Industry Trend Analysis - Quick View: New Mining Law Will Not Alter Positive Outlook - APR 2018

The Latest: On March 10 2018, embattled Congolese President Joseph Kabila signed into law a new mining code that will raise royalties on minerals across the board, as he tries to shore up the support and funding needed to retain power. The executive decision was made following the passing of the new mining code by the DRC parliament and senate in December/January 2018 and in the aftermath of a meeting between the President and key mining stakeholders last week, which yielded no agreement on changes to the final text. Discussions on updating the country's 2002 mining law had been ongoing for a number of years but stalled due to the commodity price slump experienced over 2014-2017.

Cobalt And Copper Prices Heading Higher
LME Prices - Three-Month Copper (USD/tonne) & Spot Cobalt (USD/tonne)
Source: BMI, Bloomberg

Implications: The new mining code will increase royalties on copper from 2% to 3.5%, on gold from 2.5% to 3.5% and could potentially increase royalties on cobalt from 2% to 10%, if deemed a "strategic substance". Additionally, a new 50% tax on so-called super profits, defined as income realised when commodity prices rise 25% above levels in the project's bankable feasibility study, will be introduced. Other key changes include a provision that doubles the state's free share in mining projects to 10% and a reduction on the period during which contract stability is guaranteed down to 5 years, from 10 years stipulated in the current mining law.

Beyond raising costs for domestic miners, the new mining code poses downside risks to the investment outlook of the country's mining industry over the coming years as a result of heightened government intervention and regulatory uncertainty. Randgold Resources, for instance, has already announced it will consider international arbitration against the government if its ownership and rights to the Kibali mine are jeopardized under the removal of the 10-year contract stability guarantee. We also highlight risks to project development and thus production growth ahead, should miners opt to invest in more stable regulatory environments.

What's Next: Despite rising risks, we do not expect changes introduced by the new mining code to impact our positive growth outlook for DRC's mining industry over the coming quarters for the following reasons:

  • As outlined in previous analysis ( See 'DRC To Be Global Outperformer In 2018', February 5 2018) even with the announced hike in mining levies, the DRC's royalty rates will remain among the most competitive in the world for key sources of income, including copper and gold.
  • Key domestic producers such as Glencore are in a much improved financial position to deal with higher costs in 2018, buoyed by record earnings over FY2017 stemming from the metal price rally last year. We expect prices for copper, copper and cobalt to remain elevated in 2018.
  • The DRC will continue to be the only reliable source of cobalt in the short term, accounting for approximately 50% of global reserves and over 80% of global exports as of 2017, while major deposits in Australia or Canada are yet to be developed and could take several years to reach commercial production. As such, we believe domestic producers will have little option but to comply with the new regulations in order to continue catering to growing demand fuelled by a burgeoning electric vehicle (EV) market.
  • Finally, the government's announcement that it will continue engaging stakeholders and review the new regulations on a case-by-case basis following the passing of the new law, leaves room for flexibility and reduces the risk of conflict between both parties in the coming months.

Related Research

'DRC To Be Global Growth Outperformer In 2018', February 5

'Growth To Remain Sluggish As Political Risk Rises', February 16