Miners Face Sudden Cost Increases After Congo Law Overhaul

(Bloomberg) -- The Democratic Republic of Congo canceled contract guarantees and hiked a key royalty in sweeping last-minute changes to a mining law that will have immediate financial costs for every mining project in the country.

The country's parliament finalized a revised mining code on Jan. 27, after both the lower and upper houses introduced increasingly onerous fiscal and regulatory reforms to already contested legislation. The modifications significantly raise the cost of doing business for investors in Africa's biggest copper producer, while boosting the state's share of mining revenue.

Lawmakers went ahead with the changes even after Glencore Plc Chief Executive Officer Ivan Glasenberg met Congolese President Joseph Kabila to discuss the proposed law.

In the most dramatic overhaul, lawmakers overrode a measure in the previous law adopted in 2002 that protected license holders from complying with changes to the fiscal and customs regime for 10 years. That means mines run by companies including Glencore, Randgold Resources Ltd. and Ivanhoe Mines Ltd. will immediately be subjected to higher royalties on metals including copper, cobalt and gold, as well as a new 50 percent tax on so-called super profits -- income realized when commodity prices rise 25 percent above levels included in a project's bankable feasibility study.

‘Strategic Substance'

The new code also permits Congo, the world's biggest source of cobalt, to raise the royalty on that metal to 10 percent from 2 percent if the government categorizes the mineral as a “strategic substance.” A byproduct of copper and nickel, cobalt has become a coveted commodity as its efficiency conducting electricity has made it essential for rechargeable batteries used in electric cars.

The lower house set the royalty for “strategic” metals at 5 percent and the upper house opted for a variable rate of 5 percent to 10 percent, before the joint commission agreed upon a fixed 10 percent.

The provisions of the new law “are immediately applicable to all holders of mining rights valid” on the date it comes into force, according to the legislation.

All that remains for it to be enacted is Kabila's signature. While mining companies say they will lobby the president to walk back the reforms, he could sign the law before the end of next week, according to Evariste Mabi Mulumba, the president of the Senate's economics and finance commission. Patrick Kakwata, the president of the National Assembly's natural resources commission, said Kabila will sign the legislation “at his discretionary power.”

Glasenberg Meeting

After five years of on-off negotiations with the mining industry, lawmakers chose to overlook the private sector's concerns in a move likely to rock Congo's relations with its biggest investors. Last month, miners including Glencore, Randgold and China Molybdenum Co. sent a letter to the presidents of the two houses of parliament asking them to suspend the adoption of the new code and promising they would defend their investments “by all domestic and international means at their disposal.”

In a last-ditch move, Glencore CEO Glasenberg flew to Congo last month to meet with Kabila, according to two people with knowledge of the meeting. Even Glencore, which says it will mine as much as 500,000 metric tons of copper next year -- about a third of Congo's production -- was unable to talk the president down, the people said, asking not to be identified because the meeting was private.

Glencore, Randgold, Ivanhoe and China Moly, which runs the Tenke Fungurume copper-cobalt mine, declined to comment. Simon Tuma-Waku, vice president of Congo's chamber of mines, said the business federation would react after Kabila promulgates the law.

The instant application of the new measures appears to have come as a surprise to Congo's mining industry. The tax increases “can in no way affect the current titleholders before the expiry of a 10-year period from the planned revision,” according to a statement published by Glencore, Randgold, Ivanhoe and MMG Ltd. on Dec. 11.

New Requirements

Tenke, Congo's second-biggest copper mine, was acquired by China Moly and a Chinese private equity partner last year for $3.8 billion. The project operates under a contract that predates the 2002 code and wasn't previously bound by legislative changes, but the new law requires all so-called “mining conventions” to comply with its provisions.

Two previous versions of the law, passed by the National Assembly on Dec. 8 and the Senate on Jan. 24, proposed imposing only the new royalty rates from the outset, but otherwise retain the decade-long exemptions. The decision to go further was taken by a joint committee of both houses of parliament, which was convened last week to iron out the divergence between the two documents.

Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.

To contact the reporters on this story: William Clowes in Kinshasa at wclowes@bloomberg.net, Tom Wilson in London at twilson128@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Antony Sguazzin at asguazzin@bloomberg.net, Paul Richardson, Liezel Hill

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