China Gains, Congo Loses, In Mine Deal

The recently-announced copper/cobalt mining contract between the Democratic Republic of Congo and China--widely proclaimed as bringing $9 billion in development aid to the DRC--looks like another unfortunate deal for Congo. According to my back-of-the-envelope calculations, it is probably even more one-sided than American multinational Freeport McMoRan’s arrangement for Tenke Fugurume that I examined recently.

Last year, the Congolese Ministry of Mines announced that it had signed an agreement between China's Exim Bank, the Kinshasa government, Congolese state mining company Gecamines, China's Sinohydro Corp, and China Railway Engineering Corp forming a joint venture to develop the Mashamba West and Dikuluwe copper and cobalt deposits, concessions originally scheduled to be developed by Katanga Mining Ltd through a joint venture with Gecamines. The deposits are believed to hold ten million tons of copper and two million tons of cobalt.

While complete details of the contract are yet to be announced, what is known doesn’t look particularly profitable for the Congolese. On the surface, the deal sounds fine, with the Chinese agreeing to build $6 billion worth of roads and railroads and another $3 billion in mining infrastructure in return for rights to operate the mines. Gecamines is to own 32% of the venture, too, or nearly twice as large as the share it has in Tenke.

Using recent prices for copper ($4500/ton) and cobalt ($30,000/ton) and spreading production over the 25 year term of the deal, annual gross revenues of the mine will be $4.2 billion. Using the same operating cost assumptions as at Tenke, profits will be approximately $2.6 billion annually. Gecamines share could be $832 million.

The devil, though, is in the details. First, the $9 billion from the Chinese is not a gift—it’s a loan secured by the mines and to be repaid from the Congolese share of the operation’s profits. Generously assuming that the loan will be for the 25-year life of the project and carry an interest rate of only two percent (much less than I expect it will be), Gecamines will be on the hook for $540 million in annual debt service. That leaves only $292 million as the Congo’s share of the mine’s profits. By comparison, Gecamines’s deal with Freeport annually yields $100 million more.

Additionally, Gecamines has agreed to either give Katanga Mining deposits carrying nearly four million tons of copper and 200,000 tons of cobalt or pay the company $825 million as compensation for giving up the Mashamba West and Dikuluwe concessions. This additional cost, of course, further reduces the DRC’s take from the deal with China.

The IMF has objected to the deal on the basis that Congo is simply trading $11 billion in current debt (which the DRC hopes to have canceled) for $9 billion to the Chinese, and that the state guarantees of those loans are ill-advised at a time when the government can’t fund basic services, much less invest in the country’s growth. The IMF has said it might go along with the deal pending a study to make sure the mine’s reserves cover the cost of the infrastructure and if the terms are renegotiated.

The Chinese stand to gain in several ways from the deal as announced. In addition to their nearly $1.8 billion in annual profit from the mine, they’ll earn perhaps $4.5 billion in interest on the development loans—more if they carry an interest rate higher than two percent. There also looms the very large question of who will get the profits from the contracts to build the promised infrastructure. My assumption is that China's Sinohydro Corp and China Railway Engineering Corp will be awarded those contracts on a no-bid basis, which means they’ll take home another billion or so in profits on the project.

It would seem to me that a better deal for Congo would be a straight-forward mining concession with the Chinese along the lines of those typically negotiated by Zambia and South Africa, where the parastatal companies get 51% of the operation. The infrastructure could be financed from those revenues, open-bid contracts for the roads, railroads, and power facilities let to the lowest bidders (maybe even Congolese companies), and funds would still be left over for the state general revenue coffers.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Freeport Trucks Billions From Congo Mine

While the eyes of the world are drawn to the brutal war over an estimated $200 million in annual illegal mineral revenues in the eastern provinces of the Democratic Republic of Congo, negotiators for American and Chinese corporations are angling to control ten times that amount in mining contracts in Katanga Province.

Two multi-billion-dollar copper and cobalt contracts are currently being negotiated by the DRC Ministry of Mines. One is for Tenke Fungurume, which is managed by American mining goliath Freeport MacMorAn. It’s one of six existing contracts the DRC wants to renegotiate. The other is with two Chinese firms, Sinohydro Corp and China Railway Engineering Corp, and deals with two under-developed mines being transferred from Katanga Mining Corp. Neither one is finalized as of this writing, but both are problematic from the standpoint of what they actually mean for the economic health of the DRC. I’ll cover the Chinese deal in a subsequent post.

Freeport began shipping copper from Tenke Fungurume this year. The company expects the mine to produce 250 million lbs. of copper and 18 million lbs. of cobalt annually during the initial phase, with more than 400,000 tons of copper per year within five to seven years. At recently posted prices for copper ($4500 per ton) and cobalt ($30,000 per ton), this will generate some $2.7 billion in annual gross revenue at full production. When prices for the commodities rise—-as they surely will from today’s depressed levels—-this operation could easily gross $5 billion per year.

That’s not all profit, of course, but the margin is very high since production costs in the DRC are extremely low. Freeport projects that the net revenue generated by cobalt—-even at prices substantially below those achieved in the current market—-will more than cover the cost of recovering and shipping copper from Tenke. In fact, at $10 per pound (two-thirds the current price level) for cobalt, a 2007 feasibility study published in the African Review of Business and Technology says Tenke operating costs are actually negative $380 per ton for copper. At current price levels, in other words, Tenke can generate a minimum annual profit of $2.2 billion once the project reaches full production.

It should be noted that not all of that will flow to Freeport’s bottom line. The company owns a 57.75% stake in Tenke it acquired in 2008 when it bought Phelps Dodge. Another 24.75% of the project is owned by Lundin Mining, which had the original concession. The remaining 17.5% is owned by Gecamines, the DRC’s state-owned mining company. Freeport and Lundin are responsible for the total $1.75 billion cost of developing the mine. Subtracting Gecamine’s share of the profits (a not-inconsiderable $400 million), however, still gives Freeport and Lundin a nifty 100% annual return on that investment.

It’s no wonder that the DRC Ministry of Mines is asking for the contract to be renegotiated. The DRC wants to increase its share of the project to 45%, the level at which the deal was struck with Lundin in 1996. It also seeks to increase the signing bonus from $100 million to $250 million. The original agreement with the DRC was amended in 2005 to the current terms. The official line is that the new terms were necessary to provide the company a return commensurate with the risk it was assuming at the time, even though the agreement ending the Second Congo War had been signed in 2003 and the country’s first national elections were scheduled for 2006. The transitional period still saw substantial unrest, however, which supposedly justified the greater return.

The Carter Center says, though, that there were other factors at work:

“There are several reports that the political officer and temporary Chargé d’Affairs of the embassy was personally engaged in urging the President’s office to sign....The same official that is said to have actively lobbied for Phelps Dodge retired from the State Department in 2006. In September of that same year, she became Vice-President for Government Relations, Africa for Phelps Dodge, whose only major African interest is Tenke Fungurume. This official’s important role at the US embassy and the timing of the move have fueled suspicion on the part of DRC government officials and others regarding the interests of Western governments. At the very least it indicates obliviousness to the appearance of impropriety.”

As I mentioned earlier, Freeport acquired its stake in the project when it absorbed Phelps Dodge.

When the DRC requested a reversion to the old contract terms last year, Freeport responded with a simple “no.” In a 2008 SEC filing, it said

“The Restated Agreements were negotiated transparently and approved by the Government of the DRC following extended negotiations, and we believe they comply with Congolese law and are enforceable without modifications. We are currently working cooperatively with the Ministry of Mines to resolve these matters while continuing with our project development activities.”

The hypocrisy is glaringly obvious: a “contract is a contract” and can never be changed—-unless it is in the company’s interests to do so as it was in 2005. Subsequent statements have stuck to that position, although negotiations supposedly continue while Freeport ships copper and completes construction of the cobalt processing operation.

Also used to justify the one-sided contract are the expenditures made (mostly under terms of the 2002 Mining Code) for community support and infrastructure development in the region. There is no question that considerable economic benefit accrues to the DRC from Tenke, although nowhere near what the company claims. About 1,000 employees will be hired, with another 4,000 jobs indirectly created. Freeport is also spending on social programs for the local community as well as investing in the region's infrastructure by upgrading roads, railways and a hydropower facility—-all items needed to make the operation successful. The DRC collects royalties, taxes, and other fees, too. It should be kept in mind, though, that all these expenditures—as helpful as they may be—are required by law. They’re also considered part of the project expenses, so are already included in the calculations for net profit.

If past is prologue, the Tenke Fugurame contract will eventually be revised. The DRC will get a higher stake (although nowhere near the 45% it’s requesting, much less the 51% that is fairly standard for similar contracts in South Africa and Zambia) in the project. Don’t expect Freeport to give without receiving, however. Watch for the Ministry of Mines to grant rights to another deposit in the region, agree to reimburse the company for its capital investment, or make some other major concession to get the deal done.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Talking About Congo Economy - Part 4 of 4

Students at St. John's University in New York were assigned Heart of Diamonds, not as a novel, but as a source of much information about life and progress in the Democratic Republic of Congo. They are taking a course in Economic Growth and Development taught by Dr. Joyce Furfero. This is the fourth and final audio clip from my visit with the students.

Transportation in the Democratic Republic of Congo (mp3)

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Sarkozy Plans Congo Visit

We should expect three developments when French President Nicholas Sarkozy visits Kinshasa next week. One is an announcement of more French aid to the Democratic Republic of Congo, the second is a call to revive the Economic Community of the Great Lakes Countries (CEPGL), which brings together Burundi, Rwanda and DRC, and the third are demonstrations against the sharing of resources between the DRC and Rwanda, which the French President has been advocating.

Congolese nationalists staged a protest in front of the French Embassy this week in Kinshasa and threatened more during Sarkozy's upcoming visit. They are opposed to the normalization of economic relations between Rwanda and the DRC in the eastern provinces, fearful that Rwanda's long record of just taking what it wants in the region belies the country's willingness to cooperate in a transparent economy based on a rule of law. Recent peace overtures between the governments of DRC President Joseph Kabila and Rwanda's Paul Kagame, especially the joint military operation against the FDLR in North Kivu, have thrown fuel on the fires of opposition.

Sarkozy's official state visit will include an address to the national parliament and visits with Congolese officials. He has already sworn to support the economic reconstruction of the eastern provinces now that there appears to be some glimmer of hope that the insurgents who ravaged the countryside are slowly being brought under control. I would not be surprised to hear an announcement of a significant aid package with an emphasis on infrastructure reconstruction.

The most controversial aspect of his visit will be the call to revitalize CEPGL, the organization founded in 1976 to promote regional development and economic cooperation. The First and Second Congo Wars and subsequent dissolution of the region into a quagmire of violence pretty much destroyed any progress that had been made by the group. Now may be the time to revive the organization--or something like it--as an important step in bringing peace to the region.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Talking About Congo Economy - Part 3 of 4

I spoke recently to a class at St. John's University studying economics in the developing world. It's taught by Dr. Joyce Furfero, who assigned Heart of Diamonds to be read by the class as a way of learning about living conditions in the Congo. This is the third of four brief clips from my comments to the class.

Congo’s Timber Industry and Agriculture (mp3)

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Talking About Congo Economy - Part 2 of 4

I recently spoke to a class in Economic Growth and Development at St. John's University in New York. The instructor, Dr. Joyce Furfero, had assigned Heart of Diamonds to the class. This is the second of four brief excerpts from my talk.

Basic Congo Economy and the Mining Industry (mp3)

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Congo Diamond Mine Recovery Prospects

Coffey Mining, a Canadian firm with interests in the Democratic Republic of Congo (DRC), recently reported on its efforts to revitalize the Mbuji Mayi mine, once one of the most productive diamond mines in the world. The mine's output has dwindled to a trickle--along with the rest of the country's legitimate diamond industry--as war continues to take its toll on the DRC. The company's report mirrors the fate of the diamond mine in Heart of Diamonds.

The report points out that, since the 1960's, the DRC has historically produced ten million carats of industrial diamonds each year, but production declined sharply as war raged from 1998 to 2003, then collapsed to less than one million carats in 2007.

Dr. Norman Lock, senior principal consultant and regional manager for Coffey Mining, is overseeing the restoration of the Mbuji Mayi mine, which is a key part of the larger goal of rebuilding the region's ailing diamond industry. He points out that there's more to the project than pumping money into mining operations:

"...we can't develop just a technical solution alone. Any money poured into that would be like water in the sand. We also need to look at social issues in the region like poverty, which have contributed to the decline of the mine."

Among the problems faced is the prevalence of illicit mines in the Mbuji Mayi concession. They not only operate without paying legitimate taxes or royalties, which impair the government's ability to provide security and services to the country, but are grossly unsafe and dangerous as well. Dr. Lock says the problem is massive:

"About half of the actual productivity from the concession area has been legitimate legal mining. The other half has been illegal mining from artisanal mines. Any action to try and stop that is going to run up against tremendous resistance from the local community so this is an issue that will have to be addressed somehow."

Restoring the legitimate mine to profitability, however, faces other big hurdles:

"The mine is also dramatically overstaffed. If this was a fully operational modern mine, it would have a complement of around 500 staff but it currently has over 5000. Therein lies a problem. The local community is dependent on this mine and they are going to be laying off two to three thousand people."

Lock calls for retraining of the laid-off miners as the solution, but other problems remain, not the least of which is the near total lack of environmental awareness in mine operations.

"The mine has been operating in the same way it was back in the 1950s so they have some archaic practices in place. For example, basically the tailings are pumped straight into the river, which is a big no-no."

Instability in the Congo's government and continued violence in the country has deterred investors from putting up the massive amounts of money needed to turn the industry around. The current global economic meltdown doesn't bode well for the DRC, either, but the longer term prospects may be brighter than we realize. The Congo's potential is so great that it will take only a brief movement toward peace and stability to attract the needed investment.

Dr. Lock says Coffey hopes to address not only the Mbuji Mayi mine's operating problems but the larger ones of the surrounding community as well:

"We are anticipating that a more holistic approach to managing the economic and social issues at the mine - as well as the technical ones - will increase the mine's chances of success."

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Talking About Congo Economy - Part 1 of 4

A friend of mine and an innovative associate professor of economics and finance at St. John’s University in New York, Dr. Joyce Furfero, assigned the students in her class on Economic Growth and Development to read Heart of Diamonds and report on how the book reveals the state of economic progress in the Democratic Republic of Congo. After they'd read the book, I visited the class and discussed the social, political, and economic conditions. This is the first of four brief excerpts from that talk.

A Brief History of Congo and Heart of Diamonds (mp3)

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Speculation On Congo Maneuvers

I generally try to avoid speculation in this space, using it instead to report events in the Democratic Republic of Congo (DRC), especially as they relate to my novel, Heart of Diamonds. Today is different.

Things are changing in the DRC, and recent events lead me to make a few guesses as to what they mean and where they might lead. Despite the dire conditions in the eastern provinces (and elsewhere), I think there is a bright light at the end of the tunnel.

My guess is that the threat of final victory by the CNDP and the potential establishment of an independent nation in the Virungas prompted Joseph Kabila's government to take some drastic steps. Those steps have a good chance of paying off in the long term and perhaps even start the country on the path to peace.

First, Kabila agreed to negotiate directly with Laurent Nkunda under the auspices of the United Nations. This not only bought Kabila some time, but further committed the UN to an expanded peace-keeping role in the region. As ineffectual as it may be, MONUC's presence and the commitment of 3,000 additional troops (someday) can only reinforce Kabila's claim to legitimacy.

Second, Kabila invited Yoweri Museveni to send Ugandan forces into the DRC to join some Congolese regular army units (the FARDC) and troops from South Sudan in a hunt for Joseph Kony and the Lords Resistance Army. Kony has been thumbing his nose at Museveni from the Congo since he moved his rebel army from Uganda. Even if Operation Thunder Lightning, as it is called, is unsuccessful, my guess is that there will be a quid pro quo somewhere along the line. It could be Ugandan help in an attack on the CNDP sometime in the future, or at least a guarantee that Museveni won't provide support to Nkunda's rebels.

The third step was Kabila's surprise invitation to the Rwandan army to join Congolese forces in a campaign to eradicate the remnants of the Hutu Interahamwe, the FDLR, who have vowed to overthrow Paul Kagame's Tutsi-led government after having fled to the DRC following the genocide of 1994. General James Kabarebe, the Chief of Staff of the Rwandan army, was in Kinshasa last week to work on the joint plan. How does Kabila profit from having Rwanda troops on Congolese soil--an about-face from his long-held stance? It removes Nkunda's cause for rebellion, which has supposedly been to protect Congolese Tutsis from the FDLR.

These two alliances and the commitment of UN troops to support the peace effort also send a message to rogue commanders in the FARDC who have been setting up their own little fiefdoms in the Kivus: Come back into the fold or you could be next.

Kabila's latest move--and this is pure speculation on my part--was to persuade Bosco Ntaganda, Laurent Nkunda's second in command, to break away and split the CNDP into two factions. That situation is still murky and far from resolved (as I wrote recently), but it can only work in Kabila's favor. Whether a deal was made under the table with Ntaganda or he decided to bolt on his own after seeing the pressure build against Nkunda, his move gives Kabila a lot of room and strength in the negotiations.

What happens if all this plays out as I speculate? Peace in the eastern provinces may finally arrive and a million people may be able to return to their homes and rebuild their shattered lives. That peace might even stand a chance of enduring if the military alliances morph into a common economic market built on the rich resources in the region. If all the nations involved have opportunity to reap above-board profits from the mines and forests and farms of the Congo, they will be much more likely to keep the peace.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Congo Suffers From Market Meltdown

The global economic meltdown may have dire consequences in the Democratic Republic of Congo. The BBC reports that crashing commodity prices have wiped out more than 200,000 jobs in the DRC's southern Katanga province, the economic engine that drives the country. More than 40 firms processing minerals had shut by November, with an additional 100,000 jobs expected to be lost this month.

According to Provincial Minister of Mines Barthelemy Mumba Gama, Katanga province generates nearly half of the country's revenue.

Job losses on that scale will not only cripple the economy in the region, but could have far-reaching effects throughout the country. One of the major problems facing the Kabila government is its inability to pay the soldiers in the army fighting Laurent Nkunda's rebel forces in the eastern provinces. Without pay, the army preys on the civilian population, extorting food and money from them with threats of brutal treatment as violent as anything the rebel forces inflict. Further cuts in government revenue from dwindling taxes on copper, cobalt, and other minerals mined in the country will certainly exacerbate that problem.

Rogue units of the Congolese army have also turned to trafficking in stolen minerals themselves, further undercutting the government's ability to raise funds. There have been many reports of government units cooperating with remnants of the Rwandan Hutu Interahamwe to operate mines and/or suck protection money from legitimate mine operators and mineral transporters in the Kivus. Downward pressure on commodity prices in world markets will have a devastating trickle-down effect on those operations, which are already squeezed by the criminal elements. Laborers in those regions work for next to nothing now; slave labor will be the likely next step.

In both regions (and possibly others), a major upswing in violence is on the horizon. Miners without jobs and rogue armies living on the backs of the impoverished civilian population are nothing but fuel for a major conflagration.

Dave Donelson, author of Heart of Diamonds a romantic thriller about blood diamonds in the Congo.

Worst Business Climate In The World

When it comes to conducting business, the World Bank declares the Democratic Republic of Congo is the worst country in the world. The reason? Mostly the sheer amount of corruption, fostered by complex bureaucracy and a resistance to reforms.

The World' Bank's Doing Business report for 2009, which measures the expected ease or difficulty of investing in 181 countries around the globe based on their regulatory climate and enforcement policies, ranked the DRC dead last. It held the same position in last year's report.

Adamou Labara, DRC representative for the World Bank's International Fianance Corporation, said "It wasn't a big surprise. Last year, there was no major reform." He told Reuters it was in part because of fear of change.

In fact, the DRC's ranking declined in seven of the ten specific business activity categories, improving only in the the ability to trade across borders, enforce contracts, and close a business.

In some key measures, the DRC is woefully behind even other countries in the region. It takes 155 days to start a new business in the Congo, for example, versus 48 in the region. Need a construction permit? Count on 322 days in the DRC as opposed to 271 in the region.

The nation has been governed by kleptocrats of one type or another since the time of King Leopold, of course, so it's no surprise that corruption is the rule of the day. Even after the latest war ended in 2003, government loyalsts and rebels continued the tradition from their key jobs in ministries and public companies.

Dave Donelson, author of Heart of Diamonds

Tags: romantic thriller, Congo, blood diamonds

No Power To The People In South Africa

As the lights flicker in South Africa, the fragile economies of sub-Saharan Africa are seriously endangered. South Africa is the continent’s wealthiest state, both in GDP per capita and total GDP, so serious repercussions are felt by many countries when the giant falters.

And falter it is, as rolling blackouts and brownouts cut into every facet of life—and the economic development—of the country. Failure to plan for and construct adequate electric power generating capacity has caused leading gold, diamond and platinum mines to stop production, not only sending world gold and platinum prices to record highs but adding thousands of workers to the already-high (25%) unemployment rate.

I wrote many pages of notes by lantern light and headlamp while doing on-site research in Africa for Heart of Diamonds. Power in many nations in the region is generated and delivered through chewing-gum-and-paper-clip networks, with South Africa’s heretofore adequate capacity filling in the gaps. The failure of the S.A. system to keep up with rising demand has further crippled an tottering system that the World Bank estimates has already clipped 2% off the region’s growth rate.

The S.A. government monopoly Eskom, was warned in a 1998 report that it would run short of power in 2007, but bureaucratic intransigence and financial problems stalled upgrades. Even by the most optimistic estimates, it will take at least seven years for new capacity to come on line and begin to make a dent in the situation.

Dave Donelson, author of Heart of Diamonds

Tags: romantic thriller, Congo, blood diamonds