are in theprospecting and exploration phase, and about 100 are greenfield siteswaiting for an investor to fund exploration.The Role of Local PartnersThe murky and politicized manner in which private Angolan companiesgain access to the country’s diamond resources is an ongoing area of concernwith respect to Angola’s diamond industry. As described above (see3.1 Setting up a Joint Venture) somewhere between 15-25% of everyalluvial project, and just under 5% of kimberlite projects are allocated byEndiama to private Angolan companies.Angola’s Diamond Law states that ‘participation by national firms shouldbe encouraged, as long as they meet the necessary technical and financialconditions.’ 10 According to industry insiders, however, the Angolancompanies bring neither investment capital nor technical expertise to thetable.These companies are all connected in one way or another to government,’said one diamond mining executive who has negotiated severaljoint ventures with Endiama. The only thing they offer are political ties toimportant players in the Angolan government or army, and with themthe ability to influence government decision making.6
RepublicofAngola 2007This point is actually formalized in the joint venture contracts. The contractfor the Cambuia Project, 11 for example, notes that while foreigninvestor Equatorial Diamonds brings technical expertise and US$10 millionin investment to the table, the trio of Angolan partners – Miningest,N’Jula Investment and Casa Sambukila – offer only their ability to ‘assurea harmonious relationship between the project and the local community’.For this vague ability to engender harmony they jointly receive a 5%share in the project.Exactly who decides which companies get what share of each individualproject remains one of the great unknowns of the Angolan diamondindustry. The Angolan companies do not hold mineral claims to the concessionareas, for the simple reason that mineral claims as understood inWestern countries do not exist in Angola. Nor are the Angolan companiespartners in a pre-existing joint venture, of which the foreign companyis buying a share. Nor do the Angolan companies own the concessions.As the contracts make clear, mining concessions in Angola areinalienable; they cannot be bought, sold or traded, as they often are inWestern countries. Instead, the Angolan companies’ ‘right’ to a particularconcession appears to be based largely on political influence.For government watchers, the company names attached to each newjoint venture agreement are a sign of who has won favour at the presidentialcourt. In the mid-1990s, a company named Lumanhe, owned byseveral army generals, was given sizeable proportions of several alluvialjoint ventures. In recent years companies such as Hipergesta andAngodiam have also been blessed with concessionary largesse.Government officials justify transferring large amounts of the country’snational wealth into the hands of private individuals in various ways. In amore candid moment, a senior official from the department of Geologyand Mines extolled the handouts to current and former army generals asan intelligent way of forestalling a possible coup d’etat. While this maybe understandable, transforming the general staff into an entrenchedeconomic elite with a yearly entitlement seems an unnecessarily highprice for peace.In negotiations with foreign investors, Endiama officials have justified thegiveaways as a type of affirmative action. Angolan officials are justifiablyproud of what their ‘nationalization’ policy has wrought in other parts ofthe diamond industry. In just a few short years Angolan engineers, geologists,sorters and diamond cutters have taken the place of all but a smallminority of expatriate workers. However, there is a big differencebetween giving opportunities to Angolan technicians and engineers –men and women who have trained themselves to perform their jobs aswell as anyone in the world – and giving away vast quantities of nationaltreasure to friends and supporters.Foreign investors doing business in Angola appear to have written off thisgiveaway as simply part of the cost of doing business. But in claiming 5-25% of every project, these politically connected companies are not takingmoney from government or foreign investors; it is the Angolan peoplewho pay the price. The true cost to the Angolan people is best illustratedby the case of just one company: Lumanhe.Cuango restricted zoneLumanhe: In the company of GeneralsOften known as the generals’ company, Lumanhe Extração Mineira,Importação e Exportação was founded late in 1995 by six equal partners:António Emílio Faceira, Armando da Cruz Neto, Luís Pereira Faceira,Adriano Makevela McKenzie, João Baptista de Matos and Carlos AlbertoHendrick Vaal da Silva. Five of the six hold the rank of general in theAngolan armed forces. 12In the insider’s rush for parts of Angola’s diamond industry, Lumanhe hasproven to be extraordinarily fortunate, picking up a 15% share in boththe Chitotolo and Cuango alluvial projects, as well as a similarly largeshare in the Calonda mining project.The figures in Table 1 give an indication of just how much the insider diamondgiveaway has cost the Angolan people. Beginning at just overUS$5 million in 1997, the generals’ gross yearly income grew to overUS$22 million by 2006. Royalties and taxes reduced this take only slightly.Over the past ten years, the Lumanhe generals’ cumulative net income,after taxes, reached an astounding US$120 million, or US$2 million, pergeneral, per year. 137
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Angola 2007 - Diamond Development Initiative

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