At the beginning of May 2018, Core Consultants will release a major cobalt market study that has been underway for almost two months.
The study utilises Core’s connections to sub-Saharan Africa to reveal current production in great detail, particularly that of the DRC.
1. Introduction
Cobalt has come into the limelight over the last eighteen months or so. This is unsurprising given the surge in smartphone users, battery-powered devices and investment and uptake of electric vehicles. As such, the cobalt supply chain is being looked at with more and more scrutiny.
In 2014, Amnesty International together with African Resource Watch (“Afrewatch”) exposed Chinese cobalt producer, Congo Dongfang Mining (CDM), a wholly-owned subsidiary of Chinese mineral giant, Zhejiang Huayou Cobalt Ltd (Huayou Cobalt), for purchasing material from artisinal miners, which often exploits children. The expose managed to link key end-users including Apple, Samsung and Sony as benefiting from this system and accused these companies of failing to do basic checks to ensure that the cobalt used in their supply chains did not come from child labour.
The Amnesty International Report was swiftly followed by the Wall Street Journal in January last year, which provided video-evidence of child labour and exploitative conditions. Sky News has since jumped on the anti-cobalt trail when in February 2017, it captured children as young as four years old tied up in the cobalt supply chain.
Human Rights violations is not new to the mining industry. Nor is it new or even surprising to be occurring in the DRC- a country which is one of the poorest in Africa and in 2014 ranked 151st out of 159 countries in the Human Freedom Index, however the background to the DRC and how copper/mining licenses were awarded and just how the supply chain got so out of hand, explains fully the level of corruption and decisions made by both Government and industry to partake in this corruption which has led us down the current path.
So the intention here is to set out in detail the history of the cobalt sector in the DRC, which is key to understanding governance circumstances surrounding the securing of these companies’ mining licenses, some of the constraints that companies in the DRC need to overcome and really just to try and make sense of the fact as to how cobalt, which is a relatively small industry, as opposed to copper, diamonds, gold and tantalum became the modern-day posterchild for human rights violations.
2. Overview of cobalt in the DRC
Notwithstanding all its challenges, the DRC’s copper and cobalt industry is the largest, most productive and highest export-earning sector in the country. National official statistics in the DRC are particularly unreliable but – for what they are worth – they state that in 2013, industry, including mining, contributed 21.7% of national GDP. Industrial production in the country has dwindled over the years to near-zero, so nearly all of this figure relates to mining.
In 2012, the IMF estimated that 97% of the country’s export earnings came from oil and minerals. A year later, government figures showed total recorded mining exports to be worth $7bn, or 71%, of an estimated national total of $9.9bn. Of this $7bn, recorded copper and cobalt exports contributed $6.6bn, 95%, and two-thirds of the country’s entire recorded exports.
2.1 The DRC’s illegal trade in minerals
A large proportion of the DRC’s exports (and imports) are not recorded. While minerals appear to constitute the bulk of both the value and volume of the country’s unrecorded exports, copper and cobalt’s proportion of this is probably lower than that recorded for exports. Although there is, and has been for many years, the unrecorded export of copper and cobalt ores and concentrates from Katanga, most of which is mined using artisanal miners, the majority of copper and cobalt is mined industrially and officially exported.
Despite worsening electrical power woes, the DRC’s official copper production was over 900,000 tonnes in 2013, a record for the country, 45% higher than was exported in 2012, and higher for the first time in years than copper production in neighbouring Zambia.
Mined production of cobalt in the DRC increased an estimated 9% in 2013, reaching 51,500 tonnes compared to 47,330 tonnes in 2012. Production from the DRC’s top three cobalt producers represented over 68% of the country’s total production, with Mutanda Mining firmly taking over the position from TFM as the largest cobalt producer.
In 2013, production of cobalt intermediates grew an estimated 37% to 32,300 tonnes of cobalt in primarily crude hydroxide form, with much of the incremental supply coming from Mutanda Mining, where cobalt output total reached 5,500 tonnes. The outlook for cobalt production in 2017 is expected to be 3.7% higher than in 2016, with the majority of the added capacity to be in the form of hydroxide. However we note that smelters such as Chambishi are looking at the possibility of fixing one output (such as hydroxide) and varying the other two forms ( metal and oxide for example) so it is difficult to predict the form of cobalt being produced.
Chart 1: Production outlook of cobalt
[wpdatachart id=1]
In contrast to copper and cobalt, well over half the country’s gold production is artisanally mined, with over 90% of this output being smuggled. Diamond smuggling is also common, and the proportion of the country’s tin and tantalum production that is exported illegally remains high despite ongoing efforts to track and trace supply chains in order to prevent conflict financing.
With all these provisos, however, it may nonetheless be stated with confidence that copper and cobalt are by some way the country’s largest export earners.
Industrial copper and cobalt miners are also, along with telecom companies, the country’s largest tax payers. In theory, the mining sector’s taxes are governed by the Mining Code, introduced in 2002, except for the few companies that still have hybrid mining conventions, such as Tenke Fungurume (“TFM”), now owned by China Molybdenum.
2.1.1 General note on artisinal mining and cobalt
Hundreds of thousands of Katangans live as artisanal copper and cobalt miners, or in support services (rock crushing, restaurants, prostitution, mobile phones etc.). Unlike in other provinces, where artisanal mining has been going on for decades, it is a relatively new phenomenon in Katanga, arising from the slide into bankruptcy of Gècamines during the 1990s. Prior to this, there was little or no artisanal copper and cobalt mining in the province, though there was artisanal tin mining in Haut Katanga.
The first artisanal miners of copper and cobalt were said to be ex-Gècamines employees themselves and their families, who were seeing the mines where they worked cease operations and their incomes dwindle to nothing. Artisanals progressively invaded industrial, or more properly ex-industrial sites on the Copperbelt, and began mining copper and cobalt ores. During the early 2000s, the ores were often sold to Chinese buyers, who would transport them unprocessed via South Africa for refining in China. The province subsequently banned the export of ore, which resulted in the emergence of a number of Chinese-operated mineral processors, who partially refined artisanally mined ores into concentrates for export back to their motherland.
2.2 Routes out of the country for copper and cobalt
Infrastructural capacity is the Achilles Heel in the copper/cobalt supply chain. I presented on this subject at the 2010 Cobalt Development Institute (CDI) conference, but the findings definitely still apply.
Traditionally colonial powers in Africa and later competing superpowers did not encourage road links between their respective peers, thus newly independent African states border restrictions were often tightened rather than relaxed as a way of protecting trade. Aside from this, wars and conflicts have led to the destruction of roads and river crossings, often preventing maintenance, leading to closures of major links. In the case of the DRC, war has partially destroyed the principal routes between West and East Africa and set back road infrastructure development.
Furthermore, delays are exacerbated by highway checkpoints and border controls across Africa.
[wpdatatable id=10 table_view=excel]
Figure 1: Road map of Africa showing border controls and checkpoints
On Figure 1, we note the following three main points:
- The Lobita-Beira Highway, otherwise known as the East-West Route. Most of that road is unpaved, it was used until the mid-70s, but now the Western Half from Angola South and Central DRC needs reconstruction.
- Also there are two internal roads, the Kolwezi Likasi road and the Lumbumbashi Kasumbalesa roads. In the case of the former, it is hardly operational in the rainy season and even in the dry seasons, conditions are very poor. Nikanor did spend some money repairing the roads to ensure the transportation of equipment, but the lack of maintenance since then has returned the road to its previous condition. The bridge over the Lulaba River is in desperate need of repair, though it has been reported that a Chinese company will be rebuilding the road by the end of the year. The upgrade of the Kolwezi-Likasi road must be seen as a priority in order to ensure smooth carriage of copper and cobalt, though to date there has not yet been a company who has completed this upgrade.
- The Lubumbashi Kasumbalesa road is in good condition as the toll system enables maintenance. However, the border at Kasumbalesa is badly organised as vehicles cannot pass on a Sunday, causing traffic jams on Monday and Tuesdays. Although the traffic jams between Lubumbashi and Kasumbalesa have been somewhat relieved by the Congolese Customs Body Control Centre, there is still a need for improvement.
Therefore the only viable road options for export from Katanga Province have been:
- Small volumes to the port of Dar es Salaam in Tanzania
- North and South (NS) Corridor routes via Zimbabwe/Botswana
Despite having to cross up to four borders and the large distance, the N-S corridor is, and is expected to remain, a preferred route. South Africa is a major supplier of goods to its southern African neighbours and therefore the NS corridors presents the opportunity for return loads, which has a positive effect on transportation costs.
With respect to the rail network, although the rail system in Southern Africa is extensive connecting Durban to DRC and East Africa, most of the continents’ railways are disconnected lines.
Additionally outside of South Africa, most networks still operate with their original facilities-some of which are more than a century old and have not been upgraded. Consequently, they are only capable of moving low axle loads. Furthermore, in some systems, major sections are not operational and require rehabilitation before operations can resume.
Work is underway to rehabilitate the 1,344 km Benguela railway between Katanga and Lobito port in Angola. If successful, this would become the shortest possible export route to Europe and would link Angola to the copper belt in Zambia and Katanga. At present the line is only operational between Lobito and Cubal, having been rehabilitated and opened in 2005. However, it is in a very poor condition and runs at speeds of less than 15km/hr between Kolwezi and Dilolo.
On the Angolan side, Civil War destroyed part of the network in 1975. In 2005, China provided $300-500m in financial aid to assist with the replacement of the track. However in January 2011 there was a dispute between the Chinese rail construction company and DRC railway Company, SNCC, over payment, which resulted in suspension of the project. Since this time, news regarding the upgrade has been scant.
2.3 Corporate Copper and Cobalt Miners in the DRC
The DRC’s copper/cobalt sector is highly diversified, comprising of around thirty domestic and foreign companies operating in the space. The top five copper/cobalt producers in the country represent around two thirds of the country’s copper production. ENRC, China Molybdenum ( which bought Tenke from Freeport-McMoRan) and Glencore account for some of the largest copper mines in the country.
2.4 The origin of DRC copper/cobalt and the role of Gècamines
President Mobutu Sese Seko nationalised the Union Minière du Haut Katanga (UMHK) in 1967, creating the Générale Congolaise des Minerais, which later became the Générale des Carrières et des Mines (GCM or Gécamines). Gècamines, which was and is 100% state-owned, quickly became the president’s cash cow, was also required to spend increasing amounts on its workers and surrounding communities, effectively replacing the state in Katanga’s Copperbelt in the provision of social services. Spending on maintenance, investment and exploration dwindled, hastening the day when the company’s production collapsed. That day came in 1990, with the collapse of pillars holding up mine shafts in the Kamoto underground mine, one of the company’s biggest mines.
Then followed a two-year period of great political turbulence in the country, with Mobutu and the government issuing rival currencies at one stage, and the army going on two devastating, presidentially-sanctioned national looting sprees. Gècamines’ copper output fell from over 450,000 tonnes in 1988 to under 40,000 tonnes in 1992, pushing it rapidly towards bankruptcy.
Desperate for cash, in 1995 Mobutu authorised then-prime minister Leon Kengo Wa Dondo’s administration to sign a management agreement with Enterprises Generales Malta Forrest (EGMF) for Gècamines’ Kasombo concession, and a production agreement with Australia’s Anvil Mining for Dikulushi and Kapulo. A joint venture agreement was also concluded in somewhat mysterious circumstances between Gècamines and Canada’s Lundin for the massive Tenke Fungurume concession in which Phelps Dodge, and subsequently Freeport McMoRan of the United States later took a majority shareholding. Uniquely, at the time, Gècamines’ mining title to Tenke Fungurume was transferred to the new joint venture.
In 1996, the Rwanda-backed/created Alliance des Forces Democratiques pour la Liberation du Congo-Zaire (AFDL), apparently led by Laurent-Desire Kabila, launched its war against Mobutu. As the resistance of the Forces Armees Zairois evaporated and the AFDL ploughed through the country, mining investors rapidly switched their attentions from Mobutu to Kabila. Kabila welcomed them and his team re-negotiated several mining contracts to secure additional signature bonuses and perks (including use of an executive jet) for him even before he reached Kinshasa.
Kabila took Kinshasa and became president in 1997. A year later, the country was at war again, with rebel armies backed by Rwanda and Uganda for several years restricting Kabila’s zone of control to the western provinces alone. Luckily for Kabila, however, his zone included the Katangan Copperbelt.
2.4.1 Middle men-Katumba Mwanke and Dan Gertler
Fighting the war and staying in power was an expensive business, and to help pay for it, Kabila authorised Augustin Katumba Mwanke, a former banker whom he made governor of Katanga, to raise money by either selling Gècamines’ assets and agreeing to new joint ventures. Among the first in the queue was Dan Gertler, a young Israeli diamond merchant who in 1997 lent Kabila $20m and facilitated introductions to Israeli security specialists. Gertler, who also befriended the president’s son Joseph, forming a connection that continues today, subsequently lent a further $15m, for which he was rewarded with a lucrative near-monopoly on the sale of diamonds from MIBA, a state-owned enterprise (SOE).
Mwanke’s priority in agreeing to joint ventures was to secure signature bonuses for Kabila and his entourage. In return, investors demanded – and received – a host of concessions including long-term tax exemptions that in some cases exceeded thirty years.
Kabila was murdered in 2001 and replaced by his son, Joseph, who swiftly reversed many of his father’s policies. Joseph co-operated with the UN rather than blocking them and in so doing invited back the IMF and the World Bank to the DRC. All three institutions responded eagerly, and the Bank was the driving force behind the Mining Code, which was approved by the National Assembly in 2002.
Under the Code, a new Cadastre Miniere (CAMI; a mines registry) was established, tasked with allocating mining titles transparently, according to objective criteria, on a first-come-first-served basis, to operators with guaranteed financial and technical capacity. The Code also introduced provisions intended to ensure that licenses remained only with operators who could demonstrate they had made progress on the ground, and standardised the fiscal regime, determining tax and royalty levels, and requiring that all funds from title sales go directly to the Treasury.
There were presidential elections in 2006, and Kabila needed money for his election campaign. During 2005, the state owned mining company, Gècamines, negotiated no less than twelve new and revised joint ventures for some of its best assets, like the Kamoto Underground Mine, Musonoi, and Kamoto East, Oliviera and Virgule (KOV). The joint venture agreements all featured significant signature bonuses, once again in return for tax breaks, excessive discounts on the value of existing infrastructure, and other costly concessions.
Dan Gertler and Belgian-Congolese businessman George Forrest featured prominently among the private sector investors in the new joint ventures, many of which were headed up by people deployed by Mwanke.
A striking feature of these agreements was how little effort Gècamines made in their preparation to value the reserves and infrastructure it was selling, to the point of refusing offers of help in this regard from donors and NGOs. This was because the Gècamines negotiators knew full well what poor value they were getting, but dared not speak out about the reason they were agreeing to them anyway.
The big exception was Tenke Fungurume. In 2005 Phelps Dodge, which was at the time the main shareholder in the project, agreed to restructure the joint venture in a process facilitated by then-vice-president Jean-Pierre Bemba. Bemba was Kabila’s main opponent in the 2006 elections, in which both claimed victory. The courts, unsurprisingly, found in Kabila’s favour, and Bemba’s militia and the Republican Guard subsequently slugged it out in the streets of Kinshasa. Bemba’s militia came off worst and Bemba fled to Portugal, from where he was later extradited to face charges of war crimes and crimes against humanity at the International Criminal Court in The Hague. The new joint venture terms for Tenke included an additional $50m signature bonus, and both Phelps Dodge and Lundin were later accused by some in Kabila’s circle of funding Bemba’s election campaign. Both companies denied the charges, but the matter soured relations between them and the government, improving only when Freeport McMoRan bought out Phelps Dodge’s stake.
2.5 Mine licenses are reviewed (and cancelled)
Domestic and international concern about DRC mining sector joint ventures mounted, and in response in April 2007, Minister of Mines, Martin Kabwelulu announced a review of all mining contracts. The review was scheduled to take three months, but ended up taking four years, with the ministry spurning all international offers of technical assistance for the process.
In most cases, the contract reviews resulted in title holders keeping their titles but agreeing new signature bonuses, higher royalties for SOEs, alterations in dividend flows in the SOEs’ favour and the removal or reduction of a number of fees that had previously been payable to the SOEs’ joint venture partners.
The most controversial outcome of the review was the cancellation of Toronto-listed First Quantum Minerals (FQM)’s title for the Kolwezi cobalt and copper tailings. FQM initiated legal proceedings against the government following the contract cancellation, and subsequently had all its other Congolese assets confiscated too.
2.6 Other big players arrive
Another important post-2006 development in the copper and cobalt mining sector was the steady replacement of the junior mining houses and speculators who had dominated the Gècamines’ joint ventures until then with much larger companies, including Kazakhstan’s Eurasian Natural Resources Corporation (ENRC) and Swiss commodities trader Glencore. As well documented by Bloomberg and Global Witness, ENRC and Glencore acquired their best Katangan mining assets from Gertler, who had previously acquired them from Gècamines for a far lower price. No firm proof has come to light, but the consensus view of those with knowledge of these deals is that Gertler kicked back to Mwanke and the president a sizeable portion of his windfall profit.
Kabila won the 2011 elections but shortly after Kabila was sworn in as president, in February 2012, Mwanke was killed in a plane crash in Bukavu. Inevitably, conspiracy theories have since abounded about Mwanke’s death, particularly since others on the plane survived, but the real reason, say sources who have spoken to the survivors, was that the plane landed in heavy rain, and, instead of stopping, careered along the runway and plunged into a ditch. Those who had kept their seat belts on survived but Mwanke, who had removed his, did not.
2.7 Gècamines remains swamped in allegations of corruption
Mwanke’s death was a major blow to Kabila, and particularly to his rent-seeking arrangements with the mining sector. Interestingly, Mwanke’s patronage network in SOEs, and in politics in general, has in most cases survived him and remained intact. The main exception is at Gècamines itself, where in 2014 Kalej was sacked as CEO for alleged corruption. However, Albert Yuma Mulimbi, the chairman of the Gécamines, survived, and appears to have developed a close bond with the president.
In December 2012, following a series of detailed Bloomberg articles on the subject, the International Monetary Fund suspended its lending programme to the DRC in protest of Gècamines’ refusal to publish a contract relating to a sale of a 25% stake in Katanga’s Comide copper mine to Straker International, a British Virgin Islands company controlled by Gertler. (More information on this is detailed when we discuss the awarding of mining licenses and ENRC in subsequent issues)
Prime Minister Augustin Matata Ponyo was furious and publicly berated Yuma for what had happened, but Yuma, whose confidence no doubt derived from his relationship with the president, stood his ground, saying Gècamines was a commercial company and that he did not have to answer to Matata.
In 2013, the Africa Progress Panel, chaired by former United Nations Secretary General Kofi Anan in a report entitled ‘Equity in Extractives’, strongly attacked Gècamines’ asset sales, claiming that between 2010 and 2012 the country had “lost at least $1.36bn in revenues from the underpricing of mining assets that were sold to offshore companies. Total losses from the deals were equivalent to almost double the combined annual budget for health and education in 2012.”
Embarrassed, the DRC government hosted a conference in Lubumbashi in January 2013 dedicated to the promotion of good governance and transparency in the mining sector, addressed by Kabila himself. Donors and some in the private sector were initially encouraged by the fine commitments expressed by Kabila and his government at the meeting, but there has been no obvious change since, save for improved transparency in private sector payments to state entities, resulting from the DRC’s (successful) efforts to gain membership in the Extractive Industries Transparency Initiative (EITI).
In our next Chapter, we will consider the big three players in the DRC and consider how these mining licenses were acquire. Mining licenses were awarded, often behind closed doors and shrouded in secrecy or through a series of extremely alarming M &A deals.
[caldera_form id=”CF58d4c540326ef”]
