About some comments made by a team of the university of Columbia

Perrine Toedano and Juan Aristi of the University of Columbia have approached me to exchange on the subject of Kamoto KML project and contract with Gécamines. For better understanding of the background, I edit here the exchange of Emails that lead to the present situation.

Dear Pierre,
We are writing to you because we are part of a team whose members are professors, lawyers, MBA students from Columbia University and have decided to take up the challenge to lead the RDC government to renegociate its mining contracts. The World Bank and the French and Belgium government are with us.

Juan and I are specifically in charge of the Financial Analysis of the Kamoto Contract. Since your analysis is second to none we looked carefully at it and based on it we have come up with our own analysis.

Our findings are different from yours so we would be happy to compare our reasoning to yours. Is that a way to be in contact with you?

Thanks a lot for your consideration,
Best,
Juan and Perrine

Dear Pierre,
We just wanted to let you know that some differences exist between our models but they are of minor importance:

  1. we use the numbers of the technical report for production and prices whereas you use different numbers (feasibility study)
  2. it seems that you have not considered the maintenance/replacement capex cost whereas we have taken into account this cost in the amortization after EBITDA - considering that maintenance cost are amortized in the same year of cost incurring/purchasing;
  3. we considered taxes on dividends (10% * 75% KML profit share) ). However these points are not the main ones that we wanted to discuss with you.

Of major importance are these following issues.

We understood both of the flaws that you raised concerning Kamoto contract negotiation:

Although we consider that you raised the crucial issues, we have adopted a different approach considering an effective tax analysis rather than NPV analysis. Here are the reasons for it:

  • To us, Gecamines is not a typical investor that can be compared to KML using Free CashFlow NPV. Indeed, even if Gecamines brings equipment (we'll talk about this later) , Gecamines does not bring equity as opposed to KML. Gecamines is another instrument for DRC government to raise tax and exert some control over operations through Board participation.
  • The issue of co/cu price increase is relevant only in the context of NPV analysis. Indeed in this context and as you have shown, since KML invests equity in the first year and Gecamines does not, the increase in price has a more positive effect on KML NPV than on Gecamines NPV. But because Gecamines does not bring equity, both partners are not comparable and that is why we consider that NPV analysis might not be appropriate.
  • The issue of equipment: we believe also that Gecamine does not receive a fair value for its equipment contribution. We have identified in the contract that the royalties to gecamine (2% on net sales) are supposed to be a lease payment for this equipment. The NPV of this royalty is worth less than the equipment estimated value so we believe that this royalty has to be raised or otherwise an up-front payment has to be paid to gecamines as you also suggested.
  • Our analysis to assess the fairness of the contract (leaving aside the equipment issue): The effective tax approach. This approach consists in considering what happens with the revenues from copper-cobalt shares. Some of them pay for the costs and Capex of the operation, some of them go to the government through various types of taxes: (tax on profit, DRC royalties, gecamines share, tax on dividends) and some of them end up as dividend to KML. We consider all payments to Gecamines similar to other DRC taxes since Gecamines is 100% owned by DRC- is only an instrument for the government to raise more tax. However we do not consider Gecamines royalties here because they are a rent payment for the equipment (too low as we said). In another mine without previous equipment, these royalties would, in theory, not exist. We think that the equipment issue has to be separated from the tax + DRC royalty + GCM share issue and dealt with separately (with upfront payment or increased lease payment as we said).

    • To reach the final effective tax figure, we compare DRC share with KML share. What we are planning to do to assess fairness is compare the different Congolese contracts among them and with international benchmarks.

    The main difference between tax effective analysis and NPV analysis is that in the former, equity does not appear and hence the impact of prices on DRC and KML shares is minimal.

    We look forward to receiving your reply about these points. We believe that the objective of this discussion is only to make a stronger case for the renegotiation of the mining contracts.

    We just wanted to let you know that our broad team (composed of professors lawyers and financial analysts) is reviewing the other controversial mining contracts as well (GEC, TEnke...))

    Thanks a lot for your help,
    Best Regards,
    Juan and Perrine

    Dear Pierre,

    I was reviewing the email Perrine and I just sent you and I have spotted a mistake we made. At the end of the email when we are explaining the difference between effective tax and NPV abalyses we stated that equity does not appear in the former. This is not true, over the life of the project aggregate dividends equal equity+aggregate profits after tax. The model formulae follow this.

    In the effective tax analysis, which is aggregate and not discounted, we are looking at where the benefits of the project go, irrespective of who puts money to make it happen.

    Thanks again for your time.
    Best regards
    Juan

    Here is my response.

    Mis en ligne le 07/11/2007 par Pierre Ratcliffe. Contact: (pratclif@free.fr) sites web http://paysdefayence.blogspot.com et http://pierreratcliffe.blogspot.com