Title: Outlook blackens for DRC developments

Sub-title: The recent seizure of First Quantum Mineral assets brings to the fore the risks involved in doing business in countries where rule of law is non-existent.

 

At one time First Quantum Mineral’s operations in the Democratic Republic of Congo held great promise. Its m Kolwezi Tailings Project, and Frontier copper mine, employed more than 1,500 people, and the company, which invested close to $800 million in the mineral rich West African nation, was one of its largest mineral extractors and taxpayer.

 

Today First Quantum’s hopes in the DRC are in ruins and the company is the courts and international arbitration, battling a slew of players that are divvying up the spoils from its former holdings. The final blow to came in late August, when Sodimico, a DRC state owned mining company, ordered the company to stop all mining operations at Frontier, the last property it still controlled.

 

The Congolese property seizures are forcing Canadian and international mining sector operators and developers, to reassess dangers involved in doing business in the developing world. "The expropriations are a dramatic symbol of the constant conflict between resource holding countries, usually in the emerging markets, and investors and sponsors, often from the developed world and backed up by international financial institutions,” said Thomas Wexler, a partner at Fasken Martineau LLP, an industry specialist.

 

On paper, First Quantum Minerals’ venture into the Democratic Republic of Congo looked well-structured. The company already does business Finland and Australia, in two steady jurisdictions and has experience elsewhere in Africa. So an investment in a more lucrative, though riskier venture in the Democratic Republic of the Congo looked like a good fit.

 

However Canadian company’s troubles started, when the DRC government unilaterally reopened 63 mining contracts with international players, including First quantum Minerals, and asked co-signors for additional concessions, upfront payments and the like. According to one insider, the company put considerable effort and made significant concessions to craft an acceptable proposal.

 

At some point the DRC government suddenly broke off talks, and then seized quickly seized First Quantum’s Kolwezi Tailings Project and then later, the Frontier mine, which had opened in 2007 and was expected to yield 1.43 million tones of copper in concentrate during the ensuing two decades.

 

Following the Kolwezi seizure, First Quantum Minerals asked the International Chamber of Commerce in Paris to hold a hearing on its legality, a move that company officials believe triggered the Frontier seizure. DRC also announced that it would investigate First Quantum for “suspected wide-scale misconduct.”

 

Congo: poor corruption and “ease of doing business” rankings

Canadian mining sector stakeholders’ natural instinct is to sympathize with any local player locked in a dispute in a foreign jurisdiction. However it is particularly hard to sympathize with the Democratic Republic of the Congo. The country ranked 171rst out of 179 in Transparency International’s 2008 Corruption perceptions index, and 182nd, out of 183 countries in the International Financial Corporation’s “ease of doing business” listing. 

 

Yet despite the dreadful numbers, some companies appear to be willing to take their chances. “The DRC is of course a special case, with rich deposits and unsettled politics,” says Wexler. “Increasing demand from Asian buyers and companies will also lead to further tie-ups with resource holding countries, often to the detriment of more established owners or investors."

 

This story is not going away anytime soon. In mid-September, First Quantum Resources announced that it was taking further legal action in the matter against players that participated in divvying its former mining assets, including two subsidiaries of Eurasian Natural Resources.

 

The Democratic Republic of Congo’s embassy in Ottawa declined to comment on the matter.

 

Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based freelance business writer.

  

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