Mining: Record breakers

By Gregory Mthembu-Salter in Kinshasa
Posted on Tuesday, 21 April 2015 14:44

Last year was an outstanding time for Congolese mining output, with production records smashed for copper and gold.

Whoever ends up in power will still need their mines to keep producing

The country’s chamber of mines estimates that copper output for the year reached an unprecedented 1,029,800tn, up from an estimated 920,000tn in 2013, and also much higher than neighbouring Zambia’s estimated output of 708,000tn.

A beaming Simon Tuma-Waku, vice-president of the DRC’s chamber of mines, told the African Mining Indaba in Cape Town in February: “For the second time in a year, we have beaten our southern friends.”

Tuma-Wakuaddedthatin 2014 investment in mining exploration in the DRC was higher than in any other African country.

He added, however, that at a mere $300m, exploration funding in the DRC was nonetheless much lower than in the US, Canada and Australia.

In the gold sector, the country’s recorded production increase was even more dizzying, with output rising from 6.2tn in 2013 to 19.6tn in 2014.

In both domains, large private-sector investments are driving the production boom.

In the copper sector, the main producers are Katanga Province’s Tenke Fungurume – which is majority owned by US major Freeport-McMoRan – Mutanda Mining and Katanga Mining, both of which are majority owned by Swiss commodities giant Glencore.

Tenke produced 203,000tn of copper in 2014, Katanga Mining 152,000tn and Mutanda Mining 197,000tn.

Mutanda’s production was an impressive 31% higher than the previous year. The total investment in the three mines is reckoned to be around $6bn.

Kibali stands out

In the gold sector, the star performer is Kibali Gold, which is operating in Orientale Province in the north-eastern corner of the country.

Kibali is owned jointly by Randgold and AngloGold Ashanti, which between them have invested $2.5bn in the project.

Kibali produced 6.6tn of gold in 2014, up from just 1.1tn in 2013.

Randgold chief executive Mark Bris- tow is bullish about Kibali’s prospects, declaring with pride in early February during the announcement of the company’s fourth quarter results: “Kibali is on time and on budget. Our costs are below $700/oz and we have no debt. We are profitable. Our company as a whole is in its fifth year of production growth – pretty impressive in a three-year bear market.”

Some way behind Kibali is Toronto-listed Banro Corporation, which produced around 2.7tn of gold from its Twangiza mine in Sud-Kivu Province in 2014.

The company, however, says it is on course to start production this year at another site, Namoya, in neighbouring Maniema Province.

International commodity price de- clines, however, have meant that these big numbers have not always translated into higher earnings.

The average copper price during the first two months of 2015 was just $5,756/tn, 16% lower than the 2014 average.

The consensus among analysts is that copper prices will remain depressed during 2015 and 2016, though most anticipate an increase in 2017 and 2018 driven by improved global economic growth and increased copper supply constraints.

The average gold price has followed a similar trajectory.

During the first two months of 2015 it declined to $1,239/oz. Analyst forecasts for 2015 and 2016 vary immensely.

Investors are cautious and are showing a marked reluctance to allocate funds to miners whose production costs exceed $750/oz.

While producers the world over fret about the downward direction of the copper price, another major constraint for Congolese miners in particular is a chronic shortage of electricity.

Bucking the national trend, Tenke’s annual copper output fell 3.4% in 2014.

According to a senior executive at the company who requests anonymity: “It was all due to a lack of power. We would like 105MW of electricity to operate our project, but we only get 69-82MW, and that’s not including unplanned outages and cut-backs.”

Tenke’s solution has been to invest $250m in the refurbishment of Katanga Province’s Nseke hydroelectric power plant, which should be capable of generating 260MW once it is fully operational in late 2016.

Power boost

Glencore, meanwhile, has been working on the refurbishment of two units at the Inga hydroelectric power plant on the Congo River, more than 1,700km away.

The company has invested around $300m in the project, and officials there say they expect it to yield dividends within the next 12 months.

The government is forcing Glencore and other miners in Katanga to invest in upgrades to transmission lines from Inga to Katanga, which are already at near capacity and are unable to cope with a significant increase in output.

Kibali is so remote that there was never a prospect of it receiving electricity from the grid, and so the development of its own power source has been an integral part of the project from the beginning.

Much of the capital expenditure by Randgold and AngloGold at Kibali has been on hydropower, which is currently peaking at 17MW.

This is still not enough, however, forcing a continued reliance on diesel generators, which remain a major component of Kibali’s costs.

Mining companies and the ministry of mines have been arguing with each other for over a year without agreement about the government’s planned review of the mining code.

The current mining code was introduced in 2002, but the Congolese authorities argue that it has not created enough tax revenue.

Mines minister Martin Kabwelulu submitted proposals for a new code to the cabinet in mid-February, infuriating the chamber of mines, which said he broke off negotiations without addressing its concerns.

This also sparked strong debate among Kabwelulu’s colleagues, many of whom said he had been too generous to mining companies, particularly regarding royalties.

In the draft code, Kabwelulu’s proposal for a 3% mining royalty was increased to 3.5%, the minimum government stake in new mining projects was set at 10% and the so-called stability provisions, which relate to the period of time that must elapse before contracts can be renegotiated, is to be reduced from the current period of 10 years to five.

The national assembly was scheduled to debate the proposals in March.

While the country’s political class obsesses over what will happen leading up to national elections in 2016, mining executives profess to be unconcerned by questions of the presidency.

“Whoever ends up in power will still need their mines to keep producing,” said one manager relaxedly on the sidelines of a breakfast hosted by the Congolese mines ministry at February’s Mining Indaba.

That may be so, but many miners acquired their assets via controversial middlemen like Israeli mogul Dan Gertler, all with intimate associations with President Joseph Kabila’s inner circle.

This will mean awkward questions and likely threats of contract cancellations should an opposition leader succeed in replacing Kabila. ●

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