Adonis Pouroulis, chairman, Petra Diamonds
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Petra Diamonds chops back in Angola
Brendan Ryan
Posted: Fri, 19 Dec 2008

[miningmx.com] -- IN A MAJOR strategic about-face Petra Diamonds is to hand back the Alto Cuilo kimberlite project to Angolan state diamond company Endiama at no cost.

Petra has been drilling and evaluating Alto Cuilo – which consists of a cluster of more than 70 kimberlite pipes - for some 10 years and has consistently been upbeat about the potential of eventually establishing a major diamond mine there.

In 2004, resource heavyweight BHP Billiton agreed to a JV with Petra over Alto Cuilo and invested US$60m during the next three years in further exploration work to “earn in” a 75% stake in the JV.

In May this year BHP Billiton decided to opt out of the JV and handed its stakes in Alto Cuilo and the nearby Luangue project back to Petra.

Petra chairman Adonis Pouroulis said at the time, “Petra is in a great position to deliver on its strategy and our enthusiasm and belief in Alto Cuilo and Luangue is as strong as ever.

“We see the projects, and this region of Angola particularly, as an important new source of diamonds and we intend to use our proven expertise to further unlock the value of our assets for long-term shareholder value. “

In total, Petra and BHP Billiton have invested $90m in exploration and development work on Alto Cuilo.

Petra financial director David Abery said Petra’s decision to opt out was taken based on the economics of Alto Cuilo given grade and cost considerations.

He commented, “in South Africa or Tanzania what we have found at Alto Cuilo would become a mine but the grade is not high enough given the higher cost structure in Angola.

“The economics simply do not work compared with South Africa or Tanzania where we own 76% or more of our mines while we would only be able to own about 40% of Alto Cuilo.”

The limited ownership of new mine developments in Angola is one of many onerous conditions laid down by the Angolan government which have been criticised by a number of diamond companies operating in the country.

Nearly all that criticism has been “off the record” because the companies concerned did not want to prejudice their operations by upsetting the highly sensitive Angolan authorities.

Typically, a diamond mining company in Angola has to take on a large number of “associated Angolan personnel” at the exploration stage which bumps up its overhead costs and cuts down on the amount of funds available for the actual drilling and evaluation work.

Should a mine be found then the developer is expected to fund 100% of the capital expenditure although owning only around 40% of the mine.

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The rest of the equity is held by the Angolan government through Endiama and by nominated private Angolan investors all of whom are entitled to a “free carry.”

Once completed, the developer has priority over revenues until the capex outlay is recovered but may still get only about 80% of the initial revenues because of profit share agreements with the Angolans.

Abery commented, “The 40% equity limitation is a huge issue which we have raised with Endiama.

“We feel, as many foreign investors do, that Angola’s diamond mining framework needs to be revisited. Whether the Angolan government will revisit it is a completely separate issue.

“The 40% equity allocation only made sense if there were quick, inexpensive discoveries in the country but that has not happened despite intensive exploration efforts by a number of major and junior diamond companies. “

Abery described Petra’s decision as “difficult but bold.” He said Petra’s strategy was to invest its funds in the operating mines it now owned such as Cullinan and Koffiefontein in South Africa and the Williamson mine in Tanzania.

He commented, “if we did not own such mines then it is possible we might have continued with the work at Alto Cuilo. But, given current market conditions, it makes little sense to continue spending money in Angola looking for the type of mine we already own at Williamson in Tanzania.”

A trading update published today by Petra reported a 52% increase in gross revenues to US$48.1m for the six months to end-December compared with $31.7m for the comparable six months of 2007.

Main reason for that was the jump in revenues from the Cullinan mine which came on stream from July 16 and more than offset weaker diamond prices in the second half of 2008.

Petra estimated its diamond production at 528,636 carats for the six months to December which is 422% up on the 101,213 carats produced in the previous comparable six months.