Miners dig in to resolve African resource nationalism challenges

Resource nationalism is nothing new, nor is it confined to one particular industrial sector or region, but it is perhaps in Africa and within mining and oil & gas where the most concentrated problems have arisen most recently. 

With increases in certain mineral prices over the past year or so, some sub-Saharan African governments have sought to change the mining codes and tax agreements with existing miners, which has led to loss of earnings for both sides and uncertainty over future investments. However, there is no real long-term winner with the way this has been done in the vast majority of cases.

The one thing that investors and financiers dislike most is uncertainty. Certainly, it is understandable for a government to seek the best deal possible with any mining investment, and for African governments they want to see any big mining investor also make investments in local infrastructure such as health, water, schools, the transfer of skills and technology and a significant contribution to that country’s GDP. And in many cases foreign mining companies are already doing most of these to varying degrees. But for a government to simply change the rules of the game, or introduce fines midstream is probably the worst way to deal with a mining contract they are not happy with. 

Speaking to TXF, Robert Besseling, Executive Director at pecialist intelligence company EXX Africa, says “Resource nationalism has returned to Africa on the back of higher global commodity prices. The countries where this is most evident are the usually stable metal mining hubs of Tanzania and Zambia, as well as the more volatile Democratic Republic of Congo (DRC).” 

He adds: “In the case of Tanzania and Zambia, these governments have leveraged their revenue authorities to arbitrarily impose preposterously high punitive fines on some of their largest investors and employers in the hope of extracting a quick cash settlement. In both countries, this tactic seems to have backfired, which marks an interesting trend in how foreign investors respond to state contract frustration.” 

Speaking on this issue at Mining Indaba in Cape Town earlier this year Randgold Resources chief executive Mark Bristow said: “As long as African countries offered mining codes and fiscal regimes that were reasonably investor-friendly, companies were prepared to take the risks of limited or non-existent infrastructures and skills bases, as well as political volatility. Start making unreasonable demands, however, and investors will vote with their feet.” 

He also pointed out that despite the great mineral wealth in Africa, there was now a reversal in mining investment because of unreasonable demands from governments – with only 14% of global mineral exploration expenditure there last year, compared with 30% to South America and 28% to North America.

He added: “Unfortunately, all that we and other companies have built has been put at risk by recent developments that amount to no less than an abuse of the partnership concept by one side.  At a time when Africa is endeavouring to become a major economic force, this is bad for the continent as well as the industry.  However, as the new ANC leadership has shown with its intervention in the South African mining code impasse, good sense can still prevail.”

Around the same time, Randgold, which is heavily involved in the DRC announced that it was engaging at the highest level with the government about its new mining code which, in Bristow’s words, “seems based on the irrational premise that the state is somehow entitled to the entire net cash flow from the mines”.

Analysing how mining companies are responding to many of these challenges, Besseling at EXX Africa, comments: “It seems that mining companies are now more willing to revert to international arbitration and to threaten divestment, rather than to pay up. This is likely because foreign investors have better safeguards in place to protect against violations of their contracts by host governments. Also, as more African countries are opening up to foreign investment, competition to attract foreign cash is fiercer than before, which plays into the hands of the mining companies.” 

Looking at other miners, Acacia Mining which is active in Tanzania (as well as Burkina Faso, Kenya and Mali) is currently having to live with a ban on gold exports imposed in March 2017 by the government of John Magufuli. In addition, Acacia was hit in mid-2017 with an extraordinary fine of $190 billion for alleged under-reporting of revenues. Acacia is fighting the fine through international arbitration. 

In its last annual report, Acacia said: “We are currently the largest foreign direct investor in Tanzania having invested over $4 billion into the country over the past 15 years and we made a direct economic contribution of over $644 million to the Tanzanian economy in 2017, which represents around 2% of total Tanzanian GDP.” And beyond this, among other local investments, last year Acacia paid $143 million in taxes to the Tanzanian government, spent $434 million with Tanzanian suppliers and now 96% of its employees are Tanzanian. 

However, the company has been hit hard through loss of earnings and says in its annual report that the export ban has prevented the sale of 90% of the concentrate produced by Bulyanhulu and Buzwagi in 2017 representing a loss of $264 million of revenue. Acacia’s major shareholder, Barrick, is negotiating with the Tanzanian government over the gold export ban.
 
But in relation to the DRC, there is certainly a different track being taken by mining companies, traders and the government, as Besseling points out: “However, in DRC, the surprise revision of the mining code earlier this year has not been resisted by the affected mining houses. Instead, there is a broad anticipation that the government will offer settlements on a case-by-case negotiated basis. Given the high demand for cobalt and DRC’s tight control over global supply for the metal, mining companies have weaker negotiating positions and are more willing to accept arbitrary changes to their contract terms.” 

For commodity trader Glencore, as one the world’s largest producers and marketers of copper and cobalt, the DRC is massively important to the company. And mining agreements in the DRC are much more opaque than in other sub-Saharan African countries. Here, Glencore has had to fight complex legal battles. Recently, Glencore settled its dispute with state-owned Gecamines over their Kamoto Copper joint venture in the DRC – but at the cost of a $150 million one-off payment and a debt-for-equity restructuring. 

Glencore has also had other legal battles in the DRC with firms – namely Ventora Development and African Horizons Investments (AHIL) - affiliated with Israeli billionaire Dan Gertler, so that Glencore can retain its mining interests in the DRC and continue to produce copper and cobalt. As part of that, in a June statement Glencore said:  “Glencore and Katanga Mining have determined that in the circumstances the only viable option to avoid the material risk of seizure of its assets under DRC court orders is for Mutanda and KCC to pay the relevant royalties as and when they become due to Ventora in non-US dollars, without involving US persons, in order to discharge their obligations under the terms of the pre-existing contracts.”

And the reason these payments will be made in non-US dollars and won’t involve US persons is that Dan Gertler was sanctioned by the United States Treasury’s Office of Foreign Assets Control (OFAC) in December last year. In a statement, the US Treasury alleged: “Dan Gertler is an international businessman and billionaire who has amassed his fortune through hundreds of millions of dollars’ worth of opaque and corrupt mining and oil deals in the Democratic Republic of the Congo.” 

It also added: “Gertler has used his close friendship with DRC president Joseph 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.” 

These sanctions were further beefed-up in mid-June this year when the US Treasury also sanctioned 14 companies – including Ventora - for being affiliated with Gertler. US Treasury noted: “Between 2010 and 2012 alone, the DRC reportedly lost over $1.36 billion in revenues from the underpricing of mining assets that were sold to offshore companies linked to Gertler.”  

Sigal Mandelker, Under Secretary of the Treasury for Terrorism and Financial Intelligence, also stated: “Treasury is sanctioning companies that have enabled Dan Gertler to access the international financial system and profit from corruption and misconduct. We are using our tools to change the behaviour of those engaged in the looting of natural resources and the humanitarian consequences that follow.” 

There is much more to tell on this whole story – but, as space is short in this blog, that will have to wait for another time.

Now time to get up to speed on the markets – the headline deals, margins and market dynamics

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Well, that’s all for now folks. Please do drop us a line if you have any news and want to broadcast something, or if you have any suggestions/feedback on the editorial front.

Have a great rest of the week.

Cheers

JB