Picture: ISTOCK
Picture: ISTOCK

Sydney — There’s a strange thing about the fear going through the global mining industry after the Democratic Republic of Congo signed an order to lift royalties last week: compared with most other countries, these levies are still relatively low.

The existing 2% rate on copper extraction compares with royalties five times that level in Chile and Peru, the two biggest producers.

Even at the new 3.5% rate proposed by the country’s national assembly, charges will still be lower than those paid in Australia and the US, according to a PwC database of copper royalties. (There’ll be an additional levy on windfall profits, too — but the history of those taxes suggests little money will be raised, anyway.)

So what’s the fuss about?

For one thing, royalties are only part of the cost mix for a mine. Congo’s southeastern copper belt is isolated and infrastructure-poor, even by the standards of major mining regions. Electricity is brought by power lines from near the mouth of the Congo River on the opposite side of the continent, and the region has invested heavily in diesel back-up generators and upgrades to the dams and transmission lines to gain a measure of stability. Exports are mostly along a snaking roadway via Zambia and Botswana to Durban’s port.

That raises costs substantially. Despite some of the highest ore grades in the world and a rich endowment of the currently red-hot battery element cobalt, operating cash costs at Katanga Mining, controlled by Glencore, came to $2.17 per pound of copper in 2014. That’s more than double the 93c/lb at BHP Billiton’s Escondida, in Chile, in its most recent fiscal year.

On top of that, there’s an informal Congo dividend to be paid. Israeli billionaire Dan Gertler, a former shareholder in Katanga, had his US assets frozen in December after the Treasury alleged he’d forced multinational companies to use him as a middleman to do business in Congo.

The Guardian reported the previous month that the Paradise Papers leak showed Glencore lending $45m to Gertler in exchange for assistance securing a mining agreement for Katanga. (Both sides have said there was nothing unusual or improper about the arrangement.)

There are other problems. Katanga had to restate two years of its accounts last November after Canadian securities regulators started questioning some of its practices. The review found the company claimed to have made about 8,000 tons of copper that was never produced, and said that about $108m of metal concentrates had gone missing from the plant, while Katanga hadn’t known about $5.5m in undisclosed payments that Glencore had made to 12 of its managers.

And don’t forget the ever-present risk of unrest. President Joseph Kabila, who signed the mining code after six hours of talks with resources executives, has been in government for 15 months past when his second term was meant to end.

Almost 2-million people were driven from their homes last year amid ethnic clashes centring on the northeast, and a similar number of children are now at risk of starvation due to aid shortages.

Relations between mining companies and governments resemble haggles, and this litany of difficulties means Congo is stuck in a perennially weak bargaining position.

The high quality of its mining assets is discounted by the parlous state of its infrastructure and governance. That’s only partially compensated for by the fact that taxes are still relatively light.

A better equilibrium would entail higher tax rates paying for state-building, roads and electricity generation, bringing down the cost and risk of mining in Congo.

That would be wonderful — but in a war-torn country where government revenue is frittered away on graft, it’s little wonder mining companies balk at paying tomorrow in return for the weakest hint of hope for the future.

Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. This column does not necessarily reflect the opinion of Bloomberg and its owners.

Bloomberg

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