Painting by Cheri Samba

Lokuta eyaka na ascenseur, kasi vérité eyei na escalier mpe ekomi. Lies come up in the elevator; the truth takes the stairs but gets here eventually. - Koffi Olomide

Ésthetique eboma vélo. Aesthetics will kill a bicycle. - Felix Wazekwa

Friday, July 22, 2011

Mutanda Mining’s Missing Millions

This is a guest blog written by a diplomat based in the Congo.

The Bloomberg News story published here last week could be Congo’s treasury scandal of the year. The article is about Gecamines, the once prosperous but now moribund state company, selling off assets worth over $800 million. No one wants to tell how much they've been sold for or what happened to the revenues. One allocation could be the state treasury – with a 7.2 billion budget, half of which is donor money, extra revenues wouldn’t be a luxury. But given the secrecy surrounding the case, there is little reason to expect much public benefit from the transactions. Half a year before elections are scheduled, there may be a need for cash flows that escape the governance rules the country has endorsed.

Assets worth over 800 million

A few months ago, Gécamines sold 20% in Mutanda Mining (MUMI) and 25% in Kansuki Mining. Both mining projects had been off the news radar so far, even though MUMI in particular is a very promising project. It’s only when Glencore, the world’s biggest commodity trader, got listed on the London Stock Exchange that one could read about the Gécamines sales, somewhere on page 830 of a 1600+p document describing Glencore’s assets and activities. In that document, an independent expert valued MUMI alone at over 3 billion USD. This means that Gécamines’ share was worth over 600 million.
This doesn’t even include the royalties Gécamines was entitled to. Royalties are typically a compensation mining companies pay to the state for depleting the deposit – in other words, for making Congo’s soil a little poorer as minerals get out. The MUMI Joint Venture was to pay such a 2.5% royalty on gross copper sales to Gécamines, in addition to the 2% legal royalties it owes directly to the treasury.

Over the life time of the open pit project, Gécamines royalties would run up to more than 200 million USD. Now, that money will no longer go to the State, not even to Gécamines: it will go the private entity that bought the Gécamines stake.

Sold to Gertler

Logically, Glencore could have bought Gécamines’ stakes, especially if it was being sold for cheap. As a shareholder in MUMI and Kansuki, it could block an purchase offer from a third party by buying the stake instead. But Glencore didn’t buy, even though it had the cash to do so. Instead, Gécamines sold its stake to “Rowny Assets, an entity associated with Dan Gertler”. As a reminder, Gertler is the businessman who got First Quantum’s cancelled Kolwezi Tailings license before including it in a package of assets it sold to ENRC for $175 million.

Gertler has great connections with the country's highest authorities. After having been invited to Kabila's exclusive wedding, he was more recently spotted on the VIP tribune during the last June 30th celebrations in Lubumbashi. Knowing that someone close to the Presidency bought assets worth over 800 million, two key questions remain. How much did Gécamines sell the assets for? And what happened to the revenues?

For how much?

Bloomberg News says it tried to reach Gécamines for over a month, only to get ‘no comment’ as an answer. Same silence from Glencore and Gertler. In theory, the sale price should feature in the Ministry of Finance’s revenues bulletin to be published every trimester, but there has been no report to date of any revenues for the state companies, whether from selling stakes, getting royalties or other cash benefits.

The sales agreement should be published on the Ministry of Mines’ website within 60 days of its signature. The deadline has past but the agreement is not up. There are two options. Either Gécamines sold the assets far under the market price (rumors say it went for much less than its market value). In this case we have a classic example of Congo losing hundreds of millions. If Gertler indeed paid a lesser price and he later sells it at market value, he takes the profit Congo as a state could have made. If he happens to sell to Glencore, then the latter confirms its shady reputation. It will have allowed someone close to the presidency to make a profit by not using its preemption right when it could.

If on the contrary Gécamines got something close to the assets’ real value, there is all the more reason to worry about the second question: where did the cash go?

Benefiting whom?

That’s the other secret. “They must (…) justify what the Congolese state has gained from the sale of all these concessions”, Honorable Bahati said in his Bloomberg interview, but it’s actually not clear whether the Congolese state got a single dime out of this. Hardly anything is known about the money flowing to Congo’s state companies: there is no well-defined system, let alone a transparent one. It could be transferred to the central government, or stay with the state company, or flow to selected individuals. It could be used for the organization of free and fair elections –buying, dispatching and collecting sealed ballot boxes and the like. But it could just as well be used for financing a presidential campaign – not the ballot boxes but the t-shirts, posters and other promotion that makes a single candidate popular.


Anonymous said...

Ole who de be kidding self? Aw! so nah money for people have been choped-choped this way?. If thee tied-kuluna done it for buy election, not na win would come his way, just pepper wa allah! It looks bad and thee election na problem against thee baba who is coming back from the dead. Ya Tshishi zongisa ye na bango na zamba... where they belong. I mean.... na Rwanda!!!!

Anonymous said...

Great report, Jason.

A few questions:

1. Do you happen to know who is handling/advising Geca's approaching IPO and, if possible, what exchange it will be listed on? (I assume London here but the first question will lead to the next) Uncovering both could help answer a few of the questions posed in this post.

2. Have the more braver Congolese newspapers or media outlets (Like Okapi)picked up this story?

3. Are similar papers in Switzerland, where Glencore is based, running this story as well?

4. Prior to becoming a union organizer, I was an investment banker at Goldman (don't ask). Thus, I am somewhat confused by this:

" Royalties are typically a compensation mining companies pay to the state for depleting the deposit – in other words, for making Congo’s soil a little poorer as minerals get out. The MUMI Joint Venture was to pay such a 2.5% royalty on gross copper sales to Gécamines, in addition to the 2% legal royalties it owes directly to the treasury."

But in the next sentence, the blogger states that NONE of the royalties will flow to the state. Setting aside the generally odd situation of splitting royalties to a public and private entity, which is it? I'm really not trying to be pendantic but its fairly central to the perception of potential fraud in this post. (assuming, ofcourse, this type of fraud is illegal in the DRC)

Again, fine post and this furthers my belief that the best thing the opposition can do in the approaching elections is to make a run for gaining a majority in the Assembly so as to clip and check the power of a paradoxically tyrannical and incompetent Presidency.

Feel free to respond here when you can or, if it suits you, to my personal email account as opposed to my MoveOn one.

Christopher Casey

Peter Rosenblum said...

Great piece. In partial response to Christopher Casey, the 2% royalties (called 'redevance' in the law) will still be paid to the state. It is the payment to Gecamines that now goes to the Gertler entity. One of the peculiarities of the Gecamines joint ventures -- which includes most of the copper/cobalt contracts -- is that almost all of them have an additional 2-2.5% (referred to as a 'royalties' in the contracts, not 'redevance') to be paid to Gecamines. As the anonymous author notes, it is even more bizarre, now, since those royalties will be paid to a private party. On the question of IPO and Gecamines, there is no publicly announced plan, is there?

Elisabeth said...

Hi Jason,

I've been thinking about the Gecamines royalties. Would you mind passing on a question for the author if he/she doesn't read this anymore?

Since royalties are normally a price paid to the state (or even the state company) for the minerals, this is usually factored as a cost, meaning that the profit of the company goes down. As the profit goes down, the profit tax goes down too.

My question is - if the joint venture now keeps paying these royalties to Rowny/Gertler, and keeps factoring it as a cost, even though it's not really compensating for any service or goods (minerals don't belong to Rowny), doesn't this turn this into a case of profit tax evasion?

The author suggests that Glencore may buy the stake from Rowny. If this happens, then one Glencore controlled entity (Mumi) would pay royalties to another Glencore controlled entity (Rowny), which just comes down to overt transfer pricing if the royalties are counted as a cost, no?

Could you please forward me his answer should you get one?

Anonymous said...

Gecamines' royalties are provided for in the JV agreement. If Gecamines sold its entire interest in the JV, which it appears it did, i.e., contractually Rowny stepped into Gecamines' shoes, then Rowny would be entitled to the royalties. In theory, Gecamines should pay income tax in the DRC (assuming it makes a profit). Since Rowny is a BVI company, I do not know what its DRC tax liability would be. There is nothing in the contract as far as I can tell that restricts the transfer of the Gecamines' royalty.

I'm also not sure why the author thinks Glencore might purchase this asset from Rowny. Stranger things have happened in the DRC (e.g., Emerald Star Enterprises), but I think it would be difficult to understand why SAMREF did not exercise its right of first refusal (at a rumored low price, as suggested by the author), only to have Glencore turn around and theoretically buy it at a higher price. Only time will tell, but I would be surprised if Glencore's a buyer anytime soon.

I know nothing more than the author, but Rowny certainly does not need to flip this asset to realize massive amounts of cash in the near term. Using Glencore's data, between the Rowny share of "free cash" and the royalties, Rowny should get $26 million this year, $178 million next year, $167 million in 2013, etc., etc. Glencore's numbers run through 2030. Lots of cash going to Rowny.

In any event, I do not think is this some scheme to evade taxes on a minuscule portion of the revenue generated by Mutanda . Rather, it is interesting why an asset with an NPV of $850 million (using the numbers and methodology in Glencore's prospectus) that is generating buckets of cash was sold with no public tender or disclosure by Gecamines or the DRC government. If the author is right about the price, it becomes even more interesting.

My $0.02, don't focus on tax evasion, focus on why (and on what terms) half of the most valuable mining and oil assets have ended up in the hands of BVI shells (and there are many dozens) over the past few years. This is post contract revisitation - not rehashing frequently-criticized deals from years past.

Anonymous said...

does this suggest Glencore will buy Rowny stake?

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Anonymous said...

I just read from The Guardian Newspaper,here in London yesterday. About Glencore Congo, the massive profit they just made for exploiting our land. A profit of 40 billions and the main title of the article was Congo for sale. Dear compatriots I felt ashamed and angry. Do those ones saying, they are the one to bring the country out of the chaos are doing it for themselves or really for the sick of all the population of DRC? The country economy is in shamble for a long time. Rather then raising the money and strategy to rebuild the country. They, they are favouring in membership, but it better for them also to know that Katanga is DRC. I leave it here for now. Thank you,

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