contracts article, page-5

Special Report: DRC Mining Licence Review

By Stephen Clayson
Source: ResourceInvestor.com
22 Feb 2008

LONDON The DRC (Democratic Republic of the Congo) is, speaking purely in terms of natural resources, one of the most richly endowed nations on the planet. It is also one of the least stable, and the most corrupt.

From 1994 until 2003 the country was afflicted by a bloody civil war that is estimated to have killed millions of people.

The end of the conflict coincided with rising metal prices, and international mining companies did not waste much time in moving into the DRC, despite security and infrastructure problems and the obvious political risk.

Several companies, such as Anvil Mining [TSX:AVM; ASX:AVM], Katanga Mining [TSX:KAT], Metorex [JSE:MTX] the Central Africa Mining & Exploration Company [AIM:CFM] and First Quantum Minerals [LSE:FQM; TSX:FM], brought projects into production in the DRC in fairly short order; others, such as Moto Goldmines [AIM:MOE] and Lundin Mining [NYSE:LMC; TSX:LUN], have major development or redevelopment projects under way; while others are engaged in exploration, such as Banro Corporation [AMEX:BAA; TSX:BAA].

Majors active in the country include Freeport-McMoRan [NYSE:FCX], BHP Billiton [NYSE:BHP; LSE:BLT] and AngloGold Ashanti [NYSE:AU].

But the arrangements made by individual companies with the shambolic DRC government have varied, and the government of the ostensibly democratically elected President Joseph Kabila, installed in 2006, instituted a review process in June of last year, with the results becoming available at the beginning of this week.

All the companies operating in the country are now supposed to have received communication from the government as to the status of their licences. Many have acknowledged this publicly, including BHP Billiton and AngloGold Ashanti.

Other companies that have released statements include First Quantum Minerals, Moto Goldmines, Katanga Mining, Lundin Mining and Anvil Mining (1) (2).

Without going into the exact demands made, the common themes identifiable from the statements released thus far seem to be:

1.
More for the DRC government;
2.
More for local communities;
3.
No need to disrupt operations so long as companies accept the new terms.

A document leaked in November suggested that a number of the contracts under review would be cancelled, and the rest would be renegotiated. It is still unclear what the outcome of the review process has been in all cases, but it has been reported that companies have until February 26 – not long – to analyse the implications for their operations.

It is unclear what will happen after that, but some kind of appeal process has been alluded to by the DRC government, although little should be expected from this other than possibly some bargaining down of its demands.

Putting the Situation Into Perspective

Governments around the world are citing high mineral prices, and, often under the cover of environmental and community issues, are taking steps to extract more revenue from the mining industry. No one should be surprised that the DRC is doing the same. The U.S. and Argentina are just two other examples.

However, given that foreign investment in mining is the best hope that the DRC has of building better lives for its citizens; one hopes that a workable compromise can be reached.

The China Angle

Of particular relevance here is the position of the Chinese, whose government last year agreed to ‘lend’ some $5 billion to the DRC in a clear quid pro quo for mining deals. What will be interesting to see is if the underlying assets relating to any of the contracts under review end up being cancelled and awarded to Chinese companies.

After all, you don’t see Western governments throwing that kind of money around to secure access to minerals, and Chinese companies aren’t constrained by the same sort of concerns about ‘business ethics’ as their Western competitors.

Outlook for Investors

As always in these situations, nothing is set in stone. The post-review renegotiations can go well or badly, money can change hands behind closed doors. This is Africa, and corruption won’t be far beneath the surface.

Investors who have confidence in the ability of their management teams to play the right game on the ground have the best chance of sleeping soundly. Others will be pretty nervous, although many will have sold out back in November when the preliminary findings of the review process were leaked.

Ultimately, the review of the DRC’s mining licences amounts to a shakedown any way you look at it. About the best that can be hoped for is business as usual after the renegotiations, only with a bigger slice of the pie accruing to the DRC government. Investors should expect all the companies concerned to lose something, with the possible exception of the Chinese.

Nevertheless, thanks to its outstanding geology and the buoyant metal markets, the DRC is to be short of mining companies keen to operate there any time soon.