This report is intended to make a constructive contribution to the current debate about the fairness of the mining contracts in the Democratic Republic of Congo (DRC), in particular the Kolwezi joint venture agreements between the state-owned La Générale des Carrières et des Mines (Gécamines) and private companies, which were all signed and approved during the period of the Transitional Government. By way of illustration, an economic analysis is undertaken of one of the contracts, Katanga Mining Limited's (KML) Kamoto project. The report provides an assessment, based on available information, of the distribution of the financial benefits between KML as the private partner and Gécamines. The data is used to present a possible model for the renegotiation of Gécamines' joint venture agreements: the other key Katanga contracts should be subject to a similar transparent analysis, whether conducted by the World Bank, the DRC Government or the companies themselves.
Following the elections in the DRC, the new government, with encouragement from the World Bank, has announced its intention of reviewing past mining contracts. In February 2007, Antoine Gizenga, the Prime Minister, in an address to the Congolese Parliament, announced his intention of undertaking 'a critical re-examination of the joint venture agreements with the DRC's state owned enterprises'. Note 2
In March 2007, Martin Kabwelulu Labilo, the Minister of Mines, who has tutelary powers over state-owned mining enterprises, reminded the managers that they should suspend until further orders all negotiations for new concessions until the Government had issued a procedure for review of the existing contracts. The Minister also requested that all the documents concerning the joint venture agreements should be sent to his office no later than 4 April 2007. Note 3.
So far mining companies have reacted calmly to this announcement. Note 4. Arthur Ditto, the President of Katanga Mining, told Business News that 'any legitimate balanced review of what we're up to will be very favourably considered and pass any legitimate test.' note 5. It is in the context of Mr. Ditto's invitation to review, that RAID presents its own economic model and analysis of the Kamoto project.
After 30 years of the Mobutu dictatorship and more than 15 years of war and transition, the needs of the Congolese population are immense, as was noted in the recent NGO Memorandum, Public-Private Partnerships in the DRC's mining sector: Development, good governance and the struggle against corruption.6 According to the World Bank, virtually all of the DRC's indicators of economic and social development place the country as among the most deprived in the world. Gross domestic product has fallen from about $10 billion in 1990 to approximately $4.1 billion in 2002. Per capita income has declined steadily from about $380 in 1985 to $250 in 1990 and to $87 in 2001. DRC is now one of the poorest countries in the world. The number of undernourished people in the country has more than doubled from 15 million to 32 million. Life expectancy stands at 45 years. One of every six children born never reaches his or her first birthday. In 1995 about 59% of children were enrolled in primary school.
This is a sharp decline compared with 1978 to 1979 when 72% of children were enrolled in primary school. note 7.
The elections that took place in the DRC in 2006, were seen by the international community as the best opportunity of restoring peace to the war ravaged country and of encouraging the return of an estimated 1.2 million displaced Congolese and 410,000 refugees in neighbouring countries. However, in March 2007, violence erupted in Kinshasa when the opposition leader Jean-Pierre Bemba refused to abide by an ultimatum to integrate his private guards into the national army. Sources indicate that as many as 600 people may have been killed in the fighting that ensued in which Angolan troops allegedly supported the forces loyal to President Kabila. Note 8. European diplomats have condemned the premature use of force. Jean Pierre Bemba, who has been charged with treason, has sought refuge in the South African embassy.
The mining sector is vitally important for the reconstruction of the DRC. The Congo has some of the world's most important reserves of numerous strategic and precious resources (copper, cobalt, uranium, colombo-tantalite, diamonds, gold). The DRC has an estimated 12% of the world's copper reserves and almost half the world's cobalt reserves. Note12.
Katanga, where the copper and cobalt ore bodies are found, is the source of much of this potential wealth. Historically, the extractive sector accounted for approximately 75% of total export earnings, 25% of the country's GDP and 25% of fiscal revenue, until political instability and war intervened. Note13. By 2001, the mining sector's recorded contribution to GDP had declined to 7% and by 2004 it was estimated at 9%. Note14.
According to the IMF, fiscal revenue from mining was 2.9% of the total Government revenue in 2003 and 2.5% in 2004. Mining exports are also vital in generating foreign exchange for the DRC: the IMF has recently warned that foreign reserves - necessary to pay for imports and to service debt - are at very low levels. Note15.
It is apparent that for the Congolese economy to be rebuilt and for government revenues to increase to a level where social programmes can begin to address the problems caused by extreme poverty, then not only must the mining sector be revitalised, but it must be done in such a way that both the state and the private sector benefits equitably from the wealth generated.
Whilst the majority of DRC's mineral reserves were previously exploited by the state-owned Gécamines, the mining sector is currently undergoing extensive reforms. Since 1995, there has been a proliferation of public private partnership agreements: Gécamines alone has thirty such agreements. Note16.
From now on, key concessions will be exploited through joint venture contracts with private partners, in which Gécamines will retain only a minority stake. The new Mining Code which came into force with World Bank support in 2002, (and the Mining Law of March 2003) was supposed to ensure full transparency in the access to mineral resources (e.g. allocation of permits), reduce Government discretion, promote the disclosure of information and ensure "a fair distribution of revenues among Government, mining companies and affected communities". The DRC Government was to design a restructuring plan that would transform Gécamines into a holding company. Note17.
Gecamines's concessions in Katanga have been divided for administrative purposes into three areas: Centre Group (Groupe Centre) near Likasi, which includes mines like Mukondo, the Southern Group (Groupe Sud) which has large deposits like Etoile and Ruashi and the West Group (Groupe Ouest) which comprises the enormous copper and cobalt deposits and mining installations of Kamoto and Kamoto East, Oliveira and Virgule (Kov). Standing apart is the vast greenfield site of Tenke Fungurume (TFM). The TFM concession is located approximately 180 kilometres northwest of the provincial capital of Lubumbashi and includes the towns of Tenke and Fungurume.
In mid 2005, the Transitional Government approved three joint venture contracts between Gécamines, the DRC's main state owned mining company, and a number of foreign private companies: Kinross Forest Ltd (now Katanga Mining Ltd), Global Enterprises Limited (GEC - now Nikanor Plc) and a consortium formed by Phelps Dodge Corporation and a subsidiary of the Lundin Group called Tenke Mining Corporation. Note18.
These three joint venture agreements concern, between 50 and 75% of the DRC's copper and cobalt reserves and form an important part of Katanga's industrial capacity. Note19.
There was great disquiet about way these deals had been negotiated, signed and approved, with a total lack of transparency, either on the basis of a flawed or non existent international tendering process. In November 2003, when the agreements were still being negotiated, the consultants, IMC Group Consulting Ltd, appointed by the World Bank on behalf of the Congolese Government to conduct an audit and to define a new business plan for Gécamines, recommended that all on-going negotiations should be immediately halted and that steps should be taken to prepare for a wholesale renegotiation of the joint venture agreements. Note20.
Furthermore according to the Implementation Completion Report for the Economic Recovery Credit "a moratorium" on new mining concessions was one of the measures taken by the Government which demonstrated its commitment to implementing far reaching reforms and facilitated the decision by major creditors to provide support. But the moratorium was not respected and other crucial measures, such as the reform of the Mining Cadastre and making the Commission for the validation of mining titles operational were never implemented. Note21.
At the conclusion of its recent mission to the DRC in March 2007, the head of the IMF's Africa division, Cyrille Briancon, stated: "It is important for the mining sector to contribute more to state resources. At the moment, certain companies do, but I think this sector should be able to contribute more revenues." Note22.
To this end, the IMF has urged the government to publish and analyze the partnership agreements that have been signed in the mining sector. Note23.
The assessment considers, inter alia:
The Feasibility Study for Kamoto has recently been completed and a summary of this, together with a Technical Report, including an economic analysis of the project, has been posted on KML's website. Note25.
The economic analysis shows the sources and uses of funds over the 20 year life of the project. The data made available by the company in its Technical Report is used by the independent mining analyst in assessing and modelling the Kamoto project.
The approach used in the economic modelling is rigorous and the methodology and workings are available in full: 
click here. The purpose of this report is to stimulate debate on the distribution of the economic benefits and costs of the joint venture agreements based upon a credible model to analyse a number of realistic scenarios. It should be emphasised that other parties - the World Bank, the DRC government, the companies themselves - are free to run, and, indeed, encouraged to run, their own rigorous and transparent models or to model scenarios other than those presented here.
The economic sensitivity model developed by the analyst has been run in the first instance for Kamoto because this project is nearest to production and because the necessary data is available. It is important to emphasise that the same or similar models should be commissioned to analyse all the Gécamines joint venture contracts, including those with Nikanor and Tenke Mining/Phelps Dodge, and that where questions are asked of the Kamoto partners, these must also be asked of the other companies. In March 2007, shareholders of both companies approved the acquisition by Freeport-McMoRan Copper & Gold Inc. of Phelps Dodge Corp. The deal has created the world's largest publicly traded copper company. Note26.
On Feb 7 2004 a Joint Venture Contract n° 632/67 1 1/SG/GC/200427 was signed between Gécamines Kinross-Forrest Limited (KFL) establishing the Joint Venture Company Kamoto Copper Company SARL (KCC). KCC is 75% owned by KFL and 25% by Gécamines. The contract was approved on August 4th 2005 by Presidential Decree n° 05/07028.
Under the contract, KCC has the right to mine in Kolwezi district in Katanga province, south-DRC for the next 20 years, with an option to extend. Note29. The 15,235 hectares awarded to KCC includes the underground Kamoto mine, three open-pit mines, and the Musonoie T17 deposit. Note30. Other assets comprise the Kamoto Concentrator and the Luilu metallurgical plant, as well as all other infrastructure. The total proven and probable reserves of copper and cobalt at Kamoto are 3.28 million tonnes and 344,000 tonnes respectively. Note31.
KCC is to become a leading copper company. Note32. On January 31 2007, the company announced the closing of two contracts related to the rehabilitation of the Kamoto Mine. Note33. The Kamoto underground mine and Dima open pits are on schedule to start production in April 2007, with work on the Kamoto concentrator and Luilu Metallurgical plant completed by, respectively, July and September 2007. First copper is to be shipped in December 2007. The figures for total production have recently been increased by the company: 2,507,708 of copper (average annual production of 125,385 tonnes over twenty years) and 121,818 tonnes of cobalt (average annual production of 6,090 tonnes over twenty years). Note34
To estimate the value and the feasibility of a project and to be able to decide whether to invest or not, companies calculate the Internal Rate of Return (IRR). The IRR is the rate of interest (in constant monetary value ie. without inflation) that renders the initial capital cost equal to future revenues discounted at that rate of interest. In other words, a company must compare how much capital it has invested in a project with the revenue that it expects to receive back from a project. Note41. To assess whether the project is economically viable, the IRR must be compared to a reference rate of discount. This rate of discount or interest is generally referred to as "the opportunity cost of capital". If the IRR is greater than the opportunity cost of capital, then the project will add value for the company. Note42. The extent to which risks attach to a particular project - for example, whether production may be disrupted by political instability or even conflict - requires that the opportunity cost of capital should be increased by a premium to offset these risks.
The opportunity cost of capital used here is 4%, and the risk factor is 8% to hedge against investing in politically unstable DRC, giving a total of 12%. This is the interest rate at which commercial banks would lend money to sponsors of projects in the conditions of DRC. Hence the IRR of a project in the DRC would be referred to an opportunity cost of capital of 12%.
IRRs of mining projects as calculated from feasibility studies are relatively low, with reference to opportunity costs of capital, because they involve high investment costs for exploration and proving of reserves, high costs of plant and equipment, a long time lag (typically 20 years and more).
With regard to Cu/Co prices, two scenarios are examined:
(a) The IRR using conservative metal prices
With the capital and operating cost estimates given in the Feasibility Study and Technical Report, and copper/cobalt prices of 1.10/10.00 US$/lb, the project's internal rate of return is 29.3 %. This value, which compares to the 12% opportunity cost of capital, allows a margin of return of 17.3% for the project sponsors in the case of Kamoto. This produces revenues for developing other mines, or investing in other industrial projects in DRC and in other parts of the world. The returns are shared between the project owners, KML and Gécamines at 75% and 25% respectively, under the Kamoto Copper Company (KCC) Joint Venture agreement.
(b) The IRR using average historical prices in 2004 US$ values
At short and medium terms, copper and cobalt prices are volatile. As of the end of the first quarter of 2007, copper and cobalt prices, at 3.31/32 US$/lb are very much higher than 1.1/10 US$/lb used in KML's Technical Report as the base price. Note43. See KML's published own data.Current prices should not be considered for a long term period. Our view is that historical prices are a better guide. Over the last fifty years (1952-2006) , the average prices in current values have been 0.73USD/lb for copper and 8.42USD/lb for cobalt; but converted to 2004 US$ using GDP deflators or price indices, these prices are 1.52 USD/lb for copper and 15.00 USD/lb for cobalt. Note44. If these prices are used, the IRR for Kamoto increases significantly to 76.9%, which compared to a 12% opportunity cost of capital, leaves a margin of 64.9% to the project sponsors. Note45.
It must be emphasized that in both cases, the relatively high IRR is obtained because the full cost of capital is not borne by the project; indeed, the bulk of the capital investment is represented by the assets transferred by Gécamines at zero cost to KML.
1. The respective stakes of Gécamines and the private partners
The returns that have been calculated, including those that model higher metal prices, benefit the Kamoto Copper Company Joint Venture as a whole. In other words, both the private sponsors and Gécamines, as a state owned company, are rewarded. However, in order to determine whether the returns from the project as a whole are distributed equitably between the parties, it is necessary to assess whether the return that each expects to receive from the venture is commensurate, i.e., a fair reflection of their contribution to the project.
Gécamines' contribution to the Kamoto project is considered in more depth in the section that follows. At this juncture, it is sufficient to note that Gécamines provides, by way of a lease, proven copper and cobalt reserves and the mining, processing and production facilities. Note46. Under other circumstances - for example, if it had been decided to privatise the DRC's mining assets and sell them to private investors in the framework of a competitive international bidding procedure - then Gécamines may have been offered an outright payment for the Kamoto concession and for the assets to be transferred. Rather, the decision was taken to develop Kamoto as a joint venture between the state owned mining company and a private partner without competitive bidding. Under this arrangement, in order to receive recompense for providing the concession in the first place, Gécamines should either receive an equity share in the project equivalent to its contribution or else receive a combination of equity share and a balancing up front payment.
Indeed, under the joint venture agreement, Gécamines retains a 25% stake in KCC while the private sponsors, KML, are given a 75% stake, entitling both parties to their respective shares of future revenue. No up front payment is made to Gécamines for the assets it has transferred. Hence, of the margins of return above the opportunity cost of capital generated by the mine - i.e., 17.3% in the base case and 64.9% with higher metal prices - one quarter will go to Gécamines and three quarters to KML.
In order to assess whether Gécamines' contribution to the project is fairly reflected in the Joint Venture agreement, it is necessary to establish:2. Gécamines' Contribution to KCC
The Technical Report outlines the defined assets contributed by the two partners to the joint venture: note47.
Gécamines leases to KCC the proven reserves, Kamoto underground mine, Kamoto and DIMA concentrators, the Luilu hydrometallurgy plant facilities, together with all their infrastructures and surface holdings, including the processing facilities, and all mobile equipment, together with all related files and records and all technical data. Gécamines also leases to KCC the Kamoto, Dikuluwe, Mashamba East and Mashamba West open pits, as well as the Musonoie-T17 West deposit, or any other deposits that will provide ores to ensure project profitability. KFL contributes the management expertise to operate the mines and the plants, and the technology and the organization of the equity and debt financing to start the project and to carry it through the life of the agreement.
While Gécamines remains the sole title-holder and owner of the mines and the tailings, the concessions confer to KFL the sole and exclusive right to mine. note48.
(a) Plant, equipment and installations
The value of the existing underground mine infrastructure, the ore processing facilities and metallurgical and electrolysing plants depends upon how much money is needed to refurbish them. Statements made by KML acknowledge the importance of the mineral assets and plant contributed by Gécamines at Kamoto.
According to KML's Technical Report, Gécamines assets are considerable, and much of plant, though in need of refurbishment and upgrading, requires relatively modest levels of investment before production can be started: "The initial refurbishment and rehabilitation of the Kamoto Mine, Kamoto Concentrator and Luilu Metallurgical plant and related infrastructure will require approximately six months as the Kamoto Mine requires only limited work to restore it to production". Note49.
The Technical Report also notes that: "Limited maintenance of the remaining infrastructure is required. Mining can begin almost immediately once the equipment arrives on site." Note50.
(b) The copper and cobalt reserves
Kamoto has impressive proven and probable copper and cobalt reserves. KML has recently posted increased totals for the copper reserves (up 12% from the Feasibility Study) and cobalt reserves (up 19% from the feasibility study). Note51.
In addition to the proved and probable reserves (i.e., those reserves reported with a high degree of certainty), KML is also confident about Kamoto's potential: "As meaningful exploration has not been carried out in the region since the early 1980's, the Project area holds significant potential for new discoveries, and further target generation and exploration drilling should be undertaken." Note52.
In a recent interview, the president and chief executive officer (CEO) of KML is unequivocal about the quality of both the reserves and production facilities: 'I am unaware of any start-up enterprise in the base metal mining sector that has come into the marketplace with such large, high-grade reserves and large installed capacity….If you look at the grade of these deposits, the production grade of the ore going into the mills and the plants, it's extremely high by world standards, and as a result this operation will be one of the lowest cost producers in the world.' Note53.
3. The value of Gécamines' contribution: the failure to audit assets transferred
In the absence of an audited book value of the assets transferred by Gécamines to KCC at Kamoto, there is no sound basis upon which to calculate whether the 25% stake it retains in the project is fair. Yet, incredibly, the value of these assets has either not been calculated at all or else the result of any audit has not been included in the Feasibility Study and Technical Report or otherwise published by KML. Note54.
The World Bank's principal mining specialist has stated: note55. "Divestiture of state mineral reserves and producing assets in favor of private companies is generally done after a throrough analysis, appraisal and valuation of the assets.This has not been the case with the contracts in question." (Andrews confirms: "The contracts in question are between Gécamines and Kinross-Forrest, Global Enterprises Company (G.E.C.), and the consortium for the development of Tenke Fungarume (Lundin Holdings and Phelps-Dodge)."). Andrews continues: "The result is that the government may not have received the full value of the assets to be transferred."
The fact that the assets that Gécamines brings to the project have not been valued must raise serious concerns about the basis upon which the returns from the project are divided. As a result, the split 25% to Gécamines and 75% to KML appears suspicious. The expert advice is that the only accurate way to obtain the actual value of assets transferred by GCM to KCC is to visit the site and to run a technical and financial audit of the assets and accounts - something which should have been done before the terms of the joint venture were finalised.
In the absence of this audit, however, it is still possible to make an assessment of whether the Kamoto deal is fair to Gécamines. The first step, in the absence of an audit, is to estimate a value for the Gécamines assets that have been transferred. The second step is to model how much Gécamines 25% stake in the project is worth. To do this, it is necessary to consider both the scenario presented by KML - which both reflects and justifies the existing Joint Venture Agreement - and an alternative scenario which uses more realistic copper prices, referred to above.
4. An estimated value for the Kamoto assets
The president and CEO of KML has recently gone on record stating that 'we can we can create the size of output that I have referred to with modest capital, compared to a greenfield undertaking. The program I highlighted will take CDN$427 million [US$365 million] to accomplish. If you looked at the cost of a greenfield program, it would be in excess of CDN$1 billion [US$ 850 million]. So, in other words, we can compress the time it's going to take to complete all this and we can achieve this level of production for far less than if it was a greenfield project.' Note56. According to this estimation, it would therefore appear that the infrastructure and plant alone at Kamoto are worth over CDN$570 million (US$485 million).
5. The value of Gécamines 25% stake
Establishing a value for the assets transferred by Gécamines is an important first step in determining whether its 25% stake in the project is a fair reflection of its contribution. However, having estimated a value for these assets, the second step is to calculate what Gécamines' 25% stake in the project is worth. If it is worth an equivalent amount to, or more than, the value of the assets, then Gécamines 25% holding is fair. If, however, the value accruing to Gécamines is worth less than its contribution, then the agreement is unfair. Of course, in making this calculation, a number of factors have to be taken into account, the most important of which is again the price of copper and cobalt. A model has therefore been used to calculate how much the Kamoto project is worth to each party - the net present value (NPV) - which allows metal prices to be varied. In calculating this worth, the fact that the different parties have higher or lower costs - for example, KML brings more investment funds to the project - has been taken into consideration. Once more the scenario envisaged in the feasibility study, which was used to determine how the joint venture was framed, is contrasted with a scenario of higher metal prices, more in line with prevailing market conditions.
(a) How much is the 25% equity stake worth? The scenario favoured under the existing joint venture agreement
The Kamoto project is worth $143.2 million (i.e., NPV) to Gécamines. The project is worth a similar amount - $145.5 million - to KML, giving an attractive IRR of 29.3% or 17.3% above the opportunity cost of capital. Hence, the initial impression is that the value generated by the project is equally divided under the scenario modelled in the Feasibility Study and Technical Report and reflected in the terms of the Joint Venture agreement. Gécamines receives well under a third of the estimated value of the assets it has contributed to the project, but there is no scope for an up front payment under this scenario if KML are to benefit from their investment. Indeed, the scenario favoured by KML justifies the principal tenets of the Joint Venture Agreement: 25% to Gécamines, and no up front payment made nor envisaged for the assets transferred. However, the apparent equity of this arrangement relies on the use of low copper and cobalt prices that are not realistic in terms of average historical prices in 2004 US$ values.
(b) How much is the 25% equity stake really worth? A scenario with more realistic metal prices, Gécamines actual 25% stake
When metal prices are increased in line with historic prices adjusted to 2004 US$ values, a significant part of the value realised from the project under the terms of the existing Joint Venture Agreement is captured by KML at the expense of Gécamines. Although the project's worth to Gécamines improves, the state mining company receives a significantly smaller share (i.e., 21.4% compared to 43.6% for KML) of the project's value - which, at $351.2 million, is also worth considerably less than the value of the assets it has contributed to the project - and under the existing Joint Venture, it receives no up front payment for the assets it has transferred. In comparison, the worth of Kamoto to KML increases dramatically to $716.5 million or over twice the value received by Gécamines. We believe that this is the situation which prevails at Kamoto: in other words, Gécamines is bound into a Joint Venture Agreement based on to conservative low metal prices and no up front payment when, in reality, metal prices are higher. A disproportionate amount of the value generated by the Kamoto project therefore accrues to KML.
In order to arrive at an equitable deal for both parties, there are two possible solutions: the first is for KML to make a one off, balancing payment to Gécamines; the second is for Gécamines to increase the amount of equity it holds in the project.
1. A balancing one off payment
Taken together, the worth of the Kamoto project to Gécamines, when combined with an up front balancing payment, should be equivalent to the book value of the assets the state owned mining company contributed at the outset. This combination of up front payment and present value can again be modelled for different metal prices: the scenario considered here uses historical prices in 2004 US$.
Using this scenario, Gécamines receives a total equivalent to $589 million for the assets it has contributed to the project, a figure that is in line with a plausible value for the plant, equipment , see this value, plus metal reserves. At the same time, KML still receives a somewhat advantageous split of the value generated, i.e., 38% compared to 31% for Gécamines.
2. An increased stake for Gécamines
Again using realistic metal prices, rather than Gécamines receiving a one off balancing payment, it is possible to model an increased equity holding for Gécamines that results in the state owned mining company deriving fair value from Kamoto over the duration of the project. Of course, Gécamines holding should only be increased to the point where the Kamoto deal remains attractive for KML. On this basis, it would appear that a fair distribution of equity is 40% to Gécamines and 60% to KML. This still allows KML to derive a value of $539 million from the project. At the same time, the project is worth $528 million to Gécamines, which is in line with with a plausible worth of the plant, equipment and metal reserves transferred, at a reasonable discount. In other words, both parties derive an approximately equal share of the value from the project.
So far the analysis has dealt with the fairness of the KCC Joint Venture in relation to Gécamines and the private partners. From this standpoint, it is apparent that, given the underestimated metal prices and the zero value placed on the assets transferred by the state owned company for its 25% stake, the deal is unfair to Gécamines. However, KML has consistently argued that the Kamoto project should be seen in the wider context of contributing to the rebuilding of the Congolese economy and the reconstruction of the country. Clearly investment in DRC is vital: it will ultimately provide tax revenue (both corporate and income tax) to central government, create waged jobs and foster a domestic market for goods and services. Such factors need to be taken into account when assessing the wider benefits of the Kamoto project, in order to establish to what extent, if any, they offset the existing poor deal for Gécamines.
Katanga Mining is planning to invest $675 million in the Kamoto project. Note57. The company estimates that the project over its twenty year lease will contribute almost $2.2 billion in taxes, royalties, wages and other spending to the DRC economy. Note58. Ultimately, 2,500 people will be employed during the operational phase, with 'double that number indirectly employed in the supply chain.' The company also points to 'a significant multiplier effect as increased consumer spending supports local businesses.' The initial redevelopment has created 1,700 jobs and the company claims that, even at current levels of employment, $950,000 a month is injected into government and the local economy. Note59. As of the beginning of 2007, KML estimated its contribution to date into the DRC economy at $10.4 million, of which expenditure on locally sourced goods accounted for $5.1 million and 'payroll and social support' $4.6 million. Note60. No detailed breakdown of social expenditure per se to date or in the future is given: the focus is to be upon 'strategically high impact, self sustaining projects - healthcare & education and training.'
It is, of course, pertinent to note that an improved deal for Gécamines will not, of course, adversely effect many of these wider benefits: job creation, social expenditure, revenue streams from taxation and royalties.
While KML has provided little or no data or explanations of how it has calculated the wider benefits it cites, the expert model can again be used to determine the relative worth of the Kamoto project not only to the project partners, but also to the DRC government. Again, this value alters depending on the metal prices used and whether or not a balancing payment is made for the assets transferred. The following scenario is used: a 25% share for Gécamines, with no up front payment (as under the current joint venture contract), with three price different price levels of $1.10/10 US$/lb copper/cobalt (the base case in the Feasibility Study), 1.52/15 US$/lb copper/cobalt (based on historic prices) and 1.25/10US$/lb copper/cobalt. This latter scenario is added because these prices are used by KML in its February 2007 presentation when calculating returns for the DRC government. Note61.
It should be noted that increasing metal prices from the low levels used in the Feasibility Study and Technical Report, through the conservative prices used in KML's February 2007 presentation, to realistic levels based on historic data, results in a smaller proportion of the project's value accruing to the DRC Government (i.e., through taxes and royalties) and a larger proportion accruing to KML as the private sector partner.
The object of modelling the returns and worth generated for each of the project partners at Kamoto is to obtain an independent assessment of the fairness or otherwise of the joint venture agreement. Considerable care has been taken to avoid using base data that would result in overstating the case for renegotiation in favour of Gécamines. Indeed, a conservative value has been given to many of the variables:
KCC, Gécamines and KML, appear to have underestimated the long term copper price (1.10$/lb instead of 1.52$/lb) and the cobalt price (10$/lb instead of 15$/lb) when compared with prices based on real historical data in 2004 US$ values.
y Hence the IRR for the project is significantly increased to 76.9%, which compared to a 12% opportunity cost of capital, leaves a margin of 64.9% to the project sponsors.
However, KML, as the private partner, captures a disproportionate amount of these returns because the 25% stake in the project owned by Gécamines under the existing agreement does not reflect the true value of its contribution to the project.
It is a matter of serious concern that the considerable value of the assets - the reserves of copper and cobalt and the plant and equipment - brought to the project by Gécamines have never been properly assessed. Comments by the KML's CEO suggest that, when compared to a greenfield site, and after taking into consideration the cost of refurbishment, these assets are worth in the region of US$570 million.
Modelling the worth of the Kamoto project using realistic metal prices produces a net present value to KML of $716.5 million and to Gécamines of $351.2 million. Not only is the NPV accruing to Gécamines worth considerably less than the value of the assets it has contributed to the project, but the state owned company receives a disproportionately low percentage of the value created - less than half that received by KML.
The imbalance in the distribution of the benefits from the Kamoto project can be redressed either by an up front payment to Gécamines or through an increase in its equity stake in the project. Using realistic metal prices in the model suggests that an up front payment in the region of $266 million or an increased equity stake for Gécamines of 40%. Both scenarios would result in a broadly equitable distribution of the NPV of the project, albeit slightly more favourable to KML.
Increasing metal prices from the low levels used in the Feasibility Study and Technical Report, through the conservative prices used in KML's February 2007 presentation, to realistic levels based on historic data, results in a smaller proportion of the project's value accruing to the DRC Government (i.e., through taxes and royalties) and a larger proportion accruing to KML as the private sector partner.
An improved deal for Gécamines will not, of course, adversely effect many of these wider benefits: job creation, social expenditure, revenue streams from taxation and royalties.
Both a former and present chief executives of Gécamines have stated that consideration should be given to the review and renegotiation of the joint venture contracts. Robert Crem has advocated the "revocation or suspension of mining contracts and conventions under negotiation or signed" and "[t]he examination and audit of these contracts and/or conventions as a condition for their implementation, together with their technical, commercial and financial plans with a view to their eventual revision or annulment." Note67. In an interview published in July 2006 by the Financial Times (FT), Paul Fortin, the incumbent head of Gécamines, confirmed that there is a possibility some of the mining contracts could be renegotiated. Note68. He also stated that if Gécamines enters into new joint ventures, it would be through open competitive tenders. While Fortin acknowledges that the annulling of contracts could undermine the DRC's development prospects, he states that if companies failed to produce then "we will cancel the contract, we will apply to court." Finally, and most importantly, the DRC mines minister, Martin Kabwelulu, announced as recently as 27 March 2007 that government officials must "suspend, until further notice, all negotiations aimed at the conclusion of new partnerships as long as the government is conducting a process of reviewing existing contracts." Note69. On March 7 2007, Kabwelulu announced that that he had established a commission to review all mining deals with the aim of amending those deemed unfair to the Congolese state.
There currently appears to be the political space for the renegotiation, where necessary, of joint venture contracts that are genuinely disadvantageous to Gécamines or the Congolese state. In the light of this, and in the light of the current analysis, RAID recommends that:
NOTES
See this video.Moneyweb, 'D-Day in the Congo,' 2 April 2007. In an official announcement at the end of March 2007, the AIM-listed mining company, Nikanor, which is redeveloping the gigantic KOV copper-cobalt mine, noted that the DRC government had confirmed that "a review of all mining contracts entered into during the period of the previous transitional government will take place. See this article."Business News Network, TV interview.Available click here.Available click here. Available click here.UK Department for International Development.Available click here. and Mineral Commodities Summaries, January 2007, p.195, Appendix C . Available click here. See Extractive Industries Transparency Initiative:.Available click here.. See also, Hatch, Kamoto Copper Company, Executive Summary Report for Kamoto Development Project. Available click here.Available click here..Available click here.. There are four phases of the project, each with its timing and production targets.Available click here..Government of Bermuda, Review of Companies Register:.Company profile Katanga Mining Limited: .(click here).) COSS prices are for Zambian-grade material (99.3 percent).available click here..Available click here.Available click here.. In the Feasibility Study, the figure for investment was $658 million.Congo mining chief puts private sector contracts under spotlight,' 20 July 2006.Available click here..RAID: Rights & Accountability in Development | 38 Norham Road, Oxford OX2 6SQ | United Kingdom Tel: (+44) (0) 1865.515.982 | Fax: (+44) (0) 1865.515.982 | E-mail: raid@raid-uk.org
put on line on 22/04/2007 by Pierre Ratcliffe Contact: (pratclif@free.fr)