FEATURE: MINE Magazine – Overhauling the DRC’s mining code

The Democratic Republic of Congo has overhauled its mining code to try to benefit more from its natural resources, which includes the world’s largest cobalt reserves. The new terms, however, have shocked foreign investors. Despite firms lobbying the government to reconsider the terms, the code was recently signed into law – but what impact will it have on the Congo’s mining sector?

“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.

Read the full feature here

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