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Glencore has underperformed most of its peer group, partly on concerns about developments in the Democratic Republic of Congo (DRC) where the Switzerland-based mining and trading group operates copper and cobalt mines.
On face value, these are enterprising minerals to mine, especially cobalt, given its scarcity in the face of likely significant demand as electric
vehicles proliferate.
Cobalt is an important mineral for battery manufacture, but it really only occurs with copper mineralisation, a metal which Glencore has in spades in its DRC Katanga assets.
The DRC, however, has enacted a new Mining Code this year, which seeks to extract more duties and royalties. The code, though, can be questioned legally.
It purports to supersede the 2002 Mining Code, but the contention of Glencore – and other companies operating in the DRC – is that there’s a stabilisation clause in the 2002 code, the point of which is to protect companies for a period after alterations are made to the code.
“While we take no view on how or when these issues resolve, we note that when commodities prices rise situations have arisen where producer countries ask for higher taxes and royalties,” said Goldman Sachs in a report.
It said that “historically” producer countries and companies found “a middle ground to what the countries ask for and what the mining companies can afford”.
Not so fast, claims Exane PNP Paribas, a French bank. While it acknowledges that the risk attached to the DRC regulatory environment has been priced into Glencore, it points to a more “asymmetric” risk regarding Joseph Kabila, the DRC president, who has exceeded his constitutional rights by declining to call national elections last year.
In terms of the DRC’s constitution, he is entitled to two terms in office if elected. The worry is he might run for a third.
There’s also a legal dispute involving former Glencore partner, Dan Gertler, an entrepreneur and DRC mining tycoon who is claiming potential royalty losses from assets he acquired from Gécamines, the state-owned base metals mining company.
Glencore was instructed to halve royalty payments after Gertler was declared a Special Designated National by the US government, the contravention of which is to invite sanctions.
Glencore’s Katanga and another DRC base-metal firm, Mutanda Minerals, are companies that operate on land Gertler first purchased from Gécamines.
While the legal standing of Gertler’s claim is questionable, he is asking for $695m for Mutanda and $2.28bn for Konkola.
Said Exane: “It appears to us that US sanctions on Mr. Gertler, in a twisted way, could open up an opportunity for China to take advantage of the ensuing chaos to get hold of mining rights, and therefore of copper/cobalt assets.”
This article originally appeared in the 7 June edition of finweek. Buy and download the magazine here, or sign up for our weekly newsletter here.
