DRC Mining: Can the success of Katanga be replicated elsewhere?

Changes to mining code may dampen appetite for new projects.

Nathan Allen

Mutanda-Copper-Mine-BLOG

LUBUMBASHI, DRC – Katanga’s geological wealth has long been well known. In 1892, following initial exploration of the region, the Belgian geologist Jules Cornet noted in his diary: “I would not dare to venture a figure concerning the enormous quantity of copper present at the sites I have recently examined: if I did, it would sound all too outrageous and unbelievable.” Subsequent missions confirmed that his enthusiasm was entirely justified. While in Chile, the world’s largest producer of copper, giant open pit mines are exploiting deposits with average grades of 0.5%, miners in Katanga rarely touch anything below 5%.

In more recent times, the introduction of a clear regulatory framework in the form of the 2002 Mining Code paved the way for a decade of prolonged investment in new projects. Between 2000 and 2014, total copper production rose from around 30,000 mt/y to 1 million mt/y. According to statistics from the Extractive Industries Transparency Initiative (EITI), the sector now accounts for some 64% of tax revenues and 99% of exports. GDP growth in the country reached 8.5% in 2013 and is forecasted to rise to 8.6% in 2015, largely thanks to these increases in mining activity.

Nowhere is this success more apparent than in the Katangan provincial capital of Lubumbashi. “Compared with 10 years ago Lubumbashi has undergone a thorough transformation,” explained Sarah Trice, general manager for South African safety equipment providers North Safety. “Now the roads are paved, there are streetlights on the main avenues, the electricity supply is more stable and the business environment is far more open to international companies.”

Unsurprisingly, in a country that suffers from a crippling lack of infrastructure, the central government is keen to reproduce the success that Katanga has enjoyed in other provinces, many of which are largely unexplored.

The Kasai Orientale and Kasai Occidentale provinces, for example, hold vast deposits of diamonds, but exploitation remains woefully inefficient. According to data from the Kimberley Process, in 2013 the DRC was the second largest producer in Africa by volume, extracting approximately 15.7 million carats. However, total production was valued at just $138 million. This compares poorly with other major producers, such as Angola, which produced 9.3 million carats but generated over $1 billion in revenues. The reason behind this discrepancy is the prevalence of small-scale mining in DRC’s diamond production. Artisanal miners lack the necessary technology to produce the higher quality stones that command higher prices. It is therefore necessary to attract industrial mining to the province in order to extract the maximum value from its resources.

In the northeast, Randgold and AngloGold Ashanti’s $2.5 billion Kibali joint venture in Orientale Province has served as a case study, demonstrating that it is possible to bring a world-class mine to fruition far away from the traditional hub of Lubumbashi. Fully operational since 2014, Kibali has already increased the DRC’s total gold output by 250%. Work is now being carried out to develop the underground section of the mine. The pit is estimated to hold 12 million ounces (oz) and production is forecasted to reach 650,000 oz per year by 2018, which would make it one of the largest gold mines in the world.

While Randgold’s success has undoubtedly buoyed the mood of investors, many in the industry fear that proposed changes to the mining code could undo all this good work and put a hold on new developments.

Following the growing trend towards resource nationalism among African nations, there are calls from across the political spectrum to increase the industry’s contribution to the state. Politicians feel that while mining has boomed over the past 10 years, tax receipts have not seen a commensurate rise. The proposals include an increase in state equity participation in new projects from 5% to 10%, a rise in corporation tax from 30% to 35% and a general increase in royalty payments across all minerals. “Companies already operating in DRC could probably live with the legislation although they would not make any further investment; the only real change would be a hike in royalty payments. However, this would have a very negative effect on future investments,” claimed Charles Brown, chief operating officer at Tiger Resources.

Simon Tuma Waku, vice chairman of the DRC Chamber of Mines believes that these changes, if enacted, could set the industry back 10 years. Speaking at the Chamber’s annual general meeting in Kinshasa, he claimed that the return on gold projects would drop to “virtually zero.” Meanwhile, investors in copper/cobalt projects would stand to earn just 20% of total cash flow over the life of a mine, compared with the government’s 80% take.

At present, the Council of Ministers has approved a draft that will be taken forward to Parliament for further debate. This means that there is still an opportunity for miners to lobby the government before the bill is passed into law. While most players in the industry are open to a fair renegotiation of terms, there is a strong feeling that there has not been enough consultation with the private sector and that now is not the time to make sweeping changes to the operating environment. “Once we have resolved the pressing issues of power and logistics, then it might be more appropriate for revisions,” added Brown.

While the DRC may host some of the world’s most attractive geology, if miners are unable to operate profitably then they will swiftly divert their investments toward other jurisdictions. At a time when commodity prices are severely depressed and capital for mining projects is hard to come by, the government is playing a risky game by flirting with such a serious shakeup.

This article was written as part of research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2016. To participate in this report, please contact author Nathan Allen at nallen@gbreports.com or Molly Concannon at mconcannon@gbreports.com, +243(0)826300684.

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