Chetan Chug, Chairman, Somika

Since 2011, Somika has also had its own mining operation, Kimin.

Chetan-Chug-BLOGSomika was established in the DRC in 2001, before most other foreign mining houses entered. How has the company grown since that time?

Chetan Chug (CC): I have been in Congo since 1990. In the early days, my business was more focused on trading soft commodities. When the mining code was introduced in 2001, allowing for the private operation of mines, we recognized that this would be a more sustainable long-term option than simply trading.

We are part of the Vinmart Group, which is a diversified group of companies with operations across the DRC. Somika is the metal processing arm of the group, offering a range of copper and cobalt products to the market. Under the Somika umbrella we also have another company, Mining Metal Resources, which mines tin, tantalum and tungsten. In the beginning, we were a small family company but over the years we have grown to include a broader mix of shareholders. We have had to adapt to this growth by modifying our business model and diversifying our product portfolio.

Approximately 80% to 90% of our yearly output is sold via fixed-price, off-take agreements. We sell the remaining through spot contracts. This avoids us overcommitting our production and allows us to hedge our position and leverage any major price fluctuations in our favor.

What is the source of the copper concentrate processed by Somika? Do you operate your own pits?

CC: Since 2011 we have had our own mining operation, Kimin, which operates the Kinsanfa pit. There is a Dense Media Separation (DMS) plant at the site to produce concentrate, which is then shipped to Somika where we transform it into cathodes. We also purchase excess concentrate from other mines in the area, sometimes through off-take agreements, sometimes at the spot price. Today, mechanized mining has almost entirely replaced small-scale miners, and we do not buy from them anymore. In 2014, we produced 10,000 metric tons (mt) of copper cathodes and this year we expect production to rise to 15,000 mt.

Running an SX-EW plant requires a considerable amount of energy. Is Somika connected to the grid?

CC: In 2011 we came to an agreement with SNEL whereby they would provide us with 22 megawatts (MW), as our operation expanded to full capacity. Unfortunately, the power supply crisis of the last three years has prevented us from receiving the full amount. On average, we probably receive around 7 MW, which curtailed our growth. We are only running at around 50% capacity today and only rely on our own generators as a last resort.

While copper prices have dropped over the past three years, cobalt has been more stable. Has this en-couraged you to focus more on cobalt processing?

CC: Historically, cobalt prices have fluctuated quite dramatically from $5/lb to $60/lb, but the past three years have seen more stable levels of between $12/lb and $18/lb. The DRC is the world’s main supplier of the metal, satisfying between 60% and 70% of global demand. As cobalt is a main by-product of most of the large copper mines, production has been relatively stable. Nevertheless, it would not be profitable for any company to function as a pure-play cobalt producer.

What was the rationale behind founding Mining Metal Resources (MMR) as a separate entity in 2008?

CC: During the 2008 global financial crisis, copper and cobalt prices plunged dramatically. We decided to diversify into other minerals and established MMR to work with tungsten, tin and tantalite. This means that we currently trade in five different metals, which reduces our risk of overexposure to volatility in one commodity. Extraction is focused in Katanga, and we are currently mechanizing our operations with a view to securing 80% to 90% of our minerals from mechanized mines. They are all in remote areas, where artisanal mining is common, so we are trying to work with the local communities to incorporate them into our production chain and provide a more reliable source of income.

As Somika mainly processes rather than extracts minerals, will the proposed changes to the mining code have an impact on your business?

CC: Any changes to the mining code will have an immediate impact on our business. Ultimately, extraction and processing are all combined, as any change that increases costs at a given point in the value chain will be detrimental to overall profitability. So far, the current mining code has proved to be very effective at encouraging investment. If the operating environment were perfect, producers would not have a problem paying slightly higher royalty rates, but this is not the reality. Any shakeup to the regulations will cause investors to think twice.

How do you hope to see Somika and the local mining sector grow in the coming years?

CC: Our vision for Somika is to grow into a solid mid-tier producer and continue to add value to our current production. In the next 10 years, we would like to become a five metal producer, adding value in all our operations through the empowerment of national human resources.

This interview was part of research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2016. A pre-release report on the Central African Copperbelt was released in May 2015 and can be accessed here. To participate in this report, please contact Molly Concannon at mconcannon@gbreports.com or +243(0)826300684.

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