~*~Mining and Metals Du Jour~*~

[JohnCM]

https://investorshub.advfn.com/Katanga-Mining-Ltd-KATFF-33085/

DRC Mining Code changes: Where to now?

March 26, 2018 Solidarity

On 10 March 2018 President Kabila signed a law that is to substantially amend the 2002 Mining Code of the Democratic Republic of Congo (DRC) by increasing royalties, taxes and mining companies’ obligations. The new law is also purporting to terminate a stability right given to mining companies by the 2002 Mining Code. This right ensures that, if changes are made to the code, mining companies would benefit from a 10 year grace period before having to comply with the changes.

The stability and favorable tax regime of the 2002 Mining Code had been devised by the government with the assistance of the World Bank and in consultation with mining companies. These provisions aimed at encouraging miners and financiers to invest in DRC at a time when the country, which had gone through a series of major crises, was in dire need of foreign investments.

Mining investments did increase considerably under the 2002 code and most of the large investments made by companies currently operating in DRC were made in reliance on this stability right.

It is therefore not surprising that miners have not reacted enthusiastically to the new law.

The timing of the signing by President Kabila was itself a message. It came only a few days after the chief executives of some of the world’s largest mining companies had tried to convince him, during a six hours meeting, not to implement the new law.

In fact a few weeks before, DRC had already displayed a perfect sense of timing as its National Assembly had voted the new mining law only a few days before the Indaba mining conference in Cape Town.

By doing so it had ensured that its reform would take center stage at the event as a fait accompli. Consequently the conference saw an exchange of robust declarations with some mining companies threatening arbitration or predicting that no serious investors would ever want to come to DRC and representatives of the government or of Gécamines (the DRC national mining company) accusing the industry of bad faith and having looted the country’s resources for years.

The President’s announcement could therefore also be seen as just another episode in an ongoing communication war between the government and mining companies.

This of course is nothing new and the past 15 years have seen this type of maneuvering on a regular basis. Other African countries, such as Guinea or Tanzania, have also recently been aggressively reforming their code, often in the context of highly publicized tax audits and extensive reviews of existing mining contracts.

Whether these reforms are part of a new general wave of resource nationalism driven by global economic factors or whether each country is following their own specific political or economic reasons, is a matter for debate.

However, whatever the reasons, mining reforms measures often seem remarkably similar wherever they are initiated: increased royalties, higher taxes and larger free carry state shareholdings, reduced tax benefits, stronger local processing obligations and reduced ability for governments and miners to agree specific tax packages.

DRC is no exception as its new mining law includes the following:

Mining licences reduced from 30 to 25 years, exploration licences renewable only once.

State free carry non-dilutable equity stake increased from 5% to 10% and increased by 5% on each renewal of an exploitation licence.

10% share of the share capital to be held by Congolese private citizens when creating a mining company.

Covenant to comply with the social responsibility undertakings given to local communities.

Increased obligations regarding local processing and local contents.

Obligation to repatriate funds increased from 40% to 60% and to 100% once the investment has been depreciated, with no possibility of using repatriated funds to pay external debt.

At least 40% of the development costs to be contributed by way of equity rather than debt.

Registration fees of mortgages on mining licences increased from a modest flat fee to a % of the secured amount

Mining Code tax benefits extended to mining companies’ subcontractors only if they are controlled by Congolese shareholders.

Royalties increased from 2% to 3.5% for non-ferrous and base metals and from 2.5 to 3.5% for precious metals and calculated on the gross market value of the products.

Creation of a special 10% royalty on minerals deemed by the Government to be “strategic substances.”

Creation of a special 50% tax on excess profits, defined as profits made when a commodity exceeds by 25% the price used in the bankable feasibility study.

Validity of assignment of mining titles subject to a 1% registration fee based on the transaction price, which may itself be subsequently reviewed by the authorities.

Capital gain tax on sale of direct and possibly indirect interests in a DRC mining company.

Direct and indirect change of control of an mining title holder subject to the prior approval of the State.

Purported termination of the existing 10 year stability right and introduction of a new 5 year stability right.

Some countries may go further than others on a particular topic, such as Tanzania’s attempt at prohibiting international arbitration, but the trends remain relatively similar.

However, although public confrontations between miners and governments are not unusual, one can wonder why the DRC’s reform has generated such level of bitterness.

A few factors may perhaps explain this:

The relationship between foreign miners and the CEO of Gécamines, whose company is a shareholder in many mining companies in DRC and who is said to have been instrumental in the new law, is known to be particularly tense;

Mining companies tend to resent the fact they are getting publicly blamed for not giving enough back to the country when a number of NGOs report that little of the large amounts of taxes and duties paid by the industry to state agencies find their way to the general population or into public infrastructure and services;

Whilst in 2012 extensive conversations had taken place between mining companies and Congolese officials on some proposed amendments to the 2002 mining code, the new law is said to bear little connection with what had been discussed and to have been drafted with no consideration for the concerns previously expressed by mining companies and their financiers.

However one aspect more than any other that may have led to this confrontation is the method used in the new law. Contrary to the approach taken in other African countries which have recently implemented very substantial reforms of their mining codes, the DRC law does not provide any clear transitional period for the application of the new regime.

Nor does it seem to offer any flexibility as to the way some of the new obligations may apply or accrued rights may be retained even only in part. It simply ignores the existing rights of the mining companies that invested in reliance on the 2002 Mining Code and imposes on them a new set of fiscal, financial and operational obligations.

This is made worse by the fact that some of these obligations are totally at the discretion of the government (such as the right for the state to designate some minerals as “strategic” subject to an additional 10% tax.)

Other mining reforms, whilst also imposing increased obligations, have given both governments and companies the right and time to negotiate how some of these new obligations would apply.

This is probably one of the main problems with the new law as it seems to have forced both the government and companies into a corner with little room for maneuver except to speak tough and harden their position.

It has in fact perfectly set the scene for a scenario that could eventually lead to some mines shutting down, tax revenues streams drying up and multiple international arbitration proceedings being initiated against DRC.

Whether this was deliberate or not is not clear. However the issue may have been identified as after the meeting between President Kabila and the mining companies, a statement was released by the mining minister that the concerns of the miners will be taken into account through a constructive dialogue with the government.

As part of this process some of the major companies operating in DRC and their advisers are soon to meet with the government’s officials and mining experts. Although Congolese officials are reported to have said that no compromise reached during these talks would contradict the code’s provisions, it will be in the best interest of all parties to reach some kind of agreement.

The use of a transition legal mechanism should allow for the implementation of a compromise that would preserve the substance of the 2018 code.

However the story may not end there as the CEO of Gécamines has also announced that he intends to revisit the current arrangements between the national mining company and foreign miners. The impact this may have on the forthcoming dialogue or the future relationship between the government and mining companies remains to be seen.