Betting on DRC’s mineral boom

By Gregory Mthembu-Salter in Kinshasa
Posted on Tuesday, 30 January 2018 16:02

Mineral commodity prices are ticking up once more, and the cash-strapped Congolese government is increasingly betting on rising mining revenues to come to its fiscal rescue. Because of the budget deficit and a shortage of foreign exchange, the central bank has been putting pressure on mining companies to repatriate 40% of their export earnings pursuant to a 2007 government decision. That, and a proposed reform to the mining code, have caused tensions between the Kinshasa government and the country’s mining companies.

On the production and price fronts, things are looking up now. Copper prices currently hover around $7,000/tn, sharply up from $4,500 just a year ago. And, improving matters further, the country’s recorded copper exports were 15% higher during the first half of 2017 than during the same period of 2016.

The cobalt price is rising too, buoyed by recent announcements by governments around the world, including the UK and China, of their plans to switch from petrol and diesel vehicles to electric cars. The London Metal Exchange cobalt price was $27/lb in October 2017, up from $13/lb a year earlier. Cobalt is an important component of vehicle batteries, with each battery containing an estimated 5-15kg of the metal. By 2030, global cobalt demand is anticipated to be nearly 50 times higher than what it currently is, and the Democratic Republic of Congo (DRC) is home to more than 60% of the world’s cobalt reserves.

As a result, Congolese miners have been busy. The central bank reported that copper production jumped 9.3% in the first nine months of the year, hitting 831,000tn. Cobalt and gold production rose, 18% and 5.7%, respectively. The net effect was a hefty 60% increase in commodity export receipts from the DRC during the first half of 2017 compared to the first half of 2016, to more than $6bn.

Absent donor funding

And the tax take is rising, too. The government raked in just under $200m in mineral export taxes in the first half of 2017, 29% higher than during the first half of 2017, and the figure edged to just over $200m during the second half of 2017. But with the rest of the economy in the doldrums, the overall tax take for the first eight months of 2017 was $1.9bn, 23% lower than during the same period of 2016. Figures for the fourth quarter of 2017 should be healthier though, and the government is betting that 2018 will be better still.

That will help it to weather yet another year of near absent donor funding. The country’s traditional donors are continuing to sit on their hands, hoping to push the Congolese government to proceed more swiftly towards a political transition after President Joseph Kabila failed to hold elections in 2016.

The International Monetary Fund (IMF) conducted its first formal mission to the DRC in two years in November, but is still a long way from agreeing any new loans. One of the main conditions of any fresh lending from the IMF is a clear indication that the government is committed to elections, but despite the publication of an electoral calendar just ahead of the IMF visit, promising a presidential poll in December 2018, there remains considerable scepticism that this will be respected.

Nicholas Staines, the IMF resident representative in the DRC, explains: “It is true that there has been a big improvement in export receipts and this is already translating into higher tax revenues. It is also true that there will be big increases in both next year.” But he cautions that the government cannot fix its fiscal problems with mineral export receipts alone. The government should not bank too much on that because non-mining tax revenues look set to remain depressed, so the overall picture will probably be much less impressive.

Shortly before the beginning of the national assembly’s final session of the year, President Joseph Kabila urged deputies to approve a revised mining code, something the assembly has been trying – and failing – to do since 2015. The revised code envisages higher mining royalties for the state and a change in the stability clause – meaning the period after which contracts can be amended by the state – from the current 10 years to between three and five years.

The country’s Chambre des Mines, a body representing mining companies, is strongly opposed to the changes, arguing they will shake investor confidence and render some mines unprofitable at a time when sentiment has already been undermined by continuing political uncertainty. John Kanyoni, the vice-president of the Chambre des Mines, says: “It is not just the mining royalties […] it is all the taxes and fees we have to pay. When you add them all up, it comes to over 15% of our exports. And meanwhile, in Zambia it is just 6%. So we are not competitive.”

‘Serious consequences’

The main issue for Kanyoni, though, is the stability clause: “We simply cannot accept a stability clause of three to five years. We want it to remain where it is, at 10 years. How can anyone make a serious investment here with the possibility that in just three years the terms of the deal could change?”

There is no indication that the government has any appetite for revisiting its proposed revisions, raising the prospect of the mining code being pushed through the national assembly despite the objections of the Chambre des Mines. Kanyoni, however, says he is confident that this could not happen. “They cannot bring this code in without us. If they do that, the consequences will be serious. Mining companies may pull out.”

Discussion of the revised mining code will shine the spotlight once again on mining companies’ payments to the state’s revenue authorities. Yet just as important, if not more so, are the massive payments that Katanga-based copper and cobalt miners continue to make to state-owned mining companies, and particularly the parastatal Gécamines. In early November, The Carter Center, a US-based non-profit human rights group founded by former US president Jimmy Carter, released a detailed report based on five years of research entitled ‘A State Affair: Privatising Congo’s Copper Sector’.

The report concludes that joint ventures between state-owned mining company Gécamines and international mining houses entitle Gécamines to $262m in payments annually. Yet 75% of the $1bn Gécamines was contractually entitled to between 2011 and 2014 “cannot be reliably tracked to Gécamines’ accounts,” the report explains. It does not say where the money has gone, but Gécamines insiders claim that most of the money never reached the company.

Daniel Mulé, who advises The Carter Center, adds that the government needs to look into other areas in order to be sure that revenue goes where it is supposed to: “The DRC is eager to revise the mining code’s fiscal regime to mobilise more state revenues […] Yet little attention has been focused on revenues to the state’s mining companies. These revenues largely escape public or parliamentary oversight, and Gécamines returns less than $750,000 per year to its sole shareholder, the DRC state.”

This article first appeared in the December/January 2018 print edition of The Africa Report magazine

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