Mining firms have few options left in DRC
New law voids existing agreements and increases costs for companies including Glencore and Randgold Resources
London — The options for mining companies battling new legislation in the Democratic Republic of Congo — Africa’s biggest copper producer and the source of two-thirds of the world’s cobalt — have just about run out.
After six months of lobbying, companies, including Glencore and Randgold Resources, have got nowhere in their battle to push back against the mining law, which voids existing agreements and increases their costs.
The final part of the bill was approved on Friday, and despite earlier indications from President Joseph Kabila that the rules might be eased, the law has not been weakened in any way.
While the constitution bars Kabila from running for a third term, the leader has refused to rule himself out as a candidate in elections later in 2018, and his campaign to wring more revenue out of mining companies is proving popular with voters.
A meeting in March in which CEOs including Glencore’s Ivan Glasenberg pleaded their case to Kabila was used by state media to portray the president as a wise power broker standing up for national interest.
"Something like this, which is quite scary to foreign investors, isn’t going to bother" Kabila, said Hunter Hillcoat, a mining analyst at Investec Securities in London. The law is both a vote winner and a much-needed source of extra revenue as the president seeks to increase state largess. "Kabila is going to pull out all the stops to get financing in place," Hillcoat said.
Friday’s decision means the miners are now liable to pay a 50% tax on so-called super profits and up to a 10% royalty on cobalt production, in addition to other changes.
Congo’s mining companies, which formed a lobby group to challenge the law, have not issued a statement since last week’s decision. Glencore, Randgold and Ivanhoe Mines all declined to comment.
Few alternatives now remain open to the companies. They could try to cut individual deals to gain exemptions, but any walk back on the terms of the law now looks extremely improbable. More likely, they could challenge the changes at international arbitration — as they have threatened to do — leading to protracted legal battles, according to Investec’s Hillcoat.
"One would have to expect they will have to comply to the new law under duress, in the hope that they can win at arbitration," he said.
Then there is the nuclear option — stopping all production. While this would ratchet up pressure on the government, which depends on mineral exports for much of its revenue, it also risks damaging the mining companies. The expected boom in cobalt demand being brought about by the electric car revolution could be snuffed out before it really gets going if supply constraints force vehicle makers to find alternatives.
"Glencore and company are in a pickle," said Ben Davis, an analyst at Liberum Capital. "They could shut down production in retaliation, and their copper exposure elsewhere would benefit, but this would ruin cobalt’s viability as battery material from a security of supply perspective."
A glimmer of hope may come from the decision Monday by Chinese conglomerate, Citic Metal, to spend about $555m for a 20% stake in Ivanhoe, which is developing Africa’s biggest copper discovery in DRC.
While the deal stems from Ivanhoe chairman Robert Friedland’s longstanding relationships in China, it also suggests that the Chinese, who have invested heavily in DRC in the past decade, believe the impact of the new mining law can be managed.
"It brings one of China’s largest commercial interests inside the DRC," said Paul Gait, an analyst at Sanford C Bernstein. "It shows that, even though Western equity markets are placing far too high a risk premium on Congolese assets at present, this is not the case in China."