First Quantum halts work on Kolwezi

[] — FIRST Quantum Minerals (First Quantum) has suspended construction on its Kolwezi tailings project in the Democractic Republic of Congo (DRC) after receiving an order to seal the facilities.

The order was delivered by the general prosecutor of Katanga province but First Quantum president Clive Newall said the DRC government’s actions “have no legal basis.’

He added this view is shared by First Quantum’s partners in KMT – the JV which controls Kolwezi – which are the International Finance Corporation (IFC) holding 7.5% of the project and the Industrial Development Corporation of South Africa (IDC) which holds 10%.

First Quantum holds a 65% stake in KMT. Kolwezi will cost about $553m to build and is about 65% complete.

Newall’s view is rejected by DRC deputy mines minister Victor Kasongo who told Miningmx, ” the mining licence has been withdrawn in accordance with the laws of the DRC following completion of a review of mining contracts previously awarded.

“If they take us to court then we will provide all the evidence required to show that what they say is not true.’

According to Newall, the order from the Katanga general prosecutor is illegal on at least three grounds.

These are that the Katanga prosecutor cannot order such measures, in particular without a court order; there is no proper legal basis to the order and “sealing’ is usually associated with financial matters such as non-payment of taxes which is not the case with KMT.

Newall said First Quantum had filed notices of force majeure, effective immediately, under both the DRC mining code and contract of association which “were necessary’ in response to the DRC government’s actions “to cancel or revoke the exploitation permit and interfere with the company’s activities.’

He pointed out 700 jobs would be lost immediately and there would be an indefinite delay in commissioning the Kolwezi project which had been planned for May next year.

The First Quantum share price has shown remarkable resilience in the face of this action by the DRC government sticking at levels around ₤40 – a 12 month high – compared with ₤10 a share in December.

According to Numis Securities analyst Mike Stuart, Kolwezi would only have contributed about 3.5% to First Quantum’s 2010 copper output.

This would rise to 8% in 2011 but Stuart pointed out the majority of Kolwezi’s impact is post-2013 as phase two of the project was installed.

Newall said First Quantum was preparing to file for international arbitration but added the company would “continue to seek an alternative solution to the claims which have resulted from the mining contract revisitation process.’

On August 28, First Quantum published a translation by its lawyers of the letter received from the DRC prime minister which proposed that KMT return the Kolwezi exploitation permit to state mining company Gecamines.

Amongst others, the reasons given were that Kolwezi had not come into production within the agreed time frame; the refusal to pay royalties to Gecamines of 2.5% of the gross turnover and the refusal to cancel management fees of 1.5% of sales to be paid by Gecamines.

The letter also cited “the non-respect of the terms of the initial tender offer under which an upfront payment of US$130m in favour of Gecamines was foreseen..’

Asked what would happen next Kasongo replied the legal process could take up to five years but the DRC government wanted swift completion of the Kolwezi project.

He commented, “Kolwezi is now in the hands of Gecamines and Gecamines must fast track production from it. “

Kasongo had previously told Miningmx that a tender process might be held to find a new owner/operator for Kolwezi.

Asked today whether the DRC government intended looking for a new owner he replied, “what happens next is up to Gecamines.’