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Based on data published by Catoca.
The Catoca mine produced 86 percent of Angola’s total rough diamond output of 7.9 million carats in 2013. (Courtesy of ALROSA)
By volume, Catoca’s diamonds constituted 86 percent of Angola’s total rough production of 7.923 million carats in 2013, according to the state-owned rough diamond distributor SODIAM. By value, Catoca’s diamond sales comprised 63 percent of Angola’s $957.4 million in total rough diamond sales. The company’s share of Angola’s rough diamond output was nearly identical to that of 2012 in both value and volume.
Forecast
In the short term, the company plans to focus on governance issues within the organization to improve cost control. The measure most likely to have an immediate impact is management’s decision to review and possibly renegotiate all contracts currently in force at the company. The proposed creation of an internal audit office to improve the monitoring of expenditure might have a positive longer-term impact on cost control.
Catoca is looking to boost production and has authorized the construction of a sixth treatment plant to expand its capacity.
In the long term, the company is investing in exploration ventures inside and outside Angola, which will diversify its operation and help grow the company’s long-term prospects. Catoca announced in 2013 that it would begin prospecting for diamonds in Zimbabwe, where one of its shareholders, the Russian miner ALROSA is now operating.
ALROSA and Angola’s state mining company ENDIAMA, each hold a 32.8 percent stake in Catoca. Other Catoca shareholders include China-based LLI Holding, which owns 18 percent of the company and the Brazil-based Odebrecht, which maintains a 16.4 percent stake.
In 2014, most diamond miners have reported that rough diamond prices have risen between 5 and 10 percent for the year to date, although prices appear to have softened slightly since the start of the second half. Consequently, Catoca’s revenue in 2014 is anticipated to increase in the mid-single-digit percentages with stable production. Net profit should increase as well, but the extent to which it grows will depend on how well the company implements cost control measures.
Catoca’s management has established a number of objectives to improve profitability in both the short and long term.
The Catoca mine in Angola saw a sharp decline in net profit in 2013 due to escalating costs despite the higher revenue and average diamond prices that were achieved.
Sales of rough diamonds from the mine rose 3 percent year on year to $594.4 million in 2013, as the average price rose 4 percent to $89.68 per carat (see figure). However, Catoca’s net profit decreased 24 percent to $100 million, which management attributed to costly regulatory changes and increased operating expenses.
Management noted in Catoca’s recently published annual report that implemented reforms to Angola’s tax system, combined with the new requirement that the company conduct all transactions with locals in kwanza, the national currency, instead of the U.S. dollar, hurt the company’s cost structure. In addition, the company stated that employee salary adjustments, a shift toward mining harder diamond-bearing ore and increased waste stripping raised operating costs. Consequently, the unit cost to mine a cubic meter of ore rose 5 percent to $20.87 during the year.
Production Down Slightly
On an operational level, production at Catoca fell 2 percent to 6.556 million carats in 2013, due to a slight drop in the amount of ore processed at the mine’s treatment plants.
The total amount of diamond ore treated declined 3 percent to 10.17 million tonnes during the year, although the amount of diamond ore extracted was flat at 5 million cubic meters. However, the underlying diamond yield at Catoca was unchanged from 2012, with an ore grade of 0.64 carats per tonne.
Beyond escalating costs, management said that Catoca’s performance in 2013 was negatively impacted by the macroeconomic environment. Financial difficulties in the U.S. and European economies lead to greater volatility in diamond prices,
LOM Price at posting:
38.5¢ Sentiment: Buy Disclosure: Held
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