On the background of abundant optimistic forecasts promising a cloud-free "Diamond Decade" one of the largest diamantaires gets rid of his major mining asset - Lev Leviev is selling his stake (18%) in Sociedad Minera de Catoca to China Sonangol, a Chinese oil company. According to some reports, the deal is valued at $400-$450 million.
For the Chinese neophytes in the diamond market this deal is, no doubt, a brilliant success. For the first time in the history of the diamond market a Chinese company gains access to the world-class primary diamond field which accounts for about 70% of all the diamond output in Angola. And it is unlikely that the Chinese intend to restrict themselves to a portfolio investment. At one time, the purchase of a stake in Catoca allowed Leviev to establish Ascorp (Angola Selling Corporation), which monopolized the entire legal export of Angolan diamonds (about 5 million carats per year) and in this way to control a cash flow of approximately $700 million. Although subsequently Leviev lost the monopoly right to control Angola’s diamond exports, such a precedent cannot fail to inspire the new owners of Catoca.
According to some estimates, Chinese investments in the infrastructure of Angola exceed $5 billion and Chinese mining companies play a leading role in the Angolan infrastructure projects. China Sonangol, for instance, is building railways and highways, water treatment plants and an international airport in Luanda, the largest in Africa. China regularly extends billions worth of loans to Angola at concessional rates and virtually has almost complete control over the Angolan arms market. Angola, along with Saudi Arabia and Iran are among the top three oil exporters to China, while the Chinese oil companies are operating in Angola on a production sharing basis.
Lobbying capabilities of Chinese companies in such a supportive environment are extremely high and the opportunity to establish an equivalent of Ascorp under Chinese control is taking shape quite clearly. In addition, it should be noted that Zimbabwe, so much disturbing the Kimberley Process, is nationalizing its mining business and by the coming summer controlling stakes in all the foreign owned mining companies are to go into the hands of local residents. All but Chinese. In fact, by way of strong investments in the country’s infrastructure (and informal investments into the entourage of Robert Mugabe), the Chinese have eliminated all competitors in the mining sector in Zimbabwe. And transition of the Marange diamond field under Chinese control is also quite real.
China’s interest towards Catoca is quite understandable. It is more difficult to understand why Leviev has withdrawn from the project. Catoca is an attractive asset - even in the crisis year of 2009 it scored a net income of $70 million, and in 2010 it exceeded $111 million. The stake in Catoca allows Leviev to say, with good reason, that he has created a vertically integrated system - from mining to jewelry retail under his own brand. To some extent such a strategy copied the strategy of De Beers and seemed perhaps the most promising option for development in a rapidly changing market.
May it be that Leviev was forced to cede his stake in Catoca to the Chinese by the need to prop up the Africa-Israel Holding, which strongly “sagged" in the crisis years? But the results of Africa-Israel in 2010 displayed a net profit exceeding $0.5 billion and the company announced a successful restructuring of its debt. Of course, liquidity is never too much in Africa-Israel’s ramified and diversified business, but still Catoca was a pearl in Leviev’ own "diamond pipeline." He has many developer projects running and the share in the unique diamond field added logical conclusion to its diamond "empire."
Is it perhaps Leviev, whose political instinct is difficult to doubt, is withdrawing from Angola due to fears of future civil conflicts in this country? If the established regimes of North Africa are flaring up one after another like gunpowder, what can you expect from the country where the ruling elite and security forces consist of people, who a few years ago were peering at each other through the sights of Tommy guns? But except for Catoca, Leviev has other projects in Angola and no one heard he was going to close them.
May it be that the optimistic forecasts for the rough market do not seem so much reliable to Leviev? Is there any reason for this? Perhaps, there is. The disaster in Japan may change the trend in the diamond market. It's not even the fact that the Japanese diamond market is apparently close to death - China and India are likely to be able to offset this decline. But the thirty odd years of diamond boom generated a huge polished stock held by the population of the unlucky islands. By the most conservative estimate this is no less than 100 million carats at an average price of $500/ct. And a massive dumping of even a quarter of that amount would make the market situation unpredictable.
Let us leave the debate on whether "Fukushima is better or worse than Chernobyl" to experts. We may only note that the density of population in Ukraine is 70 people per square kilometer, while in the Tokyo metropolitan area giving residence to one of every three Japanese it is 6 000 people. In September 2006, the Nuclear Safety Commission of Japan amended the seismic safety standards for nuclear reactors and required that nuclear power plants located near active faults be designed for earthquakes of 6.8-6.9 magnitude on the Richter scale (the old rules provided for an earthquake of magnitude 6). And before 2006, Japan put into operation 52 (fifty-two) reactors designed for earthquakes of magnitude 6. The catastrophe at Fukushima-1 was caused by an earthquake of magnitude 9 followed by a couple of earth shocks of 7 magnitude. So, is there any chance that Japan or at least Greater Tokyo will have to be resettled and Japanese diamonds, these best friends of not only girls but refugees as well, will flood the market? Of course, this probability is negligible - it is inversely proportional to the reliability level of fifty reactors designed for a 6 magnitude earth shock.
Sergey Goryainov, Rough&Polished
