Glencore drops as clash with former partner adds to Congo issues

Glencore Plc dropped the most among the U.K.’s biggest stocks as the company clashed with a former partner over royalties at key copper and cobalt mines in the Democratic Republic of Congo.

The shares fell as much as 3.9 percent after the company said late Friday that a Congolese court authorized bailiffs to freeze certain Glencore assets after Israeli billionaire Dan Gertler served orders on local units for almost $3 billion in damages. The damages relate to royalties from the Mutanda Mining and Kamoto Copper projects, which Glencore stopped paying to Gertler since he was sanctioned by the U.S. for alleged corruption in December.

While the company bought Gertler’s stakes in the mines last year in a near billion-dollar deal, it’s still obliged to pay him royalties, which he previously acquired from state-owned Gecamines. Making those payments has become complicated for Glencore since the sanctions, which prevent Gertler from dealing in dollars and make it hard for Glencore to trade with him in any currency.

Contesting Order

Glencore on Friday said it will contest the freezing order and any subsequent proceedings. Gertler didn’t immediately respond to a request for comment.

The move by Gertler comes on top of a difficult few weeks for Glencore in Congo. Gecamines earlier this month accused Glencore of "draining" Kamoto of profit and petitioned the same court to dissolve the joint-venture. The Swiss commodities giant is already battling Congo’s government over a new mining code that hikes royalties and taxes.

Here’s what analysts are saying about the latest setback:

Morgan Stanley

The freezing orders add to complexity around Glencore’s Congo assets and could halt production of copper and cobalt from the mines. Combined, Mutanda, Kamoto and a third mine in Zambia account for 55 percent of the growth in forecast earnings before interest, tax, depreciation and amortization to 2020. "It underlines the need to apply materially higher discount rates to these mines’ future cash flows," the bank said in a report.

RBC Capital Markets

The freezing of assets “complicates the DRC picture for Glencore," analyst Tyler Broda said, downgrading Glencore from a top pick to outperform. Given Gertler’s "historical collaboration" with Congolese president Joseph Kabila, the Congolese courts are unlikely to reverse this order in the near term, he said.

Liberum Capital Ltd.

"It is difficult to see the international courts holding much sway on the ground and the DRC government are clearly now being far more aggressive with the miners," Liberum said. Glencore has indicated it will contest the rulings in the U.K. and Hong Kong. "Cashflows are increasingly uncertain," Liberum said.