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China-Africa: Copperbelt key to the race for the 21st century

By Patrick Smith
Posted on Monday, 16 September 2019 14:01, updated on Tuesday, 8 October 2019 14:49

Chibuluma copper mine, in the Zambian copperbelt region. REUTERS/Rogan Ward/

In the race for high-tech resources, Chinese miners outplay their Western rivals.

Africa’s copperbelt – which straddles the border of Zambia and the Democratic Republic of Congo – is the target of a high-stakes race for the key components of the 21st-century economy.

The zone produces 70% of the world’s cobalt, an essential component of electric car batteries and cell-phones, together with a cornucopia of lithium, nickel and rare earth minerals.

Beijing’s hi-tech lead

China is already leading the world in the production of electric car batteries and hi-tech components. Now thanks to a bold acquisition strategy, its mining houses will secure supplies of the key minerals for the new economy.

China’s companies are looking at the potential sale of assets such Vedanta’s Konkola Copper Mines (KCM) in Zambia and Glencore’s mothballed Mutanda mine in Congo-Kinshasa.

  • Buying those assets and consolidating political ties with Lusaka and Kinshasa would enable China’s companies to extend control of supply chains in the high-tech sector and reshape the region’s mining sector at the same time.

Beijing backs its corporates

It fits in with a shift in China’s strategy in Africa to focus more on private companies’ operations rather than state-backed mega projects, as set out by Yang Jiechi, President Xi Jinping’s Africa envoy, on trips this month to Kenya and Nigeria.

  • Western companies’ dominance in the copperbelt is fading, due to political and business changes against the backdrop of an escalating economic war between the US and China.

Growing scrutiny of international oil and mining companies is forcing businesses to change tack.

One of the world’s biggest commodity-trading and production companies, Glencore, faces a raft of corruption investigations:

  • The Swiss-based company is suspending production at its Mutanda copper and cobalt mine in the DRC.
  • This challenges the country’s new mining code.
  • It is also a bid to stabilise the price of cobalt, which has halved in the past 18 months due to over-supply. Market watchers say that Glencore, facing a US Department of Justice (DOJ) investigation into corruption in four countries including the DRC, Nigeria, and Brazil, is looking for an exit.

Why Mutanda matters

Mutanda holds the world’s largest known cobalt deposits and produced a fifth of global supplies of the metal for the batteries of electric vehicles.

China’s expansion comes as many Western producers are vulnerable to takeover.

  • China Molybdenum bought the DRC’s largest copper producer, Tenke Fungurume, from the US producer Freeport-McMoran in 2016 and upped its stake to 80 % earlier this year when it bought private-equity company BHR’s 24% share for $1.1bn.
  • CITIC Metal Africa and Zijin Mining have acquired substantial stakes in Ivanhoe’s Kamoa-Kakula and Kipushi projects in DRC.
  • Eurasian Resources Group (ERG), also hit by serial litigation, may sell its Frontier copper mine in the DRC, blaming the new mining code. Several Chinese suitors are queuing up.

Lusaka’s Beijing axis

Zambia has long had Chinese mining companies – small and medium scale operators – on its copperbelt. President Edgar Lungu government’s has racked up far bigger debts to Chinese companies than previously admitted.

Sources in the finance ministry in Lusaka say creditors are losing patience over arrears. Chinese companies don’t like debt rescheduling and would prefer collateral, perhaps mining assets.

As economic problems mount, President Lungu is running out of options.

Chinese companies could benefit from the liquidation of Vedanta’s Konkola Copper Mines (KCM), at the centre of a political row in Lusaka.

  • They are also watching First Quantum Minerals, the country’s largest producer at Kanshansi, and Sentinel mines.
  • The government-owned ZCCM Investment Holdings, which has a 20% stake in the country’s biggest mines, wants to liquidate KCM, claiming that Vedanta is lying about expansion plans and should pay more tax. Yet Chinese companies are reluctant to buy disputed assets. ZCCM’s claims have to go through arbitration, which could then force a sale.
  • Jiangxi Mining has quietly purchased about 9.9 % of FQM, listed on the Toronto Stock Exchange. Its purchases have come through derivatives and direct stock purchases and have so far cost about $800m. It would take about $2bn to give Jiangxi a shot at majority control.
  • Glencore’s Zambian mine, Mopani, may be ready for auction. Industry insiders say Glencore’s two majority-owned DRC companies, Mutanda and Toronto-listed Katanga Mining, which operate the Kamoto Copper Project, are being prepared for sale.

Glencore navigates Kinshasa politics

On 7 August, Glencore announced that Mutanda was no longer economically viable, citing the new mining code and higher taxes (AC Vol 59 No 12). It said it would mothball the mine at the end of the year. Mutanda’s closure will tighten supply and boost prices.

Glencore’s threatened mine closure may help its negotiations with Kinshasa: it wants an exemption to the 10% strategic mineral levy on cobalt and to the super-profits tax in the mining code.

Cobalt closure is a political hit

The DRC’s tax revenues will plummet if Mutanda is closed; Glencore paid the government $626m in taxes from Mutanda in 2018.

President Felix Tshisekedi’s standing would be hit by the job cuts and the loss of revenues resulting from a two-year stoppage.

  • Ex-president Joseph Kabila and allies still call the shots in the mining industry.
  • Albert Yuma, close to Kabila and the architect of the Mining Code, has just had his contract renewed as chairman of Gécamines, the state-owned mining firm

Mutanda, once the jewel in Glencore’s strategy to convert itself into a hybrid miner-trader and take a bet on the future of electric vehicles, has taken a hit with the price crash.

Glencore’s Gertler factor

At the heart of the Glencore’s problems in the DRC is its disputed relationship with Israeli businessman Dan Gertler, who was placed on a US sanctions list in December 2017.

At the time, the US Treasury said the billionaire had amassed his fortune through hundreds of millions of dollars’ worth of “opaque and corrupt mining and oil deals” in the DRC.

  • Gertler had used his close friendship with Kabila “to act as a middleman for mining asset sales in the DRC, requiring some multinational companies to go through Gertler to do business with the Congolese state,” said the Treasury.
  • As a result of Gertler’s actions, the Treasury said, between 2010 and 2012 alone the DRC, one of the world’s poorest countries, may have lost more than $1.3bn in revenues from the underpricing of mining assets that were sold to offshore companies linked to Gertler.

The sanctioning of Gertler created problems for Glencore as it owed him around $200m in royalties. Paying Gertler those royalties would put them in violation of US sanctions, so the account was frozen.

  • After a political battle in the DRC and a legal battle in Europe, Glencore resumed its royalty payments to Gertler in euros, rather than US dollars, to circumvent the sanctions. It said this was the only way to retain control of its assets in the DRC.

But the issue soured Glencore’s relationship with the government in Kinshasa. In the view of the US authorities, by continuing to pay royalties to Gertler Glencore is violating sanctions and perpetuating the financial ties between Gertler and Kabila.

Shuffling the seats on the Glencore board

As it tries to reach settlement with the Department of Justice, Glencore is trying to restructure. Two of the company’s old Africa hands – Aristotelis Mistakidis, head of copper, and Alex Beard, head of oil trading – are out.

Many expect this to be followed by the retirement of managing director Ivan Glasenberg, an apprentice of commodity trading king Marc Rich.

  • However, Glencore’s argument that, whatever its regulatory problems, its exit from the copperbelt would hand control of many strategic minerals to Chinese companies, has failed to convince US officials.

Bottom line: Over the next five years Chinese companies will step up investments in the copperbelt for commercial and strategic reasons as Western companies quit.

The full length version of this article first appeared in Africa Confidential.

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