NEW YORK (ResourceInvestor.com) -- The Democratic Republic of Congo has long held the promise of becoming one of Africa’s most significant mineral producers. As a nation shattered by violent civil unrest for over a decade, and corrupted by a kleptocrat for decades before, the promise of Congo’s mineral development has stalled – even as scores of international resource companies have waited hungrily for stability to eventually return.
As the country moves toward its first democratic election in more than 40 years this June, several junior and senior mining companies have leapt at the chance to exploit some of the world’s most significant mineral finds. With vast amounts of copper, cobalt, diamonds and gold – among others – the Congo is possibly the world’s most important mineral vault that has yet to be opened.
Centuries of Underutilization
As a Belgian colony from 1877 until 1960, the vast resources of the Congo Free State (as the Belgians named it) were plundered in the most ruthless fashion. King Leopold II of Belgium is said to have accumulated a vast personal fortune from the ivory and rubber trade – while some 10 million Congolese perished in the name of Leopold’s mercantilism.
Riding the wave of Pan-African independence that arose in the 1950s and 1960s, Congo took its independence from Belgium. Shortly after socialist leader Patrice Lumumba was named prime minister, violence fueled by ethnic rivalries and conflicts with remaining Belgians broke out across the nation.
Several mineral-rich provinces seceded, and the country fell into complete disarray. When Lumumba turned to the USSR for assistance to reclaim power, the United States quickly became involved as part of its efforts to contain Communism. Over the next four years – and with the help of millions of dollars in U.S. aid and arms - Col. Joseph Mobutu gradually consolidated power across the nation.
As Mobutu removed any vestiges of democracy from the Congo, he ensured the consolidation of mineral rights within his regime – razing the economy in the process.
Mobutu nationalized a range of mineral producers and forced out several foreign investors. In the spirit of “African authenticity,” he also renamed the nation Zaire – and changed his own name to Mobutu Sese Seko.
Mobutu proved an able student of King Leopold, looting the national treasury and aggregating natural resources for his personal portfolio. From the mid-1990s, Mobutu’s power was threatened by growing civil unrest, and a spill-over of violence from neighboring Rwanda. He also lost South Africa’s support after it withdrew from Namibia, so obviating the need for its secret military bases in south western Congo.
Rebel leader Laurent Kabila seized power in 1997, named the country the Democratic Republic of Congo, and ruled in another dictatorship until his assassination in 2001. His son, Major General Joseph Kabila, was installed as his successor – and gradually began loosening the political and civil restrictions in the country. While civil strife has continued, in 2003 a two-year timeline was set by all parties for the DRC’s first democratic elections since 1960.
Mining Reintroduced
While the mining industry historically accounted for about a quarter of Congo’s GDP, and nearly three-quarters of total export revenues, the industry foundered in the face of increasing violence and a near-total economic collapse in the late 1990s. While the government was successful in attracting several Canadian juniors in the last days of the Mobutu regime in 1996 and 1997, the bulk of these companies ceased operations in the face of escalating violence.
Renewed interest in mining in the DRC didn’t come about until 2003, following the implementation of a new mining code, drafted in conjunction with the World Bank. The new mining code ensures property holder and exploration rights – and did wonders for massaging the nerves of nervous mining executives.
Several major international mining firms have since begun operations in the Congo. Just weeks ago, Anglogold Ashanti [AU] announced a stepped up exploration plan of 10,000 square kilometers of land in the Northern Ituri.
Anglogold, which expects to spend $5 million in 2005 – and $30 million to $40 million in total Congolese development, is conducting its exploration through a joint venture with state-owned Okimo (which holds the JV’s majority stake). While exact production plans likely remain several years in the future, the company has said that it expects gold resources could be “substantial.”
Still, all has not been rosy for Anglogold’s Congolese explorations. The company was forced to evacuate workers in March due to escalating violence, and also recently admitted to paying off rebels in order to ensure employee safety.
Russian state-owned diamond miner Alrosa, which controls some 25 percent of the global market, has also set it sights on the Congo. Alrosa recently established a partnership with Israel’s DGI Group to market rough Angolan diamonds in Israel. Considering that DGI’s affiliated companies currently resell some 80-percent of the rough diamonds produced in the Congo, it’s been widely reported that Alrosa hopes to leverage its new partnership to get a stake in the Congolese diamond industry
In fact, after meeting with DRC President Kabila, Alrosa CEO Alexander Nichiporuk was recently reported as saying the company would establish a presence in Congo in cooperation with the state-owned company Minerie de Bakwange (MIBA). MIBA, a joint venture between Belgian company Sibeka and the DRC government, is currently the only commercial diamond producer operating the country.
Juniors betting their futures
With the gradual democratization of the Congo, several bold mining companies have negotiated exploration and production stakes in the nation. In the face of declining violence, these mostly junior explorers have bet their corporate coffers on the reemergence of a stable Congolese government.
Adastra Minerals [AIM/TSX: AAA], formerly American Mineral Fields, has been one of the major beneficiaries of the DRC’s potential stability. Under Mobutu’s rule, the company acquired the rights to develop the Kolwezi Tailings cobalt-copper project in southern Congo. Drilling and development on the property stalled in the midst of escalating violence in 1998, and as the first Kabila regime questioned the validity of Adastra’s Kolwezi agreement.
Adastra and one-time joint venture partner Anglo American [AAUK], suffered through a great deal of uncertainty in the following years. Adastra began to pursue other exploration projects before a renegotiation of ownership rights in 2001 led to the company finally solidifying its title in May 2004. As for Anglo American, its stake was bought out by Adastra in 2002 for $3.5 million.
Today, Adastra owns 82.5% of the Kolwezi Tailings project – although its stake is expected to be diluted downwards by some 20% if the World Bank’s International Finance Corporation and Industrial Development Corporation of South Africa go through with plans to exercise 10% shares of the project. The remaining interest in the project is owned by state-owned mining company Gecamines and the DRC government.
Adastra is billing Kolwezi as the world’s third largest cobalt deposit, with a 112.8 metric tonne resource grading 1.49% copper and 0.32% cobalt. The company is projecting operating costs at a $30.7/tonne, with production costs at $0.54/lb copper and $2.10/lb cobalt. Given historically reasonable price estimates of $0.80/lb copper and $10/lb cobalt, revenue per tonne would come in at $79.
Development of the project is expected to take between $300 million and $350 million, with construction slated to begin in 2006, and production starting in 2007 – with initial production of 5,500 tonnes of cobalt and 30,000 tonnes of copper per annum.
Whilst the infrastructure surrounding Kolwezi certainly cannot be considered extensive, the project is within several kilometers of an existing rail line that could be easily used for product shipment. In addition, an existing power station is nearby.
The biggest stumbling block for Kolwezi’s development will likely be a junior obtaining competitive financing for a project of that magnitude in still-fragile Congo. But with the anticipated support of South Africa’s IDC and the IFC, Adastra’s project will likely be loaned considerable legitimacy in the eyes of institutional investors.
While Adastra’s shares have suffered in the recent commodity slump, the company’s shares recently traded at C$1.90, more than double its 52-week low of last August. Canada’s investment community has also taken note of Adastra’s success by beefing up their investment coverage. In a recent analyst note, Canaccord calculated Adastra’s expected 62.5% interest in Kolwezi at $220 million, or C$2.75 per share (assuming a $45 million equity dilution for project funding).
Another Congo play, Toronto-based Banro [AMEX/TSX.V: BAA], in November 2004 launched a $10 million exploration budget for 2004-2005 to develop four wholly-owned gold properties set in the 210 km Twangiza-Namoya gold belt.
The main goal of Banro’s exploration will be doubling its current 2 million ounces in measured and indicated resources. The company has been no stranger to the DRC’s political unrest, given that its properties are located in the country’s politically fragile eastern region, and that the company had its titles to certain properties confiscated for a time under the first Kabila regime.
Currently, however, Banro is sitting pretty – with 25-year mining licenses and 10-year tax holidays on each of its properties, along with $10.2 million in cash and an additional C$11.2 available upon exercising options.
Banro also has the added benefit of having some of mining’s top names in its management. Chairman Simon Village is an industry veteran and former head of the World Gold Council, while President and CEO Peter Cowley is a former managing director of Ashanti Goldfields. In fact, much of Banro’s staff was plucked from Ashanti after that company’s merger with Anglogold.
Australia’s Anvil Mining [TSX/ASX: AVM] is among those companies with the most advanced projects in the Congo. Anvil has been producing copper since late 2002 from its remote Dikilushi mine, which was put into initial production with capital expenditures of only $6.2 million. Indeed Anvil’s logistics achievement in getting Dikilushi into production ranks as one of the great feats of project development.
In 2004, the company produced some 5,500 tonnes of copper (12.2 million pounds) and 502,000 ounces of silver at a relatively high cash cost of $0.74 per pound of copper – after silver credits.
With the recent $8 million expansion of the property and increased access to high-grade ore, copper production is expected to rise to 20,000 tonnes annually, while costs are expected to decline by more than $0.20 per pound.
Owing to the mine’s location and the Congo’s lack of processing facilities, copper produced at the mine is trucked some 2,500 kilometers to a smelter in Tsumeb, Namibia.
Production at Dikulushi is expected to continue through 2010.
Haywood Securities recently estimated the net project value at $19 million, assuming a long-term copper price of $0.80 per pound.
However, Anvil doesn’t intend to end its life in the Congo with Dikilushi. The company announced late last year that it had entered into an agreement with state-owned Gecamines to acquire a 70% interest in the Mutoshi copper-cobalt property for $12.5 million. The project is located nearby to Adastra’s Kolwezi Tailings property.
Looking forward
While hopes are high for those companies involved in the Congo, only time will tell whether the situation in the country will truly stabilize. Fighting continues to persist in the eastern portion of the country, and the country has been ravaged by famine and disease.
UN humanitarian chief Jan England was recently reported as saying that 1,000 people die each day from violence, disease and malnutrition in the country despite a massive peace-keeping intervention. However, the majority of the country remains reasonably stable.
On Monday, Congo adopted a new constitution which paves the way for an election date to be confirmed. From a speculator’s point of view, Congo’s window of value seems to be narrowing.
