DRC mines minister says contracts to be reviewed

saw their share prices drop recently after the DRC’s Minister of Mining and Energy Victor Kasanga announced that the government wants a bigger share of mining profits and plans to renegotiate all mining contracts.

The mineral-rich country has seen a resurgence of mining activity in the past few years. The DRC hosts roughly one-tenth of the world’s copper reserves and more than a third of the world’s below ground cobalt. The African country was once a major metals producer, through state-owned Gcamines, but mining activities were for the most part deserted during the country’s civil war, which began in the late 1990s and killed more than 4 million people.

Since the fragile peace established in 2003, several companies have ventured into the country. In April, the DRC government announced it was concerned mining contracts signed in the political chaos were inconsistent and illegal in the face of the country’s new mining code, and set out to review all contracts.

In a presentation to delegates at the Mining Indaba conference in early February, in Cape Town, South Africa, Kasanga said when the government started the reassessment process it expected to find only a few contracts in need of repair.

“We actually found that we had not a single contract that was properly constituted,” he said. “What was meant to be a minor corrective has turned out to be multiple, major surgery. And we don’t have enough surgeons.”

Contracts were classified as acceptable (A), containing significant flaws but fixable (B), or unable to be repaired due to serious flaws (C). Kasanga said all contracts ended up in the B and C categories.

“We intend to institute a simple appeal process whereby companies can present their cases for reclassification,” Kasanga said, though he was unable through repeated questioning to elaborate on the appeals process or on the review process itself.

In terms of contract renegotiation, many asked whether the process would be one of mutual consent. Kasanga responded that it would involve negotiation, but added a proviso.

“There were serious irregularities with many contracts, and so it’s up to (mining companies) to defend that we’re wrong,” he said.

The day of trading following Kasanga’s speech saw shares of several mining companies working in the DRC drop considerably. Anvil Mining (AVM-T, AVM-A), which operates three producing mines in the country’s south, fell $1.10 to close at $12.70. Lundin Mining(LUN-T, LMCN) lost 51 to close at $7.93, and Katanga Mining (KAT-T, KATFF-O) lost $1.51 to close at $13.02.

The list of common failures within DRC mining contracts, according to the ministry, starts with excessive internal rates of return. But in response to questions on how the DRC government determined that rates of return were too high, Kasanga said that projects “don’t need a high rate of return” to be viable and successful.

Other contract failures include massive undervaluation of assets, constraints on the power of the government to legislate the industry, lack of protection against transfer pricing, limitations to reasonable corporate governance and lack of empowerment of the government as a minority shareholder in mining projects, and feeble obligations on the part of investors.

At a breakfast meeting the morning after his speech, Kasanga was inundated with questions about the contract review process. Indeed, mining companies working in the DRC have been told little or nothing about the process and how it will impact their operations. The vice-president of investor relations for Anvil Mining, Robert LaVallire, said his company initially heard about the review process through the media, and subsequent contact has been equally lacking.

“This started eight months ago and we have not heard from them,” LaVallire said. “After the minister’s speech I went and asked for a copy of the speech, but they didn’t have one. I asked for an official statement, but there wasn’t one. Nothing to explain what is going on.”

Under pressure, Kasanga gave out one piece of concrete information: he said that within two weeks, all mining companies working in the DRC would be asked to Kinshasa to meet with the review board.

Questions were also swirling around the conference about the composition of the board: who would sit on it, what their qualifications would be, and how many it would include. One source said there would be 32 to 35 people on the board.