First Quantum ‘shaken down’ in DRC

[] — FIRST Quantum Minerals (First Quantum) has been the victim of a “classic shakedown’ in the Democratic Republic of Congo (DRC), according to UK institution Numis Securities.

Despite the legal battles under way, Numis believed First Quantum shares were a buy at current levels of around ₤37.4. This is because of the company’s other operating mines, and projects under development in countries like Zambia and Mauritania.

Numis has set a target price of ₤56 for First Quantum, despite excluding the DRC operations from its base case valuation.

Numis said it viewed the DRC assets as adding “blue sky’ to its base case valuation should the international arbitration now under way in Paris be decided in First Quantum’s favour.

“In our view, it has always seemed that First Quantum have excellent grounds to dispute both the Kolwezi and Frontier/Lonshi court rulings.

“The worst case outcome of the arbitration proceedings is clearly that First Quantum lose all of their assets in DRC – a scenario which is effectively priced-in by the market.

“The best case reinstatement of all projects would effectively add ₤32/share to our net asset value. “

The arbitration in progress is over the DRC government’s decision to suspend operations at First Quantum’s Kolwezi copper/cobalt project in September last year.

On May 14 the DRC Supreme Court also revoked First Quantum’s licences over the Frontier and Lonshi mines in favour of state mining company Sodimico.

According to Numis, “First Quantum have, unfortunately for its shareholders, provided a textbook case study in the perils of applying high corporate governance standards in a region where the rule of law is clearly not independent from political interests.

“We believe that the company has been the victim of a classic shakedown, simply because it refused to play the “brown envelope’ game.’

Numis pointed out a string of recent developments linked to the First Quantum dispute appear to reflect decisions based on both personal business interests and broader political considerations.

The report stated: “Some clue was provided by recent press reports of a contract appearing to hand the Kolwezi project to a BVI (British Virgin Islands)-registered company, Highlands International.

“The man behind the company, Dan Gertler, is reported to have high-level connections in the DRC, including the ear of President (Joseph) Kabila.

“In the meantime, First Quantum has received the support of the Canadian government which delayed, but ultimately failed to stop, approval by the World Bank and IMF for $12.3bn in debt relief to the DRC.

“The argument went that rewarding the government for fraud and the expropriation of tax revenues in favour of secretive personal contracts was not in the interests of either foreign investment or the citizens of the DRC.

“The argument appears to have lost out to “higher interests,’ which some in the press suggest translates as the West attempting to retain influence with the DRC government in the face of rapidly escalating “no-strings’ investment by Chinese interests.’

In a separate development, the Industrial Development Corporation – a 10% shareholder in Kolwezi – has requested the South African government to become involved in the dispute to protect its investment.