[miningmx.com] –THE dispute over the $1.3bn takeover of Australian-listed Anvil Mining by China’s Minmetals is certainly another blow to the investment profile of the Democratic Republic of Congo (DRC), a place gloriously rich in copper and cobalt but where risk is so high bank debt can’t be raised for projects.
The backdrop to this development is that the state-owned Gecamines is to audit the financial terms of all its lease agreements including Anvil’s Kinsevere project and Mutoshi, a joint venture Gecamines owns 30:70 with Anvil which the latter has valued at about $52.5m. Gecamines wants to raise just under $1bn from the lease agreement reviews in order to finance its expansion.
The prospect of the audit forced Anvil to issue a statement to shareholders and prevents the deal from proceeding, for now.
Anvil Mining CEO, Darryll Castle, has steadfastly declined to comment on the matter saying negotiations with Gecamines are ongoing. Yet investors scrutinising Gecamine’s interest in an audit of Anvil’s assets – and in the lease agreements of other companies – can’t help but think the base metals company has Anvil over a barrel even though a new lease agreement over Kinsevere was signed as recently as January, 2009.
In terms of that 2009 lease agreement, Anvil agreed to pay rent to Gecamines of 2.5% of gross turnover whereas previously the deal was rent paid on a sliding scale but which was capped. Given the acceleration of the copper price, you can see why Gecamines wanted upside from production at Kinsevere.
Minmetals, the Hong Kong company which also has private as well as Chinese government shareholders, has stated that Gecamines has no legal right to vet the commerciality of an offer for Anvil. Yet as Anvil conceded in a statement on November 1, the uncertainty over the status of the lease agreement is creating deal risk.
A possible outcome is that Anvil complies with a valid pre-emptive right Gecamines has over Mutoshi, effectively walking away from the asset, although this was not necessarily desireable as it would necessitate a downwards re-valuing of Minmetals $1.3bn offer.
“The deal could be unlocked today, or it could take weeks,” a source close to the negotiations told Miningmx. “One complication is that politicians are involved in campaigning, so it’s difficult to nail them down,” he said. The DRC goes to the polls on November 28 with president Joseph Kabila likely to take up a third term. However, politicking over Anvil and Gecamines’ desire to audit the leases of certain mining properties is an unhelpful backdrop to the next stage of Kabila’s presidency.
Gecamines, a rogue element
One question that is bothering investors in the DRC is whether this recent Gecamines initiative suggests the base metals company is at odds with its government’s strategy.
Moise Katumba, the governor of Katanga, the province where the DRC’s copper and cobalt properties mostly lie, has stated publicly that there are no plans to revisit the DRC’s mining licence review, initiated in 2007 and finished about two years later.
Yet Gecamines’ audit would seem to be exactly this: a second review resulting in a repricing of Anvil’s properties. “The question I would ask,” said one source “… is whether Gecamines and the DRC government speak now with the same tongue?”
Gecamines has said in the past it wants to maximise existing joint ventures, but more importantly develop its own 100%-controlled properties. In so doing, Gecamines wants to remove its debt, both real and contingent.
If the audit is an attempt to create the platform for this strategy, effectively unseating the settlement established by the previous mining licence review, it would be bad news for Minmetals’ bid for Anvil, and foreign investment in the DRC at large, a market source said.
A further worry is that Gecamines CEO, Kalej Nkand, in a letter dated September 30, declined a request from the DRC’s mines ministry to publish the terms of all revised mining contracts.
“The refusal is likely to dent a donor push to increase transparency after Congo in May appeared to bow to International Monetary Fund (IMF) and World Bank pressure to publish all mining contracts in an effort to clean up its murky extractive industries sector,” Reuters reported when it broke this news.
“The proposed publication of these contracts has no legal basis,” Nkand told Reuters. “It is doubtful that our partners would consent to it,” he said.
As for Anvil and Minmetals, do either have much room for manouevre?
The matter is fraught, certainly. Gecamines is questioning for instance whether Anvil met the terms of its mining lease on the basis it failed to produce a feasibility study for Mutoshi. The debate has descended into an unresolveable ping-poing regarding what constitutes a valid study.
One supposes Anvil has the DRC courts to fall back on although this would certainly kill the deal with Minmetals. It’s also worth remembering First Quantum’s experience having sought legal comfort when its mining licences were revoked under the DRC government’s 2007 review. It eventually divested from the DRC
