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SAD AND DEPRESSING
Behind the DRC mining contracts review
At least 14 listed stocks could be seriously impacted by dubious Kinshasa-related leaks.
Author: Barry Sergeant
Posted: Sunday , 04 Nov 2007

JOHANNESBURG -

Whether orchestrated or not, leaks directly and indirectly from Kinshasa over draft recommendations on the Democratic Republic of the Congo's mining review put a minor panic into potentially exposed stocks in the latter trading days of the past week. Some DRC-related stocks fell by up to 9% on Friday, with Africo (ARL.TO, C$2.32 a share), which owns the disputed Kalukundi deposit, leading the losses.

Following overwhelming evidence, most of it sad and depressing, some 60 DRC mining concessions were put into a review in an official list dated April 14 2007. While it is no secret that the mining review is far from complete, rumours latterly fed into the market indicate that none of the contracts are going to survive without re-negotiation. The figures don't add up, but it's said that 37 contracts will have to be re-negotiated, while 24 are set for termination.

Whether these clearly premature numbers have been spat out by the efforts of various influences will be a major source of speculation for months to come. It's no secret that certain DRC officials (and certain private sector individuals) are keen to progress a promised $5bn investment from Chinese sources, by settling certain DRC mining interests in return. On the other hand, within the private sector, high level battles continue over titles to the fabulously rich mineral resources found across the DRC, a country the size of Western Europe.

Over the past decade, the DRC has encountered instability of such magnitude that millions, according to various NGOs, have died from unnatural causes. For years the country has hosted MONUC, the UN's most expensive single-country operation. Given this background, the vast majority of mining deals currently found in the DRC can easily be questioned.

In a July 18 2006 report to the UN's Security Council, the Group of Experts on the DRC raised serious questions over concession rights held by individuals of unknown or questionable standing. Noting that the DRC's Mining Cadastre listed 2144 mining and quarrying concessions, the Group of Experts argued that "an undetermined number appear to be held by concessionaires affiliated with investors whose personal and professional integrity is doubtful".

This lack of transparency, the Group of Experts argued, provided "hiding places for sanctioned individuals, financiers of embargo violators and for other individuals who simply do not meet the standards of the Code Minier". As an example of a "due diligence failure", the report referred to Camec (LSE: CFM.L, £0.29 a share), and noted that Conrad Muller "Billy" Rautenbach, a major shareholder in Camec, was wanted by the authorities of South Africa for fraud and theft. Rautenbach had ostensibly sold Boss Mining (concessions 467 and 469) and also concessions 1590-1605 to Camec.

As a further example of a due diligence failure, the report also referred to Ruashi Mining (concessions 627, 578, and 72), noting that Niko Shefer, "ex-convict and currently indicted by the authorities of South Africa, is the controlling shareholder of Ruashi Mining". Under cover of layers of entities, including Sentinelle Global Investments, Shefer "sold" Ruashi to Metorex (JSE: MTX, R28.20), and later realized benefits to the tune of around $400m, according to individuals familiar with the situation.

The Camec and Metorex concessions are clearly among the most vulnerable in the DRC: Camec is already fighting its case in the courts of Lubumbashi, the capital of Katanga Province, host of the DRC's copper-cobalt riches. Camec's would-be concessions can be traced back to the DRC's 1997-2003 war, under the Zimbabwe military's notorious Operation Sovereign Legitimacy (Osleg). For its part, Metorex has steadfastly refused comment of any kind on the quality of title of its Ruashi concession, now the group's major money spinner.

The cases for many other DRC mining concessions are better looking. In April this year, a memorandum by DRC mines minister Martin Kabwelulu effectively resuscitated the controversial commission report by Christophe Lutundula, filed in mid-2005. The Kabwelulu memorandum made it clear that no mining contracts would be "annulled".

Lutundula, an experienced politician from the opposition, was appointed as chairman of a commission into mining contracts; work started at the end of May 2004, and focused on investigations into selected mining contracts signed between 1996 and 2003. The final report was deposed at the Bureau of the National Assembly in June 2005, where it lingered.

Even after Lutundula filed his report in mid-2005, the DRC government dished out a series of concessions involving giant mining assets in Katanga and the Kasaï. Katanga Mining's (KAT.TO, C$13.4) Kamoto agreement was ratified by presidential decree on August 4 2005; Nikanor's (NKR.L, £6.18) titles were similarly ratified on October 13 2005, and the Tenké Fungurumé agreements on October 27 2005.

Another presidential decree in October 2005 confirmed three memorandums of agreement of diamond parastatal Société Minière de Bakwanga (MIBA) with three private companies, De Beers, DGI Mining, and Nizhne-Lenskoye, apparently concerning mining licenses for a massive surface area of more than 35 000 square kilometers.

Today Tenké Fungurumé is 24.75% held by Lundin Mining (LUN.TO, C$11.50), 57.75% by Freeport McMoRan (FCX, $112.80), with the balance of 17.5% in the hands of La Générale des Carrières et des Mines (Gécamines). Tenké Fungurumé is under construction, with commercial production planned for the first half of 2009.

Tenké Fungurumé is a greenfields operation; Katanga Mining's Kamoto and Nikanor's KOV are brownfields, to which Katanga Mining and Nikanor have committed $424m and $1.8bn, respectively, in redevelopment finance. Freeport McMoRan recently stated that capital costs at Tenké Fungurumé had increased to $900m from $650m previously, reflecting various inflationary pressures and scope changes. Some $157m in capital costs had been incurred through September 30 2007.

Senior mining groups such as Freeport McMoRan rely on legislative and multiple other certainties before committing to huge projects, and display the highest standards of corporate governance. In much the same vein, it's unthinkable that the various DRC exploration concessions held by BHP Billiton (BLT.L, £17.55) are anything but proper. The same can be said of the exploration concessions held by Gold Fields (GFI, $17.76) and the more advanced interests AngloGold Ashanti (AU, $42.94) holds in the DRC's far north east. Similar positive comments can be articulated for First Quantum (FM.TO, C$93.95), the most experienced listed miner on the adjoining DRC and Zambia copper belts.

There is no question, however, that a good number of DRC concessions are rotten to the core. The final outcome of the DRC mining review is going to have a major impact on the country's standing as to its quality as an investment destination. In a recent investment rating risk by Chubb regarding resource rich countries, the DRC ranked a lowly 25th of 32 possible positions.

In practice, it's going to be difficult to shove all the blame on the private sector. The Lutundula commission noted that the likes of Gécamines "approved joint ventures whose objective is to create new companies with private partners, which, in other words, contributes to their own disappearance". In some cases, the commission argued, "the management committees of the public enterprises that initiate and proceed with negotiations - in which the Kinshasa authorities interfere a lot - lack transparency, collaboration and cohesion".

There is ample evidence of various peccadilloes by both private sector and public sector interests. Earlier this year, for instance, Moto Gold Mines (MGL.TO, C$2.86) was known to some specialist investors as the world's hottest gold stock.

But it seemed inevitable that the stock would run into some kind of trouble for outlining nearly 20m ounces of gold resources in the far north eastern part of the DRC, in Orientale province, just outside the Ituri "province", after the proclamation of James Kazini, a warlord, in 1999. Today, Moto Gold rates as one of the worst performing gold stocks in the world, following various spats with various individuals connected, directly or indirectly, with DRC parastatal Okimo (L'Office des Mines d'or de Kilo-Moto).