The Democratic Republic of Congo (DRC) is home to vast reserves of a wide variety of natural resources – primary among them metals such as cobalt, copper, and gold; and precious stones including diamonds. DRC is believed to contain about 4% of the world’s copper reserves and one-third of its cobalt reserves. The mining industry, like the rest of the country’s economy, has suffered from the unstable political environment coupled and widespread strife caused by the six-year civil war that ended in 2003. However, for some time it appeared that, given high prices of minerals on global markets, investors would be willing to discount the political risk premium of investing in the DRC. But recent plummeting mineral prices and escalating costs has, according to the government, quoted by Reuters, already lead to 40 of the mining companies working in the DRC suspending exploration, development and production operations.

All mineral deposits in the DRC are state-owned and the holder of mining rights also gains ownership of the mineral products for sale. Governed by the National Mining Code, the Ministry of Mines regulates the Mining Registry, Directorate of Mines and the Geological Directorate. A peculiar feature of the mining industry in the DRC is that artisanal mining (ie: non-mechanised, small-scale mining) accounts for 70% of the national diamond production. So despite of being the world’s third largest diamond producer in terms of output, the country is rated seventh in terms of value. Furthermore, the use of archaic mining techniques has restricted possible growth in the diamond mining segment. Outbreaks of violence and civil unrest, and the looting of minerals and precious stones by armed militia, continue to drain the country’s rich natural resources. Though things looked up after the formation of a new government after the 2006 elections, analysts do not expect the macroeconomic and political environment to stabilise any time soon. In addition, although multinational miners have started investing in the country’s mineral and metals sector, the physical infrastructure remains extremely poor or even non-existent at times. First Quantum Contract Cancelled?

In an unexpected development, at the start of August 2008 the government cancelled one of First Quantum Minerals’ mining contracts in the country, Reuters reported. The government cancelled the contract for the Kolwezi cobalt and copper project, saying that the company had failed to commence commercial operations at the site within an agreed timeframe. First Quantum has denied this claim, saying that the 44-month timeframe referred to by the government was a non-binding guideline. The company remained in negotiations with the government as this report went to press. Development at Kolwezi is estimated to be 65% complete and production id scheduled to start in Q110. There is also uncertainty surrounding Freeport McMoran’s flagship Tenke Fungurume copper and cobalt project. Deputy Mines Minister Victor Kasongo told Mineweb that the company had two months to agree to revised terms for its mining contract at Tenke Fungureme.

BMI will monitor developments on both contracts as they occur. In a further development in August, Freeport McMoran agreed to pay US$16mn to the government to settle claims that its workers had misused the country’s visa and work permit system, it was reported by Bloomberg. On a more positive note, the government was able to strike agreements with AngloGold Ashanti, Banro, Mwana Africa and Gold Fields at the start of August 2009. China Investing Heavily In DR Congo The big news from the DRC’s mining industry in the first half of 2009 was the news in March that the country plans to accept US$9bn in investments from China, to be spent on mining and infrastructure – despite the opposition of the IMF. The IMF has expressed concern that this deal – which was originally agreed at the end of 2007 – will only add to DRC’s current debt burden. According to a report by Bloomberg, the deal will see China build roads, railways, hospitals and schools in return for metals worth some US$50bn at current prices.

Reuters also reported that negotiations on an initial US$6bn-worth of public works and mining infrastructure projects have already been finalised, with both sides still discussing the terms of the remaining US$3bn in funding. It is reported that this US$3bn will be used to fund Sicomines Sarl, a mining joint venture between state-owned metals producer La Générale des Carrières et des Mines (Gécamines), and various Chinese miners. This new joint venture– to become operational in 2011 – is reportedly set to produce up to 400,000 tons of copper and 19,000 tons of cobalt per annum. China’s ambassador to the DRC, Wu Zexian, has denied that the country will be burdened with debt as a result of the deal, also saying that the work is being carried out by China Railway Engineering Corporation and Sinohydro Corporation, which have received funding from China Exim Bank and China Railway.

Industry Forecast

The DRC is ranked third in the world in the production of diamonds in volume terms. However, whereas this area was seen as a strong growth prospect for the country, the current slump in demand for diamonds is forcing producers to cut back on production and exploration. For example, in November 2008, Gem Diamonds announced the immediate suspension of all alluvial and dredging exploration in the DRC. Meanwhile, copper and cobalt mining has also been severely dented by a massive decline in demand – particularly from China – and plummeting prices. Consequently, numerous operations have been suspended and projected copper production for 2009 has been halved. BMI believes that growth, in real terms, will be negative over our forecast period, due to the effects of high inflation, although the nominal value of the industry will climb.