African miners accepting one-time payments to settle government disputes worries investors
London — Miners across Africa are increasingly using one-time payments to settle disputes with governments, a trend that’s disturbing some investors.
A $150m payment by Glencore’s Katanga Mining to the Democratic Republic of Congo’s (DRC) Gecamines earlier this month followed Freeport McMoRan’s separate $100m settlement with the state-owned company in January 2017.
Last October, Barrick Gold proposed paying Tanzania $300m as part of efforts to negotiate a settlement for its majority-owned Acacia Mining.
The shift, identified by the Extractive Industries Transparency Initiative — which promotes good governance in the mining industry — comes as African nations seek redress from old contracts often perceived to favour international miners.
While there’s no suggestion such settlements breach any rules, some investors are concerned that certain payments are poorly defined and fall at the boundaries of existing regulations.
"We are nervous about bespoke deals," said Nick Stansbury, a fund manager at Legal & General Investment Management in London. "If a company is having to negotiate a number of one-off settlements with governments, that might be indicative they are operating at the very margins of what is permitted under a statutory framework. If so, that would raise genuine social licence to operate issues, which are first order financial risks."
On one hand, African governments are flexing their muscles and being more proactive in prosecuting companies that don’t comply with local laws. They are also being more effective at extracting penalties, particularly when rising commodity prices give them more negotiating power.
African governments are flexing their muscles and being more proactive in prosecuting companies that don’t comply with local laws. They are also being more effective at extracting penalties.
"There’s a sense that a lot of mining deals are unfair and that companies have not paid enough in taxes," said Thomas Lassourd, an analyst at the New York-based Natural Resource Governance Institute, which advises governments on mining policy. "The need to make such payments is often seen as a fair way to address that."
Of greater concern, is that some settlements lack transparency, raising concerns about how the funds will be disbursed.
If companies are going to make such payments, they need to show "they have appropriate checks and balances in place to avoid misappropriate uses", said Christine Chow, a director at Hermes Investment Management. "Any financial settlement or payments, therefore, should tie to the expectations that local communities will, as a result, be able to benefit."
In countries such as the DRC, weak governance means there’s a high risk that payments can be misused, according to Peter Jones, a campaign leader at Global Witness, a London-based advocacy group. "Gecamines has consistently mismanaged DRC’s mining revenues. It is vital that payments to the company are made with complete transparency."
Gecamines declined to comment. Last November, the state-owned miner rejected claims from the Atlanta-based Carter Centre that nearly $750m paid by international mining companies is missing from its accounts. "All the revenues received by Gecamines over the relevant periods are faithfully transcribed into the accounts," it said at the time.
The DRC was ranked 161st in Transparency International’s 2017 Corruption Perceptions Index, which surveyed 180 nations by their perceived levels of public-sector corruption. New Zealand was seen as the least corrupt and Somalia the most, ranking 180th. More than half the bottom 20 countries were in Africa.
The payment earlier this month by Katanga Mining — 86% owned by Glencore — to Gecamines settled certain "historical commercial disputes", the Swiss mining and commodities trading giant said. It was part of a wide-ranging settlement to lift the threat to billions of dollars’ worth of copper and cobalt assets it holds in the country.
Still, in a 5,000-word statement describing the mechanics of the agreement to end the legal proceedings with the state-owned miner, Katanga dedicated less than 150 words to the payment.
"The underlying basis of Glencore’s payment to Gecamines is unclear," Jones said.
Barrick chairman John Thornton agreed in October that his company’s 63.9%-owned Acacia Mining would pay $300m to the Tanzanian government in a "show of good faith" to end a dispute over exports and taxes. After gaining 16% on the day the proposed payment was announced, Acacia’s stock has since slumped 44% as a final settlement proves elusive.
Barrick declined to comment. The Toronto-based miner, this week, withdrew a timetable for resolving the spat with Tanzania’s government, after previously saying it would provide Acacia with a detailed proposal by the end of June. The $300m has yet to be paid.
Freeport McMoRan also declined to comment.
Payments that provide quick fixes for disputes can be risky, said Karina Litvack, the former head of governance and sustainable investment at F&C Asset Management, who warns that such deals should be as transparent as possible to limit the opportunities for funds to be misappropriated. "It can come back to bite companies who handle these things clumsily, and when that happens, it’s generally investors who have to pick up the tab."