Legacy issues versus frontier potential
Dealmakers move towards borders to pursue discoveries
First-movers in compliance and prospecting
Licence flipping, a lack of transparency, legacy issues and limited opportunities for discoveries are squeezing mining M&A out of the Democratic Republic of Congo’s (DRC) copper-synonymous Katanga Province, sources have said.
Katanga has been under the spotlight as DRC has attempted from 2008 to implement the Extractive Industries Transparency Initiative (EITI); accommodate the US Securities Exchange Commission (SEC) adoption of Section 1504 “Cardin-Lugar” provisions to the Dodd Frank Act; and fought Revenue Watch and UN challenges over state mining payments and permitting. The DRC is a Candidate EITI member and hopes to graduate to full-member status in accordance with its latest Validation deadline of 1 March 2013.
The province’s problems, some peculiar to the region and others symptomatic of a wider malaise, have seen majors and junior miners alike, particularly in gold, take on projects elsewhere in the country.
A profitable province
Heralded for its copper belt, Katanga plays host to big names including 74.4% Glencore-owned Katanga Mining, as well as Freeport McMoran and Lundin Mining.
However, sources considered that while globally dominant players have somewhat insulated the province from DRC’s high risk status, majors with large land positions block others from entry and discovery.
One mining banker said many investors will only invest in Katanga, not the rest of DRC, given the province’s “mining history, relative stability and presence of majors”.
Smaller players that have acted quickly to put roots down in the region appeared in agreement. Mark Stowell, chief executive of copper player Mawson West, said his group is “at home in Katanga” and will be there long term.
Ben Smit, chief executive of London-based private gold miner Benzu Resources, of Pella Group, said DRC’s governance challenges are less evident in Katanga given the strong homogenous demographic of social groupings which comprise its provincial government.
DRC citizen Kalaa Mpinga, chief executive of Mwana Africa, the first London-listed and African-owned and managed miner, said favourable changes are afoot.
He compared Katanga’s development to “1990s Ghana or mid-1990s Tanzania”.
But it has not always been a smooth ride for investors and speculators in Katangan copper. In 2010, DRC state mining vehicle Gecamines seized and cancelled First Quantum’s Kolwezi Tailings project licences in the province, selling them on to affiliates of Israeli businessman Dan Gertler. Gertler parties then sold the licences to Eurasian Natural Resources Corporation (ENRC) at a considerable profit in a deal worth US$175 million, sparking a First Quantum law suit for $2 billion, which ENRC settled for $1.25 billion.
A lot of First Quantum’s problems gave authorities reason to attack mining licences, Smit said, and therefore Katanga’s’ legal environment acts as a litmus test. A lawyer specialising in African mining said the effectiveness of implementing the Organization for the Harmonization of Business Law in Africa (OHADA), which will unify business law across DRC member states, will likely hinge on the province.
The mining banker agreed that OHADA is a qualitative criterion in investment decision-making but added that investments are driven by asset quality, management teams and mine permitting. Other sources suggested these requirements may be better met elsewhere in DRC.
Banro, Randgold and golden eggs
DRC’s Rwanda-, Tanzania- and Katanga-bordering South Kivu Province, for example, is home to the Twangiza-Namoya gold belt. Canadian gold group Banro hit commercial production at the Twangiza mine on 29 August having originally, as chief executive Simon Village put it, entered the DRC in 1996 as an explorer with not only assets to upgrade, but staff to hire and a business to start in an unchartered region of enormous potential.
Banro’s history in the DRC encapsulates the country’s potted geopolitical backdrop. In 1998, Laurent Kabila’s government expropriated Banro’s licences. An out-of-court settlement in 2002 saw the company receive full ownership of its Twangiza, Namoya, Kamituga and Lugushwa projects. Today Banro has its “hands full with the whole belt”, Village said, adding that the miner will continue to establish producing projects and associated hydropower facilities in 2013.
Smit agreed that Kivu has a lot of resources, but many uncertainties, perhaps now appeased by Banro’s success. Stowell suggested it might be an opportune time to follow Banro, adding that northern DRC houses good projects and prospecting opportunities not yet staked out by large caps, unlike Katanga.
Considering Orientale Province, bordering Uganda and South Sudan, Mpinga noted that gold majors Randgold Resources and AngloGold Ashanti are operating in what used to be one of DRC’s most dangerous regions. Around the multimillion-ounce Kibali gold mine, in which Randgold and AngloGold hold a 45% stake each and DRC’s government holds the remaining 10%, the miners have “contributed to the restoration of peace and stability”, Mpinga said. Mwana also has a gold project close to Kibali.
Randgold chief executive Mark Bristow said Katanga has many legacy issues. There is “clean-up to be done in the [Katanga] copper belt” with which Kibali is not encumbered because its gold industry is new, he explained. One concern worth addressing is ownership, he said; while the DRC owns 10% in Kibali, the lion’s share of copper deals promise relatively little-or-no government equity. The government did not respond to requests for comment.
However, Bristow does not believe Katanga’s issues are an isolated case. They are tantamount to an African problem “where things start to work and then everyone wants to kill the goose that laid the golden egg”, he said.
Diversified miners in search of big discoveries will be increasingly mindful of local compliance and governance requirements as they enter and de-risk mining provinces outside Katanga. Juniors and mid-tier miners have spotted an opportunity to capitalise on early-mover advantage after Randgold and Banro, while Katanga is scrutinised as legislative and transparency-related changes materialise.
From bolt-on tenure secured adjacent to majors, to eventual consolidation of groups in possession of top assets and land positions, DRC-active miners chasing game-changing multi-commodity assets will continue to do more deals outside Katanga.
By Nuala Gallagher, mergermarket
Nuala Gallagher is a mining correspondent for mergermarket, a news service of Financial Times Group. She is also on the executive committee of Women in Mining UK (WIM(UK)) and the former editor of The International Resource Journal. This article was previously published for mergermarket subscribers.