DRC sounds sour note on Tenke

Words from the mouth of a mines ministry official of the Democratic Republic of the Congo have been anything but music to the ears of Freeport-McMoRan Copper & Gold (FCX-N) and Lundin Mining (LUN-T, LMC-N).

The official recently told Bloomberg news agency that the government is looking to more than double its stake in the massive Tenke Fungurume project, which is 58% held by Freeport and 25% held by Lundin.

Tenke is one of the world’s largest unexploited copper and cobalt deposits and the news story quotes deputy chief of staff at the mines ministry, Gaby Matshafu, as saying the state wants to increase its share to 45% from 17.5%, and boost a signing bonus to $250 million from $100 million. Those figures are identical to those in the original Tenke Fungurume contract — which Matshafu said the government wants to go back to — signed by Lundin in 1996.

That deal was amended in 2005, reducing the signing bonus and the DRC’ssharetothe current numbers.

The government has made it clear that it is looking for ways to bolster its revenues from mining by renegotiating contracts with companies.

But Paul Conibear, Lundin’s senior vice-president of operations and the former president of Tenke Mining before it merged with Lundin, says a crucial fact was left out of the Bloomberg article — mainly that the original deal exempted the company from paying any taxes, royalties or duties.

“Now we are coming under the new mining code’s fiscal terms. We’ve agreed to the 30 per cent corporate tax, a 2.5 per cent royalty and a 1 per cent export tax — all gross of sales, so it has no bearing on whether the project is profitable or not,” he says. “If you run financial models on a cash-flow basis, the Congo gets a greater sweep of cash flows now than in the original deal.”

It is clear that if the government were to take only the beneficial parts of the original deal without the tax, royalty and duty exemptions, the feasibility of the project –a key part of the country’s drive to gain economic strength — would become doubtful.

But in the Congo, brash talk from one bureaucrat doesn’t necessarily become reality, and Lundin and Freeport both say they have yet to receive any word from the government.

For its part, Freeport says the 2005 contract was negotiated transparently and “is fair and equitable, complies with Congolese law and is enforceable without modifications.”

Lundin called the agreement “legally binding” and added that the fiscal terms of its mining convention exceed the requirements of the Congolese mining code.

Along with the remarks about Tenke, Matshafu said the government wants 51% of all projects for which a feasibility study has not been finished. Functioning operations would largely be left alone, he said.

Katanga Mining (KAT-T, KATFF-O), Anvil Mining (AVM-T, AVM-A) and Moto Goldmines (MGL-T, MTOGF-O) have all submitted feasibility studies to the mines ministry.

And while Freeport and Lundin have also submitted a feasibility report, their project was labelled an exception by Matshafu — although he did say the government was open to negotiation.

Renegotiations with any targeted company, the government says, would draw from a report finished towards the end of last year that examined individual contracts. That report recommended that the government revert to the original terms of the Tenke Fungurume agreement.

Conibear says operations at Tenke are pushing ahead.

There are currently 5,500 workers on-site and roughly $100 million per month is being spent on development. The companies expect to be producing copper by the end of 2009, Conibear says.

In Toronto on the news, Lundin shares were off 2.5% or 13 to $5.07 on roughly 2.3 million shares traded. In New York, Freeport shares were off 46 to $90.63 on roughly 7.2 million shares traded.