Alert 83 – Proposed new DRC Mining Code Raises Alarm

by ERA

On 7 March Democratic Republic of the Congo (DRC) President Joseph Kabila held a meeting with the heads of the largest mining companies operating in the DRC (namely, Randgold, Glencore, Ivanhoe and China Molybdenum Co.), to discuss the contentious new Mining Charter, also referred to as the mining code.

After the six-hour meeting, Kabila stated that he would sign the new law with a joint statement emphasising that he had reassured the mining firms that their concerns would be considered via “constructive dialogue with the Congolese government following the promulgation of the new mining law”.

Some of the most significant proposed amendments to the existing Mining Code include the following:

  • An increase in taxes and royalties based on gross market value of products.
  • An increase in the state’s minimum unpaid share of new mining projects from 5% to 10%.
  • An obligation for Congolese companies to hold at least 10% of large-scale mines.
  • Reduce exploitation licences from 30 to 25 years; exploration licences would be renewable only once.
  • Social responsibility commitments and higher local content requirements.
  • Increasing taxes on profits from 30% to 35% plus a 50% tax on “super profits”.
  • The obligation to repatriate funds would be increased from 40% to 60% during the ‘investment return phase’ and to 100% thereafter.
  • At least 40% of the funds required to develop the project are to be contributed by way of capital injection, rather than financed through debt.

Further, a controversial amendment proposes raising royalty fees on metals from 2% to 10%, if the government categorises a mineral as a “strategic substance.” Cobalt will be considered “strategic”, as it has become a coveted commodity due to its efficiency in conducting electricity. Also of concern is the proposal that the code be applied immediately to holders of mining conventions while the two previous versions of the law proposed imposing new royalty rates from the outset, but retaining decade-long exemptions. The removal of the stability clause (which would protect mining companies from changes to the fiscal and customs regime for ten years) is of grave concern as mining companies will have to revise projected costs for the immediate to long-term.

Stakeholders had unsuccessfully lobbied Kabila to refuse to sign the code, arguing it will discourage investment and potentially violates existing mining agreements. Mining firms have also argued that higher royalties and taxes will erode profits and disincentivise further investment in the country’s mining sector. The Congolese government has disputed this, arguing that the revised mining code is necessary to boost tax revenue. Given that the new mining code is to be signed and promulgated, the next step is likely to be international arbitration by the leading mining houses with unified action possible, as suggested by Ivanhoe Mines’ executive chairperson Robert Friedland in February 2018.

In this context the outlook is not favourable for operations in the DRC’s mining sector although the laws of supply and demand could tip the scales in government’s favour given growing global demand for cobalt for, for example, electric car batteries; and the DRC will likely continue to lead in cobalt and copper production. However, in an increasingly insecure country, and with Kabila’s tenure beyond 2018 becoming uncertain (given looming December 2018 presidential elections, and pressure on him to name a successor), the proposed reforms could be a significant deterrent to investment in the mining sector, outweighing the surge in demand for cobalt currently leveraged by government. Further, while increased royalties and taxes would boost Congolese tax revenue, transparency and governance deficits mean that these revenues will not necessarily translate into improvements in the country’s infrastructure or benefits for local communities.