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21 August 2019

Big questions surround future of mining in DRC

Glencore’s decision to temporarily mothball the world’s largest cobalt mine in the DRC raises many questions about the state of mining in the central African country. Jonathan Bell examines the reasons behind the decision and assesses what the future could hold for both the country and Glencore.

With much of the talk in the mainstream press about the future of the auto industry being one of increased electric car manufacturing and the growing demand for materials such as cobalt, the news that the Swiss-headquartered trading company and miner Glencore had decided to close its massive Mutanda mine – the largest cobalt mine in the world - in the Democratic Republic of Congo (DRC) probably comes as something as a bit of surprise.

However, it should not. First there are metal market and corporate fundamentals which require a degree of rationalisation relating to the issues of market price, production costs, as well as overall supply and demand. Yes, there are changes taking place in the auto industry which could see less initial demand for cobalt than previously thought. Then there is the really big issue of working in the DRC and dealing with the government and its ever-changing regulations and stipulations. The latter issue turns the picture into a veritable minefield for Glencore, and for one of the world’s biggest traders that says an awful lot about the current situation.

Like any trader working on the frontline, and particularly one with such important assets, Glencore is no shirker when it comes to rolling up the sleeves and getting down to the hard grind of doing business in what many see as a very murky market such as the DRC. Since publicly listing, Glencore is a much different animal to the one of the past. Transparency and sustainability are fundamentals which it is embracing – as it must. But balancing all this in the DRC does not come easy.

The recent decision to close the Mutanda mine is really one of putting the mine in a ‘care and maintenance’ mode, possibly for a period of two years from the end of this calendar year. This comes following a 40%+ collapse in cobalt prices. Cobalt prices on the London Metal Exchange (LME) are near their lowest since October 2016, having crashed to around $27,000 a tonne or $12 a pound from levels near $94,000 a tonne or $44 a pound in April last year. 

Largely, the cobalt market was impacted by oversupply following the opening of new mines in the DRC. Mutanda produces about 15%-20% of global supplies and accounted for around 65% of Glencore’s total cobalt production in 2018. It is also  understood that Glencore has around 10,500 tonnes of unsold cobalt at its Mutanda mine - some of which may be sold on the spot market if the price improves.

Since the Glencore announcement about Mutanda, the cobalt price has picked up to around $31,000 a tonne today. Some 7,000 people officially work at the Mutanda mine. However, there is much illegal artisanal mining taking place at most mines in the DRC, and in some cases this has led to fatalities on sites such as at Katanga in June this year. Glencore is now understood to be planning perimeter fencing at specific mines. 

But despite the market forces which have impacted the cobalt price, Glencore’s decision to close the Mutanda mine is also part of the ongoing standoff between the company and the DRC government. Possibly Glencore had expected some change for the better in its commercial arrangements in the country when former president Joseph Kabila stepped down in January this year, and Felix Tshisekedi took over as president – but so far this does not seem to have happened.

Last year, just months before leaving office and despite fierce lobbying, Kabila enacted a new mining code which places an additional financial burden on mining companies. The code increases royalties on ‘strategic’ minerals (cobalt is of course classed as a ‘strategic’ mineral) from 2% to 10% and requires mining companies to allocate 0.3% of their turnover to the development of community projects. Glencore is already a major contributor to community projects in DRC. According to Glencore’s report on payments made to governments – as per the EU directive – the company made a total of $593 million to the DRC in 2018 in taxes and other payments as part of its obligations.

But even more punishing for mining companies is a 50% super-profits tax, which kicks in when profits exceed 25% of those forecast in a mine's original feasibility study. Glencore has complained that the prices were set several years ago when cobalt was worth much less than today.

In a group management letter to employees at its Mutanda mine, Glencore cited DRC’s new mining code as among the reasons for closing the mine. “Due to the significant decline in the price of cobalt, increased inflation in some of our main inputs (mainly sulphuric acid) and additional taxes imposed by the mining code, the mine is no longer economically viable in the long term,” the company wrote.

However, the political scene in DRC continues to flounder. One analyst has stated that Glencore lost patience with the Congo's deadlocked politics after Tshisekedi took some four months to announce a new prime minister as he sparred with Kabila's Common Front for Congo (FCC) party, which continues to hold an absolute majority in parliament. None of this continued turmoil helps any company involved in DRC mining.

And the whole question of mining in DRC is even further complicated by the involvement of Israeli businessman Dan Gertler, who has for many years been active in the country’s mining sector and is closely allied with the Kabila family.

In Glencore’s extensive sustainability report published in April this year, CEO Ivan Glasenberg, reported: "The year also brought specific challenges for Glencore and our DRC operations, arising from sanctions imposed on Dan Gertler, Katanga’s deliberations with Gecamines over the required recapitalisation of its main operating subsidiary, the introduction of a new mining code and the appearance of excess levels of uranium in the cobalt hydroxide produced at Katanga.

“Katanga resolved the matter with Gecamines in a constructive manner, while after careful consideration of its legal and commercial options and obligations to a broad stakeholder universe, Glencore settled its dispute with the various entities affiliated with Dan Gertler, in a manner that sought to address appropriately all applicable obligations and concerns.

“We hope to be able to negotiate a reasonable resolution with the DRC government on various key issues during 2019 but remain willing to take the necessary steps to protect our legal rights.”

Glencore’s overall performance H1 2019 also took a tumble and it reported that adjusted earnings had fallen 32% to $5.6 billion, while net income was down 92% at $226 million because of impairment charges. Consequently, the company’s shares have dropped to 233p from its high of 400p back in early 2018. The company’s share price is down around 21% this year, compared with a 10% rise for the FTSE All-World Mining Index (see below).

Glasenberg stated: “Our performance in the first half reflected a challenging economic backdrop for our commodity mix, as well as operating and cost setbacks within our ramp-up/development assets.” Glencore has also blamed: “heightened global trade policy tensions, US dollar strength and volatile interest rate curves”.

And in terms of the commodity mix, Glencore has considerable focus on its assets in copper and cobalt – commodities that are forecast to be in increased demand for use in electric vehicles. But the roller-coaster market has seen copper prices fall some 11% in the first half of 2019, zinc was also down by 16% and nickel by 11%. Glencore of course has substantial assets in and is a trader in thermal coal, but again it is a commodity which has seen substantial price drops this year.

However other big miners such as Rio Tinto reported bumper profits, largely because they own and trade iron ore. Glencore does not own any iron ore mines, even though it does handle the commodity. Iron ore hit a high of over $120 per tonne during the first half of 2019, lifting Rio Tinto’s iron ore profits by 39% to $4.5 billion. Rio’s coal profits were down 27% on the half year however.

Speaking on the commodity mix, Glasenberg has said: “We have got the right metals. You see the amount of electric vehicles is growing. With the batteries, we get the benefit of nickel and cobalt; at the charging points there is more copper; and the electric vehicle uses more copper than regular vehicles.”

Glasenberg remains optimistic about the business, also stating: “We are convinced that commodity prices will evolve in our favour and that our diversified portfolio will continue to play a key role in global growth.”


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