Congo digs for more revenues from its rich seam of minerals.By...

Congo digs for more revenues from its rich seam of minerals.
By REBECCA BREAM and WILLIAM MACNAMARA

26 February 2008
Source: Financial Times

Mobutu Sese Seko, the late Zairean dictator, turned them into a personal treasure trove. Under his successor, Laurent Desire Kabila, they were carved up by warring factions and armies, as the country he renamed the Democratic Republic of Congo slid out of his control and into war.

Now the future of some of the world's richest deposits of metals and gems is in the hands of his son, Joseph Kabila, who won democratic elections in 2006.

Western mining companies with investments in the Congo discovered last week the terms they can expect from the new regime. A long-delayed review of mining licences was completed on February 18, and mining companies' response to it will help decide the pace and direction of the country's economic recovery.

To some investors, the first glimpses of the review's findings confirmed their worst suspicions that the review was an attempt to squeeze as much money as possible out of mining companies and bring the sector and its profits under government officials' control.

A DRC official rejected this interpretation during a speech at an international mining conference in Cape Town this month. The objectives of the review, said Victor Kasongo, vice-minister of mines, were to weed out illegal contracts inherited from the civil war, evict speculators who had not developed their concessions and renegotiate contracts that were improperly structured. He went on to confirm that none of the 60 mining licences under review was properly structured.

Bill Turner, chief executive of Anvil Mining, a Toronto-listed copper miner in the DRC, acknowledges that the motivation of the DRC is to claim more wealth from its minerals.

The review commission wrote Anvil two letters last week informing the company of its findings: Anvil should pay a cash bonus of Dollars 150m (Euros 100m, Pounds 75m) to Gecamines, the state mining company that owns the title to Anvil's Kinsevere mine; and Gecamines should be actively involved in the management of Anvil's Kulu mine and enjoy a royalty of at least 2 per cent of revenue from that mine. The title to Anvil's lucrative Dikulushi mine should be cancelled and redrawn in line with the current mining code.

"It appears that the government has taken its decision on these three projects without full appreciation of their history or the facts relating to them," said Mr Turner. The review commission had not explained how it arrived at its calculations or conclusions, he added.

Anvil, like other licence holders, has until tomorrow to submit its response to the government. If it disagrees with the findings, Mr Kasongo has promised, it can appeal to a panel of third-party arbiters.

But the companies face a dilemma. Do they privately negotiate their position with the government, as Mr Kasongo has urged, or do they make a legal challenge to the decision.

In a letter to First Quantum Minerals, a Toronto-listed miner of copper and cobalt in the DRC, last week, the review commission said the company's title to its huge copper and cobalt project at Kolwezi was improperly structured.

It pointed out that a First-Quantum-led consortium had lowered the price of the Kolwezi title sale from Dollars 130m to Dollars 15m. The commission advised the contract be redrawn in respect for "up-front payments" of cash and a more active role for Gecamines in management.

But speaking before the letter arrived, Clive Newall, the president of First Quantum, said: "We have a contract that is legally binding. We acquired our assets in an open tender."

A source close to the review said First Quantum was considering international litigation.

"Most of the other mining companies have reached a behind-the-scenes accommodation with the political elite," he said, "but (First Quantum) feel they have done nothing wrong and they greatly resent the political harassment they have been under in the last year."

The company, he added, appeared willing "to play hard ball, and fight the government in the courts".

But a legal fight over contracts could slow the process of the DRC's mineral development, which is key to the country's recovery plan.

Disputes could also influence the government's reception of Chinese investors. A recent infrastructure-for-commodities deal with Chinese companies was worth Dollars 9bn, said the DRC's planning minister on February 15. The deal - which would involve a road-building programme - involves two Chinese companies taking the majority stake in a copper and cobalt mining jointventure with Gecamines.

Large western mining houses are also watching the review with interest. Partly to guard their reputations, majors like Anglo American and BHP Billiton have hesitated to move in on the DRC's fabulous prospects. They are waiting to see from the review whether the junior companies can themselves achieve security of contracts and negotiate transparently.