African Copperbelt: still risky after all these years

The African Copperbelt running through Zambia and the Democratic Republic of the Congo (DRC) hosts some of the world’s richest copper and copper-cobalt deposits, and has attracted dozens of junior companies over the years. But like moths to a flame, some were badly burned, leading to a perception that the belt’s risks are as great as its mineral endowment.

Zambia is perceived more favourably than the DRC (formerly Zaire), reflecting its more stable history and greater willingness to retain much-needed foreign investment in good times and bad. In 2009, as an example, Zambia withdrew a windfall mining tax imposed just before the global financial crisis hit in late 2008. But DRC has continually earned its reputation as a risky destination, despite hopes of a mining renaissance following the forced ouster of former President Mobutu Sese Seko in 1997, after more than 30 years of notoriously corrupt rule.

New President Laurent Kabila immediately opened the doors to foreign investment as state-owned miner Gécamines was in dire need of capital after years of plunder by Mobutu. The first juniors to arrive found idled mines and stalled development projects of world-class calibre. A flurry of deals ensued and foreign capital poured into the country. But the mood soured as regional conflicts escalated and Kabila failed to deliver promised reforms. He was assassinated in 2001, only to be replaced by his inexperienced son (or stepson), current President Joseph Kabila.

It wasn’t long before deals unraveled, one by one. The first casualties didn’t attract much attention, as projects were still in the early stages. Some juniors left, but others fought back, notably Banro (BAA-T, BAA-X) after its gold properties were expropriated in 1998. The company successfully sued the DRC government for US$240 million, which ultimately led to a settlement that included more mineral properties and a new mining convention with improved security of tenure.

The DRC government sent a chill through the global mining industry in 2007, when it announced it would be conducting “reviews” of more than 60 mining agreements with foreign companies signed during the previous decade. Companies waited on pins and needles, including First Quantum Minerals (FM-T, FQM-L), which had acquired several projects there through its 2006 takeover of Adastra Minerals, formerly American Mineral Fields (AMF). The crown jewel was the Kolwezi copper-cobalt tailings project, which AMF had secured through a tender process in 1997.

In August 2009, First Quantum received a letter from the DRC’s prime minister, who noted the “impossibility to pursue the partnership” and directed that the Kolwezi exploitation permit be returned to Gécamines. By then, the company had invested at least $1 billion in the DRC, including more than $700 million to acquire and develop Kolwezi into a copper-cobalt mine.

First, the DRC’s mining registry cancelled the permit. Gécamines then terminated the contract, ostensibly based on a local court ruling stating that it contained a “formal defect” and involved “fraud.” First Quantum describes the ruling as “complete nonsense” made “without any evidence.” The company also notes that the International Finance Corp. (IFC) and Industrial Development Corp. (IDC) conducted extensive due diligence on these matters before becoming involved as partners.

First Quantum and its partners turned to international arbitration in early 2010. Weeks later, a DRC appeals court upheld the local court judgment and awarded a $12-billion judgment for damages to Gécamines and the DRC mining registry.

The company again turned to international arbitration and was granted interim relief from the judgment and pending Kolwezi liquidation. But the next day, Eurasian Natural Resources (ENRC-L) reported that it had paid US$175 million for rights to various assets in the DRC, including Kolwezi. 

First Quantum slammed the deal as “illegal” and questioned the business ethics of its rival, but can do little else but wait until the European-based arbitration process is complete, sometime in the latter part of 2012.

In early 2010, the DRC government’s mining registry suspended First Quantum’s permit for the Frontier copper mine. First Quantum saw this action as retaliatory and “without legal basis.” The company responded by closing the mine, which opened in 2007 after an investment of $226 million, and began international arbitration through the International Centre for Settlement of Investment Disputes in Washington, D.C. Meanwhile, First Quantum significantly reduced its exposure to Africa by acquiring advanced projects in less risky jurisdictions, notably Australia, Peru and Finland.

The government review also turned its sights on the huge Tenke Fungurume copper-cobalt project operated by Freeport-McMoRan Copper & Gold (fcx-n) and originally held by a junior acquired by Lundin Mining (LUN-T, LUNMF-Q). The contract was found to be in good standing, but the government sought and won improvements to the original deal, including a higher free carried interest (to 20%) for Gécamines, production milestone payments totaling US$30 million, and additional royalties and fees. The mine was developed in this case, with costs borne 70% by Freeport and 30% by Lundin, and it continues to operate.

Freeport had the advantage of extensive operating experience in the developing world, where nationalist sentiment or a change in government can create a negative investment climate almost overnight. But the review process was a gauntlet for smaller companies that lacked such experience or the deep pockets needed to deliver increased benefits in cases where the government believes, rightly or wrongly, that deals negotiated and signed in the past were flawed or unfair.

Today, only a handful of junior companies remain in the DRC. Major companies are wary too, as analysts have almost doubled their discount rate on DRC projects (up to 20%) in the wake of negative publicity from the First Quantum and Freeport reviews.

But as one door closes, a window of opportunity opens, this time for state-owned companies from China, or companies controlled by Chinese interest. Even senior mining companies face a challenge competing with these rivals, which aren’t bound by the same rules as Western companies. Chinese companies are more likely to appeal to the socialist leanings of African leaders, and also have the advantage of the weight and influence of the government of China should major disputes arise.

But African nations have come to realize that companies backed by “China Inc.” are primarily interested in the mined metals and commodities, and mines poised for production. These companies are content to leave early-stage exploration to junior companies and often invest in ones that do it best. Hence the DRC government is once again putting out the welcome mat to juniors. Asked about risk at a copper conference in Chile in 2009 a Gécamines official told Reuters that there aren’t “any huge risks in exploration” and that existing laws make it “very easy” for anyone to invest. 

At the same conference, mining financier Robert Friedland announced that one of his private companies, Ivanhoe Nickel & Platinum (Ivanplats), had made “a major copper discovery of historic importance” in the DRC, west of Kolwezi. The company holds 50 exploration permits covering about 14,000 sq. km in Katanga province and has been exploring these licenses since 2003.

Friedland told conference delegates that drilling at the wholly owned Kamoa project has discovered laterally continuous, sediment-hosted, high-grade stratiform copper mineralization in a newly discovered copper district that “forms a previously unrecognized western extension of the famous Central African Copperbelt.” 

He added that this discovery, and the discoveries by Ivanhoe Mines (IVN-T, IVN-N) at Oyu Tolgoi in Mongolia “are the type of world-scale mineral systems needed to supply the copper for the electrification of the global economy, to usher in the era of the electric car and to reduce our planet’s consumption of hydrocarbons.”