Glencore faces metals showdown in the Congo as government introduces new mining code

Reports from the Democratic Republic of Congo (DRC) suggest the bountiful resources nation has finally implemented prohibitive mining law reforms that could see significant levies added to existing production on all resources projects – specifically metals.

Regulations to immediately implement a new mining code were signed into law last Friday by Congolese President Joseph Kabila.

The regulations were first adopted at a cabinet meeting on Friday and then signed by Prime Minister Bruno Tshibala, saying that the application of the code will be “immediate”.

Knock-on effects

The new Mining Code increases royalties payable to the DRC government, on copper from 2% to 3.5%, on gold from 2.5% to 3.5% and could potentially increase royalties on cobalt from 2% to 10%, given the metal’s newly classified status of “strategic mineral”.

If that wasn’t enough, the DRC has also implemented a 50% “super-profits tax” which comes into play if commodity prices rise by 25% over-and-above what was estimated in resource feasibility studies.

Other key changes include a provision that doubles the state’s free share in mining projects to 10% and a reduction on the period during which contract stability is guaranteed down to five years, from 10 years stipulated in the current mining law.

News of last week’s law changes was largely expected by market analysts after several months of forewarning, however, the tax levies could lead to legal proceedings between the government and major mining companies operating in the DRC, including Glencore and Randgold.

Both companies have threatened legal action against the DRC’s government and are expected to resist several changes, especially the super-tax measure that could significantly undermine the economic viability of their projects in the region.

Furthermore, the Swiss-based major resources miner continues to be dogged by a series of scandals in the DRC including an unrelated case involving Congolese-American businessman Charles Brown who alleges that his shares were fraudulently sold to Glencore in two transactions, in 2007 and 2012, and is demanding more than US$1 billion in compensation and damages.

The case has become the third court challenge the mining and commodities giant now faces this year for control of its DRC mines.

Mr Brown is one of the founders of Mutanda Mining, currently the world’s leading cobalt producer thereby highlighting the tussle for resources supremacy in the DRC, but also other countries such as Tanzania where local governments are keen to claw back a larger share of growing revenues on the back of strong battery-metals demand.

Not all doom and gloom

Glencore shares have largely priced in the ongoing flux within several African nations are currently trading at 388.98 per share, unchanged since this time last month. Randgold Resources shares have also remained resilient, closing last week at 5,841 per share.

This week’s trading could see their shares price in the perceived impacts from the augmented tax regime in the DRC, although the actual impact has been muted so far.

For starters, both companies are likely to mount legal challenges, which could see the tax changes reduced or changed altogether.

In addition, despite the higher tax regime and royalty rates, the DRC remains one of the most competitive countries for copper, gold and cobalt mining – a region that remains far more low-cost compared to developed nations such as Canada or Australia, despite the additional levies now creeping in.

Resource market analysts have predicted that DRC’s domestic investment environment is unlikely to be impacted and that its huge resources endowment is likely to continue to attract prospective explorers and miners to the country.

Internally, Glencore is in a strong financial position to deal with higher costs this year, buoyed by record pre-tax profits in the last financial year of US$5.8 billion – generated on the back of a strong rally in metals prices.