With the rapid rise in the prices of certain minerals and metals, commodity-rich nations in Africa are looking to capture a greater share of this bonanza. To take advantage of the growing demand for key metals such as cobalt and vanadium, developing countries can either open up mining operations to foreign direct investment or try to collect more revenue from their raw materials. The Democratic Republic of the Congo is taking the second approach, which is adding to the problems facing Glencore PLC, one of the country's larger mining operators.
In the 2018 Second-Quarter Forecast, Stratfor noted that the shifting regulatory environment in the Democratic Republic of the Congo could have global repercussions. The country has approved legislation that could affect the mining of cobalt, an essential metal in battery technology. The government's increasingly heavy hand and corruption scandals are plaguing Glencore PLC, a major mining company in the country, and those difficulties could further open the door for Chinese companies in the short term.
After a drawn-out period of uncertainty, the government implemented a new tax policy for strategic materials in March. Despite objections from the mining sector, the government in Kinshasa made three alterations to the law: increasing taxes on windfall profits, increasing royalties and removing contract guarantees, and removing a 10-year waiver on complying with new legislation. The mining industry objected strongly to the last two measures. And mining companies have already submitted alternative plans for royalty schemes and have threatened to seek arbitration, claiming that the new rules violate existing contracts. However, the government appears to have little impetus to change anything. Even with the new regulations, production is unlikely to decrease in the near term, but the composition of operators could slowly shift.
Swiss mining giant Glencore is at the heart of the ongoing disputes. The government — through state-owned mining company Gecamines — is challenging Glencore's holdings in the country. On April 20, Gecamines sought through the courts to dissolve a joint venture, Kamoto Copper Co. (KCC). Gecamines owns 25 percent of the company, and Katanga Mining Ltd. owns 75 percent. (Glencore owns 86 percent of subsidiary Katanga.) KCC is nearly $10 billion in debt because of problems with contracts and the underperformance of the mine, which shut down temporarily in 2015. Now copper and cobalt production at the mine is poised to boom. Production resumed in December, and the operation could become the world's largest producer of cobalt by 2019. Glencore Chairman Tony Hayward suggested recently that the most likely outcome of the disagreement would involve recapitalizing KCC and forgiving a portion of its debt.
But with a six-month deadline to resolve the debt problems, Glencore's interest in the operation is at risk. The company is seeking an amicable resolution, but this dispute isn't the only difficulty plaguing Glencore. The company is also under scrutiny because of its relationship with Israeli billionaire Dan Gertler. The United States sanctioned Gertler, claiming his business dealings in the Congo were corrupt. He has sued Glencore, which stopped paying royalties to him after the sanctions were imposed. On May 1, Glencore won a temporary injunction against Gertler, and a hearing has been scheduled for May 11. In addition, Glencore subsidiary Katanga, which trades on the Toronto stock exchange in Canada, is being investigated by regulators there over its accounting practices.
Under President Joseph Kabila, the Congo has shaken up the mining industry, and companies are trying to regain their footing. (Companies are also facing uncertainty over a possible political transition away from Kabila.) Scandals and disagreements continue to threaten Glencore, and other Western companies may eventually balk at mining in the Congo. This situation could open the way for Chinese companies that have the political backing to weather these less than desirable circumstances. And in two to five years, the Congo could start to lose its stranglehold on the global market if Australia and Canada become potential alternative sites for cobalt.