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Heart of lightness
David McKay
Posted: Mon, 11 Jul 2005
[miningmx.com] -- THERE’S a real belief that the Democratic Republic of Congo (DRC) is clawing its way back after nearly 40 years of political and economic darkness, much of it imposed by President Mobutu Sese Seko. There are small signs of improvements: Lubumbashi, the DRC’s second city, has its first traffic lights, an emblem of progress, says John Clemmow, an analyst for Investec in London. But there are also characteristic lurches backwards.
An admission in February that SA gold producer AngloGold Ashanti had paid rebel forces US$8 000 in protection fees was a serious wobble. It was followed by equally discomforting news that vehicles owned by Australian firm Anvil Mining had been commandeered by armed state forces.
Clearly, the DRC remains a frontier territory notwithstanding political and economic advances, including a coalition government consisting of no less than 26
representatives.
Responding to Britain’s Commission for Africa, which found that it takes 203 days to establish a business in the DRC, Anglo American CEO Tony Trahar says it was unsurprising that enterprise was “stunted or driven underground” in Africa.
Companies operating in the DRC say violence is restricted to the east, far from the mineral fields in the southern reaches of the DRC’s Katanga province. But violence anywhere converts into one sovereign risk rating.
Says Clemmow: “When a man with a gun and a uniform tells you he’s in the employ of the state and asks that you hand over your vehicle, you tend to agree – no matter where you are. Though in Africa you tend to agree rather more quickly than elsewhere.
“Both Anvil and AngloGold have been unlucky to be caught up in situations which were not their fault. Their bad luck shouldn’t be taken as representative of what it’s really like doing business in Africa today.”
The fact of
the matter is that there are millions of dollars in investment waiting to be poured into the DRC, mostly in mineral resources development. Banro, AngloGold Ashanti, Anvil Mining, First Quantum Minerals, BHP Billiton, and perhaps Phelps Dodge, are either examining or actively preparing for major investments there.
Adastra Minerals, a London-listed base metals firm, is waiting to press the button on investments worth $340m to retreat cobalt (Kolwezi) tailings dams. The investment is so good, and so well timed, that copper by-products will pay for operating expenses, analysts say. That means Adastra hopes to achieve project payback within three years.
It’s one of the reasons that SA’s Industrial Development Corporation has declared its interest in accepting a 10% option in the project. The World Bank’s International Finance Corporation has also said it will take up 7,5% of the project.
Adastra’s Kolwezi tailings project represents an enormous 40 to 50 year resource of cobalt,
a mineral that’s doubled in demand between 1993 and 2003 and is likely to continue to grow at 5%/ year, according to a recent Investec Securities report.
Construction is planned for 2006 and will establish the DRC as a major source of cobalt. “We believe the Kolwezi project is world-class in every respect – it’s enormous,” says Leon Esterhuizen, an analyst at Investec. However, there are other projects. Phelps Dodge, a Canadian mining firm, hopes to produce cobalt from the DRC in 2009, though it would have to make an investment decision this year to meet that deadline. Meanwhile, SA mid-cap mining firm Metorex expects to produce 1 000t/year (compared to Adastra’s first stage target of 5 500t/year of cobalt) from its Ruashi project, starting in 2006.
“We’ll produce metal on time unless there’s a major catastrophe,” says Metorex chairman Simon Malone. “We’ve got all the ingredients to make the cake”.
The first phase of Ruashi is to produce some 1 000t/year of cobalt
(and 9 000t/year of copper) from a stockpiles and tailings project that’s cost $40m. The second $110m phase envisages mining and processing 3 000t/year of cobalt (and 40 000t of copper) in situ from a high-grade resource.
“On paper, the quality of the opportunity looks mind-blowing,” says Mike Bedford, an analyst at Barnard Jacobs Mellet. “We know it’s fraught with risk, but it really does appear that Ruashi has a more than even chance of success.” BJM reckons Ruashi is a potential “company maker” for Metorex.
Metorex confirms growing international interest in the DRC. “We’ve come away from a roadshow in the US with two to three additional institutional shareholders,” says Charles Needham, Metorex's newly appointed chief executive officer. In addition to US interest, Needham says that the group’s secondary London listing has been transformed. “We’ve turnover of 7m to 7m shares/month from almost nothing,” says Needham.
Says Malone: “We want to use the LSE
listing like a secondary listing – but the Toronto Stock Exchange has got to be looked at.”
Stockbrokers and other analysts are factoring in the value multiples of a peaceful and economically progressive DRC.
First Quantum Minerals derives most of its current business operating a copper mine at Kansanshi, Zambia. But a copper prospect called Frontier in the DRC represents 83% of the reserves at Kansanshi. RBC Capital Markets says that adds C$1,90 to First Quantum’s fair market valuation of C$25,50/share.
Mining companies are also operating in the northern, eastern and central DRC to uncover the country’s vast gold and diamond resources. In a separate report, RBC Capital Markets applies a massive discount of 25% and 50% to the resources and inferred resources of Banro, a Canadian gold producer. Those are discounts relative to normal values attached to African gold resources and therefore aptly captures the political risk of the DRC, it says.
Nonetheless, “Banro will be one of the best positioned exploration companies to take advantage of the DRC’s mineral inventory when political and social order is restored to the South and North Kivu provinces (where Banro operates),” RBC said in a report published on 1 March.
The DRC’s resources industry is still on its knees. Copper production from the state-owned Gecamines fell from 450 000t/year in the mid-Seventies to the current 20 000t/year. Ore reserves remain plentiful but the capital to develop them has dried up after years of abuse. However, there’s now an even chance now that the DRC could recover.
“I was in Lumbumbashi as the guest of Adastra Minerals,” says Clemmow. “Alongside me on the trip were representatives of every other major South African banking group – plus a fair few Europeans – all keen to lend money to a project in the DRC. They’d not have been there five years ago.”
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