Majors Under Fire in DRCBy Stephen Clayson24 Mar 2008 Source:...

Majors Under Fire in DRC

By Stephen Clayson
24 Mar 2008
Source: Resource Investor

LONDON The saga of the review of mining contracts being carried out by the DRC (the Democratic Republic of Congo) took a new turn last week as the country’s government released the full text of the review, in French only, on its website.

Mining companies active in the DRC were informed of the outcome of the review by the government last month, and some made announcements in view of this, but others did not, and those that did revealed little of substance.

Therefore the full implications of the review were unclear, although it had been apparent since a leak in November last year that numerous ‘renegotiations’ and even cancellations of the contracts under which foreign miners were working in the DRC were in the offing.

Now however, the cat is out of the bag, and it seems that the big boys, including Freeport-McMoRan [NYSE:FCX], BHP Billiton [NYSE:BHP; LSE:BLT], Anglo Gold Ashanti [NYSE:AU] and De Beers, are all in the line of fire.

Freeport-McMoRan is undertaking perhaps the DRC’s biggest mining project, the development of Tenke Fungurume, a gargantuan copper-cobalt deposit, and the DRC government has said that it wishes to renegotiate the terms of the project.

Likewise, Anglo Gold Ashanti’s Kilo gold exploration joint venture, where last year a 2.93moz inferred resource was outlined, is up for renegotiation, as are diamond projects held by BHP Billiton and De Beers.

The DRC government participates in the country’s mining industry through a small number of state mining companies, which hold equity stakes in projects and receive payments on behalf of the government, and it is these companies that will be the main beneficiaries of the renegotiations.

Smaller Western companies active in the DRC include Anvil Mining [TSX:AVM; ASX:AVM], Katanga Mining [TSX:KAT], Metorex [JSE:MTX], the Central Africa Mining & Exploration Company [AIM:CFM], First Quantum Minerals [LSE:FQM; TSX:FM], Moto Goldmines [AIM:MOE] and Banro Corporation [AMEX:BAA; TSX:BAA].

Outlook

It seems likely that the renegotiation process will rumble on for some time yet, and could conceivably result in undesirable outcomes for some operators.

It is impossible to say exactly what sort of settlements may eventually be reached, or how long the renegotiation process will take. We have no way of knowing what discussions are taking place behind the scenes, and some companies have suggested that they will try and take the issue out of the DRC and into the international courts.

How the government of the DRC would respond to such a move is unclear, but it is quite possible that the government sees the review as a starting point for talks, not necessarily as a collection of take it or leave it offers to the operators of the various projects concerned.

That said - the DRC government would probably prefer not to have the renegotiating process too open to international scrutiny. After all, this is a country where the army makes a bit on the side by smuggling minerals out of the country and the leader of the opposition is in exile claiming that he fears for his life.

Seemingly, the government of the DRC sees the rises in commodity prices since many contracts were negotiated as grounds for renegotiation in its favour, and feels that it can decide when rates of return on mining projects are ‘excessive’ and intervene to redress matters to its satisfaction.

Sentiments like this are of course completely anathema to the investment community, which craves a predictable fiscal and regulatory environment when considering whether to undertake mining projects, and this is exactly what does not, and may never, exist in the DRC.

The ever present undercurrent is that with the Chinese pouring money into Africa in general and the DRC in particular, Chinese groups may stand ready to pick up projects if current holders don’t like the new terms being offered.

Ultimately, the DRC’s government is taking this line because it believes it can afford to. If commodity prices were at rock bottom, maybe investors just wouldn’t bother with the country. If the Chinese weren’t scouring the globe for resources and throwing money around to ensure they get them, maybe the Western mining companies would have a stronger hand to play.

However, the DRC should be careful not to take things too far. In the environment of uncertainty and under the table horse trading that now exists in the country, marginal projects may not be developed, and the DRC will lose out. But projects like Tenke Fungurume are attractive enough that their operators may choose to bite the bullet and endure some turning of the screws by the government.