New DRC mining code upsets miners

A new mining code in the Democratic Republic of the Congo that would raise royalties on metal production and eliminate a stability clause enshrined in the previous 2002 charter that protects mining companies from changes to the code for 10 years is rattling mining companies and investors.

The country’s two houses of parliament (the National Assembly and Senate) have approved the new mining code, but it has yet to be signed into law by President Joseph Kabila, and companies like Randgold Resources (LON: RRS; NYSE: GOLD) and Ivanhoe Mines (TSX: IVN; US-OTC: IVPAF), among others, are joining together in a formal group to lobby the government.

Randgold CEO Mark Bristow says he is not ruling out international arbitration if the mining code becomes law.

“It is our express wish that the government grasps the serious consequences this ill-considered code will have on its ability as a country to attract international investment and reinvestment to the DRC, and to refer the code back to the ministry of mines for further consultation with the industry,” Bristow said in a prepared statement. “If this fails, however, we shall seek to enforce our rights, including those which provide for international arbitration.”

Bristow noted that he is disappointed the new mining code does not reflect the mining industry’s input over the proposed legislation and “what it regarded as very serious flaws in its provisions.”

Randgold co-owns the Kibali mine with AngloGold Ashanti (NYSE: AU) (each has a 45% stake) and state-owned gold miner Société Minière de Kilo-Moto owns the other 10%. Randgold is the operator.

A drill rig at Ivanhoe Mines’ Kamoa copper project in the Democratic Republic of the Congo. Credit: Ivanhoe Mines.

In a statement released on Feb. 5 ahead of Mining Indaba in Cape Town, Ivanhoe executive chairman Robert Friedland said the company is “absolutely determined to see that any additional revenues generated from our projects directly benefit the Congolese people,” adding that “we also expect to receive assurances that previous agreements will continue to be honoured to safeguard the DRC’s future as an important destination for mining investment.”

If signed into law, the mining code would raise royalties on base metals such as copper and cobalt from 2% to 3.5%, impose a 5% royalty on “strategic metals” and slap a 50% super tax on profits when a commodity price rises 25% above the metal price used in a project’s feasibility study.

But the most worrying part, miners say, is the lifting of a provision that exempts licence holders from compliance with the new code for 10 years. According to Bristow, the 10-year stability clause in the 2002 mining code “was the basis on which Randgold and other mining companies invested in the DRC.”

“When Randgold and AngloGold Ashanti bought the project that became the Kibali mine, we sought and received a formal written declaration from the DRC government, which entrenches our rights under the 2002 code, and confirms that the law would be honoured in respect not only of Kibali, but also any permit renewals,” Bristow said.

Ivanhoe, which has been active in the DRC for more than two decades and is developing a mine at its Kamoa-Kakula copper discovery and upgrading the Kipushi mine, said its projects have become pillars of the local economy.

“Ivanhoe supports a fair and equitable distribution of profits and benefits between the government, surrounding communities and international investors,” Friedland said in the company’s press release. “We also equally support the upholding and fulfilment of prior government commitments to foster investments in mine developments.”

For Ivanhoe, eliminating the stability clause is particularly unnerving, as the company transferred another 15% stake in the Kamoa-Kakula copper project to the government of the DRC in November 2016. At that time, the agreement noted that any dispute would be subject to binding arbitration.

During Friedland’s keynote presentation on Feb. 7 at Mining Indaba, the largest annual mining conference in Africa, which attracts political leaders, government ministers and representatives of most African nations, as well as investors, financial institutions and industry executives from around the world, the billionaire mining executive emphasized that royalties and taxes must benefit local people and there must be impeccable accounting and transparency.

“I don’t mind paying … as long as that royalty goes to develop, help and empower local people,” the Financial Times reported Friedland as saying. “I’m not concerned about the level of taxation, that’s not the fundamental issue. The issue is that the mining industry needs stability, and we absolutely need transparency.”

The British newspaper also reported Friedland said that “the mining industry is sick and tired of being gored — we are like a herd of antelopes, our horns pointing out united in our opinions.”

Charles Watenphul, a media spokesman for Glencore (LON: GLEN), told The Northern Miner that the company is not commenting “on the latest developments,” but forwarded a letter that major mining companies sent to the DRC government last month.

“A unilateral revision of the tax and legal system currently governing the industry represents a strong negative signal sent out by the DRC which could do nothing but undermine, for a long period of time, the confidence of the stakeholders in the sector, whether they be present or not in the DRC to date,” the companies said in a press release.

The companies also noted that if the mining code becomes law, it “would cause the certain death of a young industry, however it contributes to the achievements of the national economy.”

In 2015, the mining sector generated 98% of the DRC’s exports, 25% of the government’s revenue and contributed more than 21% of its gross domestic product, the letter stated.

“While the draft revision initiated in 2013 had — following the holding of tripartite sessions — led to its abandonment, the industry was subsequently surprised when in May 2017, the government decided to relaunch the process for the revision of the mining code by directly submitting the draft to parliament without holding any consultation or tripartite session that would have enabled to bridge opposing views and analyze the relevant recent developments in the sector,” the companies stated.

The companies also pointed out that the government had yet to repay its VAT liabilities, which in December amounted to US$1 billion.