St. LOUIS (ResourceInvestor.com) -- The long-awaited shake-up in the Democratic Republic of Congo’s mining sector may finally be happening.
A government-appointed panel is due to release its report tomorrow on which mining contracts in the country remain “viable” following the government’s transition after the DRC’s 1998-2003 civil war - but a preliminary report was leaked this weekend, advising that 24 of the 61 mining contracts under review should be cancelled.
The panel began its review of the legality of the contracts in June. The contracts were classified into three categories: those that should be renegotiated, cancelled or remain untouched. The leaked report did not classify any companies as remaining untouched, according to sources.
Permits held by Freeport-McMoRan [NYSE:FCX], BHP Billiton [NYSE:BHP; LSE:BLT], AngloGold Ashanti [NYSE:AU], Nikanor [LSE:NKR] and Katanga Mining Ltd. [TSX:KAT] are included in the 37 contracts classified for renegotiation in the leaked report. Some companies listed were criticized for “irregularities” in licence negotiation and disrespect of the Congo’s mining code.
Several companies said that they had not heard anything officially from the DRC government and pointed out that it is the government - not the panel - that will make a final decision.
Anvil Mining [TSX:AVM; ASX:AVM] lost almost 19% today on the Toronto Stock Exchange on the report’s news that the firm’s rights to the Dikulushi copper-silver mine will be recommended for termination and its contracts with the Mutoshi and Kinsevere-Nambulwa properties will be recommended for renegotiation. The company issued a statement saying that it has heard nothing from the DRC government in regards to the preliminary report.
“Anvil confirmed that it has received no written communication from the Minister of Mines or the commission (or any other government body in the DRC) in respect of renegotiation or termination of any agreement to which Anvil or any of its subsidiaries is a party,” the press release stated.
“Anvil understands that the commission is to report to the Minister of Mines and that the commission is mandated to issue recommendations only and does not appear to have the power itself to renegotiate or terminate any contract. Accordingly, Anvil can offer no comment on whether any of its contractual arrangements in the DRC will actually be terminated or renegotiated. “
Not the First Time…
The DRC is estimated to hold one-tenth of the world’s copper reserves and about one-third of the world’s cobalt. The country has produced as much as 475,000 tonnes of copper a year in the past, although output has decreased in the past 30 years.
Under President Joseph Kabila, the government launched its review of mining contracts earlier this year to make sure all were legal and fair to the state.
In late August, the DRC revoked Central African Mining & Exploration Co.’s copper and cobalt mining licences - essentially knocking out CAMEC’s pending [AIM:CFM] $1.4 billion takeover bid for Katanga.
The DRC stripped London-based CAMEC of its rights to the C19 concession due to “serious irregularities in the original issuing of the licences,” according to a Congolese Justice Ministry press release.
“The judicial decision has been taken to revoke and cancel the licences held for the area known as C19,” the press release read. “The rights to mine the C19 area revert to Gecamines, the state-owned mining company.”
CAMEC maintained that there was “no legal basis” for the revocation and argued that the DRC did not take the proper steps as requires by law to revoke the permits.
An Agreement With the Chinese?
In September, China agreed to loan the DRC government $5 billion for mining and infrastructure projects, including a new Chinese-Congolese joint venture mining company - leading some to speculate that revoked licences will be awarded to Chinese companies.
But Philippe de Pontet, an analyst with the Eurasia Group, told Resource Investor he does not believe a majority of terminated contracts would be handed over to the Chinese.
“I doubt that the Chinese will get a majority of revoked licences,” de Pontet said. “…I doubt it would be more than a handful. I don’t think the Congo wants to alienate Western companies.”
Octagon Capital analyst Hendrik Visagie does not even think any of the major companies will lose their licences. He told RI that he thinks the Congo is using its Chinese connections as a leverage point in negotiations.
“With the Chinese involved in the background, (the DRC) has a much stronger hand,” he said.
Visagie, who noted that he is not an expert on the Congo but an observer, said that he thinks it is likely that the companies ordered to renegotiate will choose to do so and not walk away.
“Ultimately, that’s the only choice they have, right?” he said. “…I think that they’ll have to negotiate.”
Effects on the Copper Market
Copper futures fell to a seven-week low today on the London Metal Exchange, dropping to $7,350 per tonne during midday trading. But the DRC’s decision regarding contracts could turn out to be good news for copper prices, according to Visagie.
“This will just delay the development of copper projects,” he said, which will drive traders to be bullish on both copper and cobalt.
“The world is depending on the Congo production to bring the copper supply and demand into balance,” Visagie told clients in a note.
Many of the miners in the preliminary report saw their share prices drop on today’s news. Anvil led the way, trading 15.38% lower at C$14.75 on TSE this afternoon, while Katanga lost 13.42% to C$11.68. Nikanor closed 4.77% lower at 588.50 pence on the London Stock Exchange. BHP lost 5.25% to $79.33 on the New York Stock Exchange, and AngloGold declined 0.54% to $42.71.
But de Pontet pointed out that the preliminary report will not be the DRC government’s ultimate decision. “This is not the final word,” he said. “The recommendations will not be accepted in total.”
Find a list of the contracts under DRC review as of 21 April 2007 here. (Document in French)
