November 2010

Outlook darkens for DRC developments

Recent seizure of assets brings to the fore the risks involved in doing business in developing countries

By Peter Diekmeyer

Frontier Mine

First Quantum’s Frontier Mine, expropriated by the Democratic Republic of Congo, is now the subject of international arbitrationPhoto courtesy of First Quantum Minerals

At one time, First Quantum Minerals’ operations in the Democratic Republic of Congo (DRC) held great promise. Its Kolwezi tailings project and Frontier copper mine employed more than 1,500 people, and the company, which invested close to one billion dollars in the mineral-rich West African nation, was one of its largest mineral extractors and taxpayers.

Today, First Quantum’s hopes in the DRC are in ruins and the company is embroiled in the courts and international arbitration, battling an array of players that are divvying up the spoils from its former holdings. The final blow came in late August, when Sodimico, a DRC state-owned mining company, ordered the company to stop all mining operations at Frontier, the last property it still controlled.

The Congolese property seizures are forcing Canadian and international mining sector operators and developers to reassess the risks involved in doing business in the developing world. “The expropriations are a dramatic symbol of the constant conflict between resource holding countries, usually in the emerging markets, and investors and sponsors, often from the developed world and backed up by international financial institutions,” said Thomas Wexler, a partner at Fasken Martineau LLP, and industry specialist.

Signi Schneider, director of political and human rights risks at Export Development Canada, agreed. “Experts have long been aware of a variety of political, currency and change of government risks attached to doing business in developing countries,” said Schneider. “However when a big story like this comes around, it increases awareness of these risks both among the general public and investors, who then tend to look for ways to mitigate them.”

On paper, First Quantum Minerals’ venture into the Democratic Republic of Congo looked well-structured. The company already does business in Mauritania and Zambia, two steady jurisdictions in Africa. So an investment in a more lucrative, though riskier, venture in the Democratic Republic of the Congo looked like a good fit.

The Canadian company’s troubles started when the DRC government unilaterally reopened 63 mining contracts with international players, including First Quantum Minerals, and asked co-signors for additional concessions, upfront payments and the like.

At one point, the DRC government suddenly broke off talks, and then quickly seized First Quantum’s Kolwezi tailings project, and then more recently, the Frontier Mine, which had opened in 2007 and was expected to yield 1.43 million tonnes of copper in concentrate during the ensuing two decades.

Following the Kolwezi seizure, First Quantum Minerals asked the International Chamber of Commerce in Paris to hold a hearing on its legality, a move that company officials believe triggered the Frontier seizure. For its part, the DRC announced that it would investigate First Quantum for “suspected wide-scale misconduct.”

The DRC ranked 171 out of 179 in Transparency International’s 2008 Corruption Perceptions Index, and 182 out of 183 countries in the International Financial Corporation’s “ease of doing business” listing.

Yet despite the forbidding numbers, some companies appear to be willing to take their chances. “The DRC is of course a special case, with rich deposits and unsettled politics,” said Wexler. “Increasing demand from Asian buyers and companies will also lead to further tie-ups with resource holding countries, often to the detriment of more established owners or investors.”

First Quantum is not ready to give up the fight any time soon. In mid-September, the company announced that it was taking further legal action in the matter against players that participated in divvying up its former mining assets. Its primary targets include two subsidiaries of Eurasian Natural Resources, which, Clive Newall, president of First Quantum, said “…had plenty of notice that they were dealing in stolen property.”

On October 1, the company announced that it was heading into international arbitration in Washington, D.C. to regain its mining title to its Frontier Mine. The property has been sold to a Hong Kong company named Fortune.

“We will continue to drive this legal process to its conclusion,” said Newell in a statement. “We are determined to achieve a just outcome and to uphold the standards of good governance, not only for our shareholders, but also for the Congolese people.”

The Democratic Republic of Congo’s embassy in Ottawa declined to comment on the matter.

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