Mining companies struggle with Congo's new mining law
The Democratic Republic of Congo is home to two-thirds of the world’s known cobalt deposits and the biggest producer of copper in Africa, but mining those minerals has become more difficult for many major mining companies because of a new mining law that voids existing agreements and increases costs to mining companies.
Bloomberg report that mining companies such as Glencore Plc and Randgold Resources have lobbied the government for six months to no avail. On June 8,. Congo approved the final part of the bill, and despite earlier indications from President Joseph Kabila that the rules might be eased, the law hasn’t been weakened in any way.
While the constitution bars Kabila from running for a third term, he has refused to rule himself out as a candidate in elections later this year, and his campaign to wring more revenue out of mining companies is proving popular with voters. A meeting in March in which chief executives including Glencore’s Ivan Glasenberg pleaded their case to Kabila was used by state media to portray the president as a wise power broker standing up for the national interest.
The June 8 decision means the miners are now liable to pay a 50 percent tax on so-called super profits and up to a 10 percent royalty on cobalt production, in addition to other changes. In a violation of the terms of the previous legislation, the government has also chosen to ignore stability clauses in their contracts that should have protected Glencore, Randgold and others from the most material changes for 10 years.
Few alternatives now remain open to the companies. They could try to cut individual deals to gain exemptions, but any walk back on the terms of the law now looks extremely improbable. More likely, they could challenge the changes at international arbitration -- as they have threatened to do -- leading to protracted legal battles.
The final option is the nuclear option of stopping all production. While this would ratchet up pressure on the government, which depends on mineral exports for much of its revenue, it also risks damaging the mining companies. The expected boom in cobalt demand being brought about by the electric car revolution could be snuffed out before it really gets going if supply constraints force automakers to find alternatives.
A glimmer of hope may come from the decision Monday by Chinese conglomerate, Citic Metal Co., to spend about $555 million for a 20 percent stake in Ivanhoe, which is developing Africa’s biggest copper discovery in Congo. While the deal stems from Ivanhoe Chairman Robert Friedland’s longstanding relationships in China, it also suggests that the Chinese, who have invested heavily in Congo in the last decade, believe the impact of the new mining law can be managed.
“It brings one of China’s largest commercial interests inside the DRC,” said Paul Gait, an analyst at Sanford C. Bernstein & Co. “It shows that, even though Western equity markets are placing far too high a risk premium on Congolese assets at present, this is not the case in China.”