Fool’s folly

Last year, Zimbabwe’s defence minister, Moven Mahachi, described military involvement in mining ventures as “a noble option” that would allow his government and the government of the Democratic Republic of Congo (DRC) to pay for military operations in the DRC’s ongoing civil war.

This year, African journalists are using considerably less genteel words to describe the deals being struck between Osleq, a company owned by high-ranking Zimbabwean military officials, and Comiex, a company owned by DRC army officers. “Carpet-bag generals,” sniffed one African newspaper.

The resources-for-guns controversy has heated up in recent months, despite a ceasefire agreement signed by six countries that was supposed to have sent the foreign armies packing. However, rebels opposed to Laurent Kabila’s government refuse to lay down their arms — or give up control of mineral-rich areas.

With rebels snapping at his heels, Kabila has continued to seek help from his allies, primarily Zimbabwe — and he’s getting it, albeit at a price. As the Zimbawean defence minister explained, “Instead of burdening the treasury for more resources, which are not available, our army in the DRC embarks on viable projects for the sake of generating the necessary revenue.” These “viable projects” typically involve diamonds, gold, copper and cobalt.

After all, war isn’t cheap. Last year, The Financial Times obtained a confidential finance ministry document which showed that Zimbabwe’s expenditures in the DRC amounted to US$166 million in the first half of 1999 — about ten times the official figure given to the International Monetary Fund. The rebels are also paying for their arms with gold and diamonds.

Increasingly, Zimbabwe’s reasons for involvement in the DRC are being viewed as economic, rather than political — a perception that is causing problems for the country’s megalomaniacal president, Robert Mugabe, who has deflected criticism for bringing his country’s economy to the brink of collapse by pretending to be the Robin Hood saviour of his landless peasants. If he kills his country’s agricultural industry in the process, well, such is the price of staying in power.

With the Zimbabwean economy in tatters, the country’s military officials have brazenly helped themselves to the DRC’s natural resources. In early 1999, Zimbabwean businessman Billy Rautenbach became top dog at Gecamines, the state-owned copper and cobalt mining company. However, Rautenbach’s star has since fallen because his Zimbabwean cronies haven’t benefited from Gecamines to the degree that was expected. Cobalt production has fallen by half in the past year, and copper production isn’t doing much better. Gecamines’ decrepit mines need new equipment and capital, but, given the current political climate, there isn’t much hope of serious investment anytime soon.

Zimbabwean military officials have since focused their attention on the DRC’s diamond and gold production — commodities easily mined and whisked out of the country to international markets. Because of the millions to be made, speculation is growing that high-level politicians have stakes in Osleq, Comiex and related business ventures.

This explosive mix of guns, gold and diamonds was initially viewed as a local problem. It no longer is. Earlier this year, Petra Diamonds, a junior mining company listed on the London Stock Exchange’s Alternative Investment Market (AIM), announced an agreement with Oryx Natural Resources, which described itself as “engaged in diamond production, exploration and trading in the Democratic Republic of Congo.”

A technical report placed a value of US$208 million on the Tsubua kimberlite pipe, six alluvial fields and some prospective exploration ground. However, others say the mines are barely functioning and are badly in need of capital investment — a problem the deal with Petra is supposed (ostensibly) to address. Petra has proposed to acquire Oryx shares in a reverse deal that would result in the vendors of Oryx owning 60% of Petra. In the meantime, Oryx is “generating cash flow” by buying diamonds from local miners and selling them to dealers in Antwerp and polishers in India. The diamonds are generally of poor quality (about US$25 per carat), with the better stones lost to theft or smuggled out of the country.

As might be expected, journalists are asking annoying questions about the murky dealings of Oryx and its backers. How did Orex — a company created last summer in the Grand Caymans by Omani businessmen — get rights to a concession covering about 550 square kilometres in the Mbuji Mayi region? Does the company have rights that would hold up in an international court of law after hostilities cease?

Talk on the street is that Oryx secured its deal with Zimbabwean army interests last summer, and that the transaction with Petra may not pass muster with regulators, who are concerned about such things as the legality of business contracts and the quality of the people behind the project. It is also no secret that Congolese rebels (and their backers) have no love lost for the Zimbabwean “colonials,” calling security of tenure into question.

If all this weren’t bad enough, Petra is no stranger to controversy. In late 1998, the company (which then had exploration projects in Angola) announced plans to join the Nabera consortium, which was competing for the management contract of Alexkor, a diamond mining company owned by the South African government.

At the time, Petra’s chances for success were viewed as next to nil. The competition included such heavyweights as De Beers, Namco and Trans-Hex, and Alexkor was one of the top producers in the country (or at least it had potential to be), with stones valued at about US$250 per carat.

Petra’s consortium won the contract, helped by its partners, which included 17 unions and various other parties representing black empowerment. Industry analysts were quick to call the choice “a political and not an economic decision,” because the idea was to attract a company with technical expertise and deep pockets, and therefore capable of reviving the ailing operation. There were also cries of cronyism, because one of the members of the consortium was the wife of a government minister (she eventually pulled out of the consortium).

Despite all the controversy, Petra arguably could redeem itself by turning around the inefficient, money-losing operation. The mine once produced 500,000 carats, but this has slipped to under half that amount, owing to low productivity and a high theft rate. Already, there is talk that Petra is in talks with a major player in the diamond business to help speed up the turnaround process.

Petra’s more immediate concern is the very real controversy that continues to dog its merger proposal with Oryx. The company has been peppered with questions from journalists and investors, including ones pertaining to the morality of doing business with military officials who place their interests above all else. No one expects that Osleq or Comiex will benefit the people of either Zimbabwe or DRC.

But this story is far from over. Investors are not necessarily without moral values. Most have a line they will refuse to cross, no matter how attractive the prize on the other side. And it’s safe to say that a good many will have moral objections to the circumstances that brought about Oryx’s deal-making with Zimbabwean army interests.

On the economic front, investors will want to know whether or not Oryx can retain its concession after the Zimbabwean troops go home, or whether other parties hold pre-existing claims or legal rights (which is believed to be the case). If these and other concerns are not addressed through full, plain and true disclosure, Petra should not be surprised if investors shun this deal and keep their wallets closed.