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Tuesday, July 15, 2014
Henry Bonner
Congo Doing OK on Mining, 12 Years after Reform -- Imran Patel, Kilo Gold
In 2002, the Democratic Republic of Congo (DRC) instituted some major revisions to its mining code.
Imran Patel has close ties to the mineral exploration sector in the DRC and currently serves as an Advisor
to Kilo Goldmines Ltd., a well-followed Canadian based and listed exploration firm with operations in the
Congo.
I asked: Should we consider investments in the DRC, a country that is considered high-risk for
investors?
Historically, since independence in 1960, mining in the Congo was controlled by state-owned
enterprises. Its not until 2002, when the new mining code was introduced, that private investors and
private groups could acquire exploration and mining rights through the mining registry, called the
Cadastre Minier, which is overseen by the Ministry of Mines.
Through to the early 1990s, the DRC had a large mineral-based economy, with significant copper and
cobalt production in the Katanga province, tin mining in the Kivus, Maniema, and northern Katanga,
diamond mining in the Kasais, and gold mining in the Orientale province. Artisanal mining activity was
also present in addition to the state-controlled production. So when mining investors first started coming
into the DRC in the late 1990s and early 2000s, they focused on the low hanging fruit which largely
consisted of state-owned deposits and historically producing mines. In many instances, these investors
entered into joint venture agreements with the state-owned companies and gained majority ownership
stakes in these projects in exchange for providing development capital and technical expertise.
These assets often had proven reserves and existing infrastructure that needed rehabilitation. Hence, this
low-hanging fruit served as the primary focus of private investors. These were not green fields or
grassroots exploration stories; instead, they were developing or re-developing assets and bringing known
deposits into production. For instance, Phelps Dodge and Lundin Mining partnered with Gecamines (the
state-owned copper producer) and began re-developing the world-class Tenke-Fungurume mine.
Subsequently, Phelps Dodge was acquired by Freeport McMoran, which continued the investment push
by bringing the mine into production and is currently undertaking an expansion of production capacity.
Gecamines similarly entered into joint ventures with various other companies, foreign and domestic
owned.
While known deposits were coming online or being expanded in the Congo, some exploration firms also
raised money to seek out undiscovered mineral deposits. Although the Congo is considered rich in
minerals, the war-torn country had little exploration activity before the new mining code was established.
Thanks to modern exploration techniques backed by extensive historical geological information, there is
reason to believe that the potential for multiple significant new discoveries in the area is high. Many
major mining firms have spent considerable amounts on exploration projects, especially in the Katanga
province.
The Kamoa deposit, which was discovered by Robert Friedlands Ivanhoe Mines, is a world-class copper
project discovered in 2009. You also had companies like Glencore, Trafigura, and Randgold come in with
major investments, especially after 2008 when global miners acquired various projects and mines from
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private investors, often Congolese entrepreneurs, in order to build these projects into mines. In Katanga
province, we saw a lot of investment inflows from Freeport McMoran and its partners, as it spent about
$3 billion on the Tenke Fungurume mining complex, with further investments still underway. Trafigura
was a major investor in Anvil Mining and funded the construction of the Kinsevere mine with a major
capital injection even during the Global Financial Crisis. Anvil was subsequently acquired by MMG, a
Chinese-controlled global mining company based in Australia. Glencore acquired control of Katanga
Minings Kamoto-KOV complex and went on to build the Mutanda mine, having spent $2 or $3 billion.
Since investors were allowed into Congos mining sector, most capital has been spent in the Katanga
province. We are now beginning to see exploration and development in other parts of the country, which
is a good sign, says Mr. Patel:
What we are starting to see now is large investment outside the Katanga province. We had the Kibali
mine commissioned by Randgold in September of 2013, which is located in the Northeast of the country,
in Orientale province. Randgold is on track to produce 550,000 ounces of gold this year from the Kibali
mine. Randgold and its partner AngloGold Ashanti invested nearly $2 billion in this project, and theyre
reinvesting cash flows to fund the large capex requirement to continue to expand production and as well
as the construction of several more hydro-power dams. All the while, they are aggressively exploring
around the region.
Randgold has also partnered with mining group Kilo Goldmines in a green fields exploration project
located in the Isiro and Ngayu Greenstone belts. Randgold has announced that it is finding geological
similarities on these projects with those found at Kibali, which is very encouraging. It is important to note
that the massive Kibali gold resources were discovered off of one soil sample.
Mr. Patel believes that the country is stabilizing and becoming safer for investors.
The prospects are good for the Congo. Investment risk is perceived as very high because of governance
and security issues, the latter almost exclusively contained in northeastern DRC and some parts of
northern Katanga. Those have been relatively isolated, and have not spread across the country. Although
progress and continued improvements in governance and stability would be welcome, we are not at the
brink of civil war.
In the last couple of years, there has been an aggressive campaign to flush out the various militias and
rebel for lack of a better word forces. One has to understand that there are various armed groups
from neighboring countries that have been hiding out in the DRC due to porous borders. These groups are
now being brought under control, with support from the United Nations and African Union. Security
concerns are actively being addressed and can be witnessed through recent actions undertaken to stabilize
what was once a conflict area. Were still seeing large investors, such as private equity groups,
multinational industrial groups, and large miners come in and deploy capital.
You are seeing a big presence from major miners, such as Freeport, Randgold, Glencore. With these
come large investments and improvements in infrastructure. Everybody is very confident that we will see
stability brought back into the northeast of the country. Roads are being built to connect to the East
African corridor, and a rail link is being planned as well. An existing railway, controlled by SNCC, the
state-owned rail operator, connects the DRC all the way to South Africa, which could see investments to
increase capacity. These improvements should facilitate further investment in the Congo.
In the last ten years or so, inflation has remained relatively stable. The economy has improved and
grown a lot. Sure, there are issues like the debates over changes in the administration, amongst the various
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political parties, and whether the constitution will be amended or not, but it looks like the direction of
investment is upwards, and I dont believe that much will cause this direction to reverse.
P.S.: Want to hear more from companies about opportunities available for investors in mining? Join us at
our inaugural Sprott Vancouver Natural Resource Symposium, from July 22-25, 2014. Register today!
http://www.randgoldresources.com/randgold/content/en/randgold-kibali-project
http://www.randgoldresources.com/randgold/content/en/randgold-kibali-update
http://www.fcx.com/operations/AfricaTenke.htm
http://www.ivanhoemines.com/s/kamoa.asp
http://www.mmg.com/en/Our-Operations/Mining-operations/Kinsevere.aspx
http://glencore.com/
http://www.kilogoldmines.com/our-business/gold/
Disclaimer: The companies mentioned in this article are for illustration only, and are not
recommendations. Sprott Inc. and its affiliated companies are shareholders in several of the
aforementioned companies.