“We are talking about the development of a country, not the shareholder rent of a particular pension fund,” Gecamines chairman Albert Yuma Mulimbi told a mining conference in Cape Town, South Africa at the beginning of February.
He was referring to the Democratic Republic of Congo’s (DRC) decision to revise its 2002 mining code to redress what he called the current “imbalance” of existing mining contracts.
To remove any doubt about his intentions, Yuma Mulimbi added: “Let it be clear, the moans of our partners who fear to displease their shareholder boards do not concern us.”
For many years, the Congolese have felt the original terms of the mining code were too generous in favour of foreign mining firms. At the time, they were designed to attract investors back after a long and heinous civil war.
Yet today, despite abundant reserves of cobalt – a core component in batteries – and copper, and record level of production reached last year, local people have received little benefit from mining. In fact, the DRC still ranks among the poorest nations in the world, at 176 out of 187 countries, according the World Bank.
Since 2012, the mining industry has been consulting with legislators to make the necessary revisions, yet what emerged in January after five years of deliberation has had mining firms up in arms.
“Draconian” was the term used by Randgold Resources CEO Mark Bristow. He also said that, if the government does not revise the “ill-considered code”, Randgold, which has investments in the Kibali mine, will enforce its rights for international arbitration.
The new mining code
The new terms for mining firms include an increase in royalty rates from 2% or 2.5% to 3.5% for non-ferrous and precious metals, rising to up to 10% for minerals considered strategic by the government. On 14 March, Reuters reported that an advisor to the prime minister has said cobalt and coltan will both be declared strategic minerals, which means royalties paid on both will jump from 2% to 10%.
Particularly controversial is the creation of a special 50% tax on excess profits, defined as profits made when a commodity exceeds by 25% the price used in the bankable feasibility study.
Equally contentious is a scrapped ten-year stability clause enshrined in the 2002 code, on which many licences, including the Kibali mine, were bought under.
The clause effectively protected companies already invested in the country from tax increases for ten years.
Furthermore, a 10% capital stake of a company is to be held by Congolese private citizens. There is also a requirement for a company to spend 0.3% of its turnover on local development needs, as well as factoring in additional transparency requirements.
Due to the changes, Gecamines has said it will revise all contracts with its international partners, starting from the second quarter of 2018, to be completed by the beginning of 2019.
Impact on foreign investors
Mining firms were seeking stability from the tax reform, overall, and this has not been delivered, according to Deloitte international tax partner James Ferguson.
“Firms are price takers, they don’t set the price of the commodity; they accept volatility because they can make a return over a long period,” says Ferguson. “If they [mining groups] are going to build a mine and spend $2bn-3bn doing so they need to get a return over a period of anywhere between ten to 30 years, so they need stability in the tax system.”
The royalty demands, he adds, effectively accelerate the government’s cashflow ahead of the companies’. Whereas, with a profit tax, the government doesn’t get any money until the company has recouped all the cost of investment and any losses it has made at the beginning.
“If royalties go up to 10% because a mineral is considered strategic, that is 10% of a company’s earnings paid to the government regardless of whether it has made a profit or recovered its capital costs,” says Ferguson.
“This act will significantly reduce investments in the country as the investor won’t be able to make a return as most of the profits will go to government.”
Where will the money be spent?
Founder and executive chairman of Ivanhoe Mines, Robert Friedland, whose company is developing the Kamoa-Kakula copper deposit in partnership with China’s Zijin Mining in the DRC, said his company would pay higher royalties and taxes, but only if the money is guaranteed to benefit locals.
“Will the money go substantially to the people affected by mining, who often live in rural areas, or spent in central government on defence or the legal system?” asks Ferguson, “If locals lack essential services then there is pressure on the mining company to make additional investment in corporate social responsibility.”
Problems with corruption in the DRC have been widely reported on. NGO Global Witness previously published a report entitled ‘Glencore and the Gatekeeper’, which alleged that Glencore had participated in shady deals involving controversial Israeli businessman Dan Gertler, a known close friend of DRC President Joseph Kabila. Gertler is currently sanctioned by the US Treasury.
Furthermore, US-based advocacy group The Carter Center published a report showing that almost $750m allegedly paid by international mining companies to the state-owned miner Gecamines between 2011 and 2014 were missing from its accounts.
“Corruption has been an issue in government as well as in industry, but to build for the future of a country you need to start with a clean slate and actually have terms that are good on both sides,” says Ferguson.
What could also help, Ferguson adds, is if mining companies better engage with local communities to show the benefits that mining provides the country. This way, when elections come around, raising taxes against the sector isn’t such a quick and easy way to win votes.
“Companies produce a lot of detailed reports and information, but it is difficult to understand compared a local politician on Twitter,” he says.
Feeling the benefit of mining in the DRC
Mining projects must benefit both local people and the foreign investors making the upfront investments. This is the best route to create a harmonious and thriving mining sector.
This has not been achieved in the DRC yet and precedent suggests that it’s unlikely this new mining code will either. Raising taxes quickly and in ways not clearly set out rarely works.
For example, as Ferguson points out, when Zambia increased its royalty rate on copper from 6% to 20%, investments dried up until they changed the mining code back again.
Given the corruption-entrenched culture of Kabila’s Government and that the bill permits government officials to own mining companies, it seems there are few guarantees that millions more in resource money won’t be lost to corruption.
If local people don’t start to see benefit from the sector, it will create additional risk for foreign miners.
Furthermore, upcoming elections later this year and growing unrest and ambiguity around whether President Kabila, who was supposed to step down in 2016, will stand yet again are increasing tensions and creating even more uncertainty.
For now, the DRC’s mining sector faces huge challenges and this mining code isn’t going to solve them alone and could quite possibly make them worse.
“If this bill becomes law, it will probably create costly legal complications, while its implementation could be delayed, possibly leading to the need for further revisions in the near future,” Natural Resource Governance Institute director of legal and economic programmes Amir Shafaie and his colleagues wrote in an open editorial in The Financial Times.
“The gap between law and practice…could further widen.”