ALROSA’s own example proved that diamond mining in Angola is by far not as attractive as just recently it seemed to investors from all over the world, RBC daily writes. The Russian company abandoned the Luo Project for development of two kimberlite pipes having sold its stake to Portuguese Escom Mining for a final total of almost 3.7 billion rubles. However, it will be a long wait for the Russian company to get the payment… postponed until 2035. And even in a quarter of a century ALROSA risks to remain without the money so the company was prompt to create a 3.76 billion dollar reserve for doubtful debts.
Inspired by prospects of mining diamonds in Africa, in 2002 ALROSA in team with Portuguese Escom Mining decided to develop first-rate kimberlite pipes there, Camatchia and Camagico (Luo Project). The Escom-Alrosa Joint Venture obtained a 45-percent stake in Camatchia-Camagico Mining Company (the operator of the project), while the remaining 55% were split between Angola’s Endiama, Hipergesta and Angodiam. As Escom stressed in 2008, Camatchia and Camagico were one of the largest diamond pipes in the world (their reserves were estimated at 14 million carats).
In the middle of the last year Sergey Vybornov, the then president of ALROSA, admitted that in the crisis period the Luo Project appeared beyond economic efficiency noting that even before the crisis it hardly reached a breakeven. However, he said the chance of getting out of this project was impractical due to its complex ownership structure and his company’s desire to back up its Portuguese partner. However, on December 30, 2009 ALROSA abandoned the project. And as it appeared Escom got more than favorable terms on the occasion.
According to ALROSA Group’s 2009 IFRS-based reporting, the company sold its share in Escom-Alrosa (44%) to Escom Mining for 129 million rubles ($4.3 million) on December 30, 2009. It is noteworthy that Escom will have to pay the sum only in December 2020. Taking into consideration the discount rate and repayment risk ALROSA put only 14 million rubles on its credit account in the result of this transaction. Besides, ALROSA transferred to Escom Mining its receivables for 3.58 billion rubles due from the joint venture.
The loan should be reimbursed on March 31, 2035. It is stipulated that it will occur only in case the diamond field will bring profit. ALROSA hardly believes it will ever happen, therefore the company has already added a back-up reserve for this debt in the amount of 3.76 billion rubles.
The company has ascribed this sum to administrative expenses which had an immediate impact on the company’s net profit which turned out to be 3.46 billion rubles based on the results of 2009 (in 2008 ALROSA was in the red for 32.78 billion rubles). It is remarkable that the company’s last-year sales proceeds decreased by 14.4% to 77.9 billion rubles – to a great extent due to slumped demand for its major produce.
ALROSA explains that it is focused first of all on money-earning projects in Angola, such as Catoca. “Our key problem is to reduce debts and implement our investment program for underground mines construction,” the company says.
Diamond mining within the Luo Project started in 2005, and in 2007 it yielded 204,000 carats. At that point the forecast was that output in 2010 would reach 180,000 carats a month. However, in 2009 the project brought a $27.1 million loss (ALROSA’s part in it was $5.37 million). An industry source told RBC daily that preliminary exploration had put a would-be cost of rough at over $100 per carat, but further exploration proved that diamonds would not exceed $25 in cost which was much lower than at similar Russian ventures. “The company has probably exited as sweetly as possible just to keep good business relations with Angola’s authorities,” Sergey Goryainov of Rough&Polished says.
According to the industry source, diamond mining in Angola is not core-business for Escom since its main thing is construction projects. “So the Portuguese are unlikely to leave the project even if it proves a money-loser just to keep good relations with the government,” the source adds.
