Few places have had their mineral wealth catalogued to the extent of the Democratic Republic of the Congo (DRC), which has made a name for itself largely as the shared owner of Africa’s Copperbelt, but also as a prolific producer of tin, diamonds and, to a lesser extent, gold.
That coverage has historically focused on ‘conflict minerals’ but since the end of the civil war in 1999 has had more to do with the mining industry’s obsession with unlocking unrealised mineral potential in new and exotic places.
Despite a background of political instability, corruption and third world infrastructure, the DRC has seen the contribution of its mining industry grow considerably based on its vast mineral wealth and a World Bank structured mining code from 2002.
The hope would have been that a decade-long mining boom would have alerted political minds to a greater opportunity should they successfully manage down the multitude of risks miners face when investing in the DRC. Such was the case in many neighbouring African countries.
But we have been disappointed. Lessons learnt over the past 10 years are few and demonstrable insight into the workings of an industry on which the country relies so heavily remains limited.
Rather than building on the foundation laid by the rocks and a reportedly strong code to slowly improve the scale and contribution of its mining sector, politicians have sought to tinker with the mining code and done nothing to address political and infrastructure concerns.
For miners hoping at the onset of the boom that the DRC would grow into a safer and savvier mining jurisdiction, the best they could possibly expect now is the status quo.
Geologically blessed
More than half the country is dominated by the Congo Basin, which occupies the centre and west of the DRC, though these rocks are largely irrelevant to the mining industry. Of far greater consequence are the rocks to the east, and specifically the southeast.
Running from southeast to northeast and tracking the borders with seven different countries are a prolific copper and cobalt region, a tin region, and a significant gold region. Diamond mining is well established to the eastern interior.
The Copperbelt, which straddles southeastern DRC and northeastern Zambia, is a mineralised geological feature famous in not only in Africa but across the world.
It was formed when base metals deposited during basin rifting were compressed and remobilised during the Lufilian Orogeny (550 million years ago), according to GECO, a geological research group backed by the Belgium government .
Copper-cobalt mineralisation was redeposited along stratigraphic boundaries and fault systems, with a carbonate sequence hosting the richest known stratiform mineralisation across two levels.
The resulting mines have made the DRC a major copper and cobalt producer to the point where it overtook Zambia in 2013 as Africa’s leading copper player with 970,000t, according to Statista.
When last year’s numbers are ratified, the DRC is expected to have broken 1Mt. Almost half the world’s cobalt reserves are in the DRC for more than 65% of production in 2012, according to the British Geological Survey.
The tin producing region runs as an elongated grouping of mines from the immediate north of the copperbelt up the country’s eastern portion, stopping short of the Eastern Province in the north.
It follows the Kibaran Orogenic Belt, which is heavily populated with granite intrusions that started forming almost 1.4 billion years ago and continued until the so-called ‘tin granite’ intrusions just under 1 billion years ago, according South African mining consultant, MSA Group.
The DRC was the 10th largest producer of tin in 2012, according to the British Geological Survey, with some 2,500t, though production is very much in decline and has been for several years for political reasons.
Gold production in the DRC is underpinned by mines in the northeast of the country, but the greenstone belts that host the economic gold deposits start midway up the eastern border. Those same belts run eastward across the African Great Lakes and host the major gold deposits that have reenergised the Tanzanian economy over the past 15 years.
Though there are several known economic gold deposits, world class discoveries eluded the DRC until relatively recently. Gold production in 2012 was about 2,400kg (85,650oz), down from 3,500kg the previous year, but in 2013 when the massive Kibali mine roared into life the country produced some 4,000kg. Once 2014’s numbers are ratified, the DRC could see a four-fold year-on-year increase.
The Congo Craton is also home to diamondiferous kimberlites, with the Mbuji-Mayi province at its centre. In 2012, diamond production was almost 16Mct making the country Africa’s second-most significant diamond miner behind Botswana, according to Russian part-SOE, ALROSA, but this number is in decline.
Who’s doing what
Given the minerals on offer, it’s hardly surprising that the DRC has established some major operations across its primary mining regions. What is slightly more surprising given the political risk profile, or at least the perception thereof, is that several of these operations are run by major mining groups.
Glencore runs two copper-cobalt operations in the Katanga region – the well-established Katanga operation and the more recently developed Mutanda mine – that together produced 89,000t of copper and 3,500t of cobalt in the first quarter for an annualised rate of 355,000t and 14,000t respectively.
These numbers are likely to improve as the ramp up at Mutanda continues and improvements at Katanga are bedded down.
The major has another operation in the Copperbelt, across the border in Zambia. The Mopani mine however is in decline, producing 22,000t in the first quarter against more than 31,000t in the previous quarter – a 36% drop.
US mining major Freeport-McMoRan is the majority owner (56%) of the Tenke Fungurume operation, which it runs in cooperation with its joint venture partner Lundin Mining (24%). The operation produced more than 105,000t of copper in the first half along with some 7,260t of cobalt.
The Tenke Fungurume JV’s cumulative investment in the project is some $3 billion, making it the largest private investment in the country’s history. A phase two expansion was completed in 2013 and the JV continues to invest in exploration and technical studies with the aim of enlarging the operating base further still.
Chinese SOE-backed and Hong Kong-listed MMG became a significant DRC copper player when it bought junior success story, Anvil Mining, in 2012. The Kinsevere project developed by Anvil is expected to produce about 70,000t of copper for MMG this year.
Most known gold deposits in the DRC have delivered resources in the order of 1-3Moz, falling short of the threshold at which most majors need to get involved (circa 5Moz). The exception that has changed opinions on the calibre of discovery possible in the country is the Kibali mine.
Kibali was discovered by Australian explorer Moto Gold Mines, which pulled together a 22.5Moz resource before Randgold Resources (45%) and Anglogold Ashanti (45%) teamed up to buy the junior in 2009.
Kibali is in the far northeast of the DRC near the borders of South Sudan and Uganda. It is an integrated underground and open pit operation with a 7.2Mtpa processing plant, which delivered first gold in September 2013. With more than 525,000oz produced in 2014 and 600,000oz targeted this year, Kibali dominates the DRC’s gold industry.
Though not in production there is another big fish that, given its pedigree, rates a mention in the company of Glencore, Freeport, MMG, Randgold and Anglogold.
Robert Friedland’s Ivanhoe Mines is developing the Kamoa copper deposit, which has been described as Africa’s largest high-grade copper discovery and the world’s largest undeveloped high-grade copper discovery. It has an indicated resource of 739Mt grading 2.67% copper for 19.7Mt of metal and a further 227Mt of inferred resources grading 1.96% copper for 4.45Mt of metal.
Ivanhoe brought in Zijin Mining Group earlier this year to help finance what is expected to be a $1.4 billion build. Zijin will contribute $412 million for a 49.5% stake in the holding company, which owns 95% of the project.
The operation targeted by a prefeasibility study would produce 300,000t/y of copper for 30 years and has an after-tax net present value (8% discount) of $2.5 billion using a $6,600/t copper price.
More important from the DRC’s perspective is the location of Kamoa to the west of the Kolwezi deposits, essentially extending the known length of the Copperbelt.
Smaller producers have also successfully found a home in the DRC. Notable players including ASX-listed Tiger Resources, which is ramping up production at its Kipoi operation toward 50,000t/y and looking to develop a bolt-on operation at Lupoto.
TSX-listed Mawson West was until recently producing copper and silver from its Dikulushi underground mine, which has been placed on care and maintenance pending a mine review. The company has received financial support and continues to ramp up its Kapulo operation toward a targeted 15,800t/y of copper and 78,000oz/y of silver.
Banro Corporation has brought two gold mines into production – Twangiza and Namoya – both with production profiles of around 120,000ozpa.
Listed explorers include Regal Resources, which has completed a scoping study at its Kalongwe copper-cobalt project; and gold hopefuls Armadale Capital and Kilo Gold. A burgeoning phosphate sector has attracted Minbos Resources and Allamanda Trading.
That the DRC has managed to attract not only junior exploration groups synonymous with risk but also junior producers and major mining groups speaks to the fact that it is possible to do business in the DRC despite its risk profile.
It is noteworthy, however, that Rio Tinto and BHP Billiton – the two more conservative major mining houses – continue to steer clear. Remember Anglogold Ashanti and Randgold are Africa specialists, Freeport is not adverse to political risk for the right reward as its Grasberg (Indonesia) investment demonstrates, and Ivanhoe’s other locales of choice are South Africa and Mongolia.
Lessons not learnt
Like many neighbouring African countries and many other third world and developing nations abroad, mining makes a major contribution to the DRC economy – some 12% of GDP not including the businesses and services supporting the sector, according to the World Bank.
And, like many of those countries, the DRC found itself renegotiating its stake in the mining industry in the face of record commodity prices.
A quick look over to West Africa provides abundant examples of countries that have renegotiated not only an equitable deal but a sensible deal, too. This was not always done on the first pass and the fall in commodity prices helped many countries better understand the cyclical nature of mining and the need to establish a cycle-proof mining framework. Such was the case in Guinea and Cote d’Ivoire, which both revised their revisions.
While no one would begrudge the DRC’s decision to take a second look at its mining code – established in 2002 at a time when commodity prices were just lifting off a cyclical low and the country was fresh out of a civil war – there is a fear that the need for fair, cycle-proof terms is being overlooked.
The mining code review had been ongoing for two years when discussions stalled in the first quarter, mainly over tax hikes and an increase in the mandatory government stake.
“Mining companies have called on the government to change the existing 2002 code as little as possible, arguing that low taxes and royalties are needed to compensate for Congo’s lack of infrastructure and political instability,” Malte Liewerscheidt, senior Africa analyst at Verisk Maplecroft, told Mining Journal.
“Proposed royalty increases on copper and cobalt revenue (from 2% to 3.5%), gold and other precious metals (from 2.5% to 3.5%) and diamonds (from 4% to 6%) are particularly feared by investors.
“Doubling the mandatory government share in new mining projects to 10% raises questions whether Kinshasa could muster the resulting financing obligations while an envisaged profit tax increase from 30% to 35% would dent company profits.”
Randgold chief executive Mark Bristow told Mining Journal the existing 2002 Mining Code is already the “most aggressive on the continent” and, despite an initial failure to recognise that fact, politicians were coming round the realities of implementing the proposed changes.
“The perception amongst politicians was that the 2002 code hasn’t really delivered much to the economy, which is completely untrue,” Bristow said.
“If you model the [proposed] code at a realistic gold price, which is above today’s gold price, any investor in the gold industry and to a lesser extent the copper industry would be asked to pay 100% of the capital for zero return – of course that will never happen.
“The harsh reality is the proposed changes don’t work. It took a while but [the government] is starting to appreciate that.”
Though Bristow was confident that key politicians were cognitive of the need for reasonable terms, the proof will be in the pudding.
As the mining community waits with bated breath for a resolution to the mining code dispute, it is also keeping an eye on what looks to be a deteriorating political environment in the DRC.
President Joseph Kabila has attempted to push an amendment to the constitution through parliament that would allow him to run for another term when elections next take place. The move has led to protests in the streets of the capital, Kinshasa.
Meanwhile, there has been a handful of poorly executed coup attempts in the military, underpinned by long running divisions.
Jesper Cullen, lead analyst for Sub-Saharan Africa in the Intelligence & Analysis department at The Risk Advisory Group, told Mining Journal political stability was a major concern for investors in the DRC with a coup in the near-term a genuine possibility.
He said an election would stabilise the situation and was due in the next two years, though that timetable was very much subject to change.
Risky business
This heightened volatility builds on a long running foundation of political instability and corruption; and equally well-established security and infrastructure concerns.
According to the Fraser Institute’s most recent survey of the mining industry, the DRC ranks 62nd of 122 regions surveyed for ‘Investment Attractiveness’ and 94th for ‘Policy Perception’, which is described as a report card for government mineral sector policy. These rankings are surprisingly high given the DRC topped Verisk Maplecroft’s global Corruption Risk Index this year, which includes almost 200 countries.
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The mining code review had been ongoing for two years when discussions stalled in the first quarter, mainly over tax hikes and an increase in the mandatory government stake
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According to a panel led by former UN secretary general Kofi Annan, at least $1.36 billion in potential revenues were lost from 2010-2012 through discounted sales of mining assets to offshore companies. Meanwhile, Liewerscheidt questioned the conduct of state-owned mining company Gecamines, which continued to undermine the regulatory regime by breaching disclosure rules in the sale of licences and stakes in mining joint ventures.
If it’s physical risk you’re after, the DRC won’t be caught short there either.
The concept of conflict minerals is well documented in the DRC and is up there in notoriety with the diamond trade in Sierra Leone. The powers of the central government in the DRC generally fail to reach far into the provinces, where armed groups regularly fight for control over mineral rights.
The situation is at its worst in North Kivu and South Kivu at the heart of the tin region, where tantalum is also extensively mined, often under duress through small scale artisanal operations.
“Violent clashes between armed groups, government, and UN forces pose a direct risk to company personnel and threaten supply chain continuity, especially in the Kivu provinces,” Liewerscheidt said.
“Compliance with the US Dodd-Frank Act concerning the conflict-free origin of tantalum, tin, gold and tungsten is extremely difficult to achieve due to ongoing security risks and the lack of comprehensive certification mechanisms.”
The fighting has generally kept its distance from the copperbelt but the re-emergence of a separatist movement, the Bakata Katanga, has threatened to upset the applecart there, too. Attacks in Katanga’s capital city, Lubumbashi, are reason for concern and may increase in frequency as Bakata Katanga and other separatists seek to disrupt the election process.
And, for the complete suite of risks, miners in Katanga are facing serious power shortages that DRC Prime Minister Augustin Matata Ponyo last year reportedly described as an “energy crisis”.
Freeport McMoRan has indicated future investments into expansions at Tenke Fungurume are at risk should the company not be assured the energy infrastructure can stand up to the job. Other operations are being asked to restrict output to manage energy supplies.
For its solution, the government is looking longingly toward the Inga 3 Basse Chute hydropower project, which could deliver 40,000MW at an estimated generation cost of US$0.03/kWh. That would make it one of Africa’s most reasonable sources of energy. Some 1,300MW would be available to mining companies in the Copperbelt.
The World Bank likes the idea and has approved a $73.1 million grant. The grant, together with $33.4 million approved by the African Development Bank, will provide world-class expertise to help DRC develop its hydropower potential, estimated to be the third-largest in the world after China and Russia.
The project does appear to be a winner but it is still several years from becoming reality. There is no other sustainable relief for miners in the interim.
Reviewing this comprehensive roll call of challenges for miners in the DRC, it is clear to see why the industry expects any revisions to the mining code to adequately reflect the risks taken rather than punish any hard won successes.