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Facing corruption probes and resource nationalism, Western mining companies are quitting the Copperbelt
Producing 70% of the world's cobalt, an essential component of electric car batteries and mobile phones, Africa's Copperbelt is in the midst of a sweeping transformation. Seeking to expand their access to the metal, China's mining companies are eyeing the potential sale of assets such as Vedanta's Konkola Copper Mines (KCM) in Zambia and Glencore's mothballed Mutanda mine in Congo-Kinshasa.
Buying up those assets and consolidating political ties with Lusaka and Kinshasa would enable China's companies to extend their control of supply chains in the high-tech sector and reshape the region's mining sector at the same time (AC Vol 60 No 11, Little cash, no credit). It is also fits with a shift in China's strategy in Africa to focus more on private companies' operations, rather than state-backed mega projects, as set out by Yang Jiechi, President Xi Jinping's Africa envoy, on recent trips to Kenya and Nigeria.
Western mining companies' dominance in the Copperbelt is fading, owing partly to changing political conditions and business strategies while economic war between the United States and China escalates. Another complication is the growing scrutiny of international oil and mining companies. Glencore, one of the biggest commodity trading and production companies, faces a raft of corruption investigations.
The US and China have not competed much for African oil or minerals. But President Donald Trump's trade war, coupled with the search for scarce minerals for high-tech products, has changed the stakes.
Rising demand for cobalt, lithium, nickel and rare earths is changing mining companies on both sides of the border between Congo-Kinshasa and Zambia. With significant assets in both countries, Glencore's fate is key. The Swiss-based company's move to suspend production at its Mutanda copper and cobalt mine in Congo-K is seen as a challenge to the country's new mining code and an attempt to stabilise the price of cobalt, which halved in the previous 18 months because of over-supply (AC Vol 59 No 4, Kabila squeezes the miners).
It comes amid speculation in the markets that Glencore, facing a US Department of Justice (DOJ) investigation into corruption in four countries including Congo-K, is looking for an exit.
Mutanda holds the world's largest-known cobalt deposits and produced a fifth of global supplies of the metal for the batteries of electric vehicles.
China's expansion comes as several Western producers look vulnerable to takeover. China Molybdenum acquired Congo-K's largest copper producer, Tenke Fungurume, from the US producer Freeport-McMoran in 2016 and upped its stake to 80% earlier this year when it bought private equity company BHR's 24% share for $1.1 billion (AC Vol 57 No 11, Mine sale prompts tax grab). CITIC Metal Africa and Zijin Mining have acquired substantial stakes in Ivanhoe's Kamoa-Kakula and Kipushi projects.
Eurasian Resources Group (ERG) has signalled its intention to sell its Frontier copper mine and other assets in Congo-K following a drop in value due to the mining code and a dip in commodity prices. Several Chinese suitors are queuing up.
Neighbouring Zambia has long had Chinese mining companies, small and medium scale operators, in its Copperbelt. President Edgar Lungu's government has racked up much bigger debts to Chinese companies than it has previously admitted.
Sources in the Finance Ministry in Lusaka say that the Chinese creditors are losing patience over debt arrears. Chinese companies are not keen on debt rescheduling and would prefer to get some collateral, perhaps in the form of other mining assets. Under growing political pressure as economic problems mount, President Lungu is running out of options.
Chinese companies would seek to benefit from the liquidation of Vedanta's Konkola Copper Mines (KCM) and are also watching First Quantum Minerals (FQM), the country's largest producer, which operates Kanshansi and Sentinel mines.
The government-owned ZCCM Investment Holdings, which has a 20% stake in the country's biggest mines, wants to liquidate KCM, claiming that Vedanta is lying about expansion plans and is paying too little tax. However, Chinese companies are reluctant to buy disputed assets. ZCCM-IH's claims have to go through arbitration. This is an important test and could open the way for a sale.
The companies also face some anti-Chinese sentiment on the ground among trade unionists and local communities.
This explains the secrecy as Jiangxi Mining has purchased about 9.9% of FQM, listed on the Toronto Stock Exchange. The purchases have come through derivatives and direct stock purchases and have so far cost about $800 million. It would take about $2bn to give Jiangxi a shot at majority control. Meanwhile, there is a standstill agreement between FQM and Jiangxi in which the Chinese have agreed not to take over without the approval of FQM's managers and shareholders.
Glencore's Zambian mine Mopani may also be ready for the auction block. Some industry insiders say Glencore's two majority-owned Congo-K companies, Mutanda and Toronto-listed Katanga Mining, which operates the Kamoto Copper Project, are also being prepared for sale.
On 7 August, Glencore announced that Mutanda was no longer economically viable, citing the new mining code and the increase in corporate taxes as reasons (AC Vol 59 No 12, Making the miners sweat). The company said it would mothball the mine at the end of the year. The closure of Mutanda will constrain supply and has already stabilised the price.
Glencore's threatened mine closure may strengthen its hand with the government in its bid for an exemption to the 10% strategic substance levy on cobalt and the super-profits tax in the mining code.
Congo-K's tax revenues will plummet if Mutanda closes – Glencore paid the government $626m in taxes from Mutanda in 2018.
But it is not clear whose attention they are trying to get in Kinshasa. President Félix Tshisekedi would be most damaged by the job losses and the loss of tax revenues from a two-year stoppage although many of his supporters wanted him to take a harder line with the mining companies and their political allies. Ex-President Joseph Kabila and his allies still call the shots in the mining industry. Albert Yuma Mulimbi, Kabila's man and the architect of the Mining Code, has just had his contract renewed as Chairman of Gécamines, the state-owned mining firm (AC Vol 60 No 12, Tshisekedi tries his luck).
Mutanda, once the jewel in Glencore's strategy to convert itself into a hybrid miner-trader and take a bet on the future of electric vehicles, has dimmed along with the price crash. Chronic energy shortages and political battles with Kinshasa have further complicated matters.
In February, a truck carrying sulphuric acid to Mutanda crashed into a minibus and spilled acid on the road, leaving at least 22 people dead. A month later, 43 artisanal miners were killed at Kamoto and the army was sent in to restore order.
At the heart of Glencore's problems in Congo-K is the fact that its assets were acquired with the assistance of the Israeli businessman Dan Gertler, who was placed on a US sanctions list in December 2017.
At the time, the US Treasury said the billionaire had amassed his fortune through hundreds of millions of dollars' worth of 'opaque and corrupt mining and oil deals' in Congo-K. Gertler had used his close friendship with Kabila 'to act as a middleman for mining asset sales in the DRC, requiring some multinational companies to go through Gertler to do business with the Congolese state' (AC Vol 58 No 5, An awkward tango for Gertler and Glencore).
As a result of Gertler's actions, the Treasury said, between 2010 and 2012 alone, the Congo-K, one of the world's poorest countries, may have lost more than $1.3bn in revenues from the under-pricing of mining assets that were sold to offshore companies linked to Gertler.
Glencore's acquisition of the Congo-K assets is being investigated alongside charges against it of bribery and corruption in Nigeria, Venezuela and Brazil.
The sanctioning of Gertler created problems for Glencore as it owed him around $200m in royalties. Paying him those royalties would put them in violation of US sanctions, so the account was frozen. After a political battle in Congo-K and a legal battle in Europe, Glencore resumed its royalty payments to Gertler in euros, rather than US dollars, to circumvent the sanctions. It said this was the only way to retain control of its assets in Congo-K.
But the issue soured Glencore's relationship with the government in Kinshasa. In the view of the US authorities, paying Gertler in euros is still a violation of the sanctions and perpetuates the financial ties between Gertler and Kabila.
As it tries to reach a settlement with the DOJ, Glencore is trying to restructure. Two of the company's key Africa hands – Aristotelis Mistakidis, head of copper, and Alex Beard, head of oil trading – have been pushed out. The use of middlemen to negotiate under-the-table deals is said to have been suspended.
Many expect this to be followed by the retirement of managing director Ivan Glasenberg, an apprentice of commodity trading king, Marc Rich, who died in 2013. However, Glencore's argument that, whatever its regulatory problems, its exit from the Copperbelt would hand control of many strategic minerals to Chinese companies, has failed to convince US officials.
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