Taxes aren't the real problem with mining in Congo: Gadfly

There's a strange thing about the fear going through the global mining industry after the Democratic Republic of Congo signed an order to lift royalties last week: Compared with most other countries, these levies are still relatively low.

The existing 2 percent rate on copper extraction compares with royalties five times that level in Chile and Peru, the two biggest producers.

Even at the new 3.5 percent rate proposed by the country's national assembly, charges will still be lower than those paid in Australia and the U.S., according to a PricewaterhouseCoopers database of copper royalties. (There'll be an additional levy on windfall profits, too — but the history of those taxes suggests little money will be raised, anyway.)

So what's the fuss about?

For one thing, royalties are only part of the cost mix for a mine. Congo's southeastern copper belt is isolated and infrastructure-poor even by the standards of major mining regions. Electricity is brought by powerlines from near the mouth of the Congo River on the opposite side of the continent, and the region has invested heavily in diesel back-up generators and upgrades to the dams and transmission lines to gain a measure of stability. Exports are mostly along a snaking roadway via Zambia and Botswana to South Africa's Durban port.

That raises costs substantially. Despite some of the highest ore grades in the world and a rich endowment of the currently red-hot battery element cobalt, operating cash costs at Katanga Mining Ltd., controlled by Glencore Plc, came to $2.17 per pound of copper in 2014.  That's more than double the 93 cents per pound at BHP Billiton Ltd.'s Escondida, in Chile, in its most recent fiscal year.

On top of that, there's an informal Congo dividend to be paid. Israeli billionaire Dan Gertler, a former shareholder in Katanga, had his U.S. assets frozen in December after the Treasury alleged he'd forced multinational companies to use him as a middleman to do business in Congo. The Guardian reported the previous month that the Paradise Papers leak showed Glencore loaning $45 million to Gertler in exchange for assistance securing a mining agreement for Katanga. (Both sides have said there was nothing unusual or improper about the arrangement.)

There are other problems. Katanga had to restate two years of its accounts last November after Canadian securities regulators started questioning some of its practices. The review found the company claimed to have made about 8,000 tons of copper that was never produced, and said that about $108 million of metal concentrates had gone missing from the plant, while Katanga hadn't known about $5.5 million in undisclosed payments that Glencore had made to 12 of its managers.

And don't forget the ever-present risk of unrest. President Joseph Kabila, who signed the mining code after six hours of talks with resources executives, is in government 15 months after his second term was supposed to end. Almost two million people were driven from their homes last year amid ethnic clashes centering on the northeast, and a like number of children are now at risk of starvation due to aid shortages.

Relations between mining companies and governments resemble haggles, and this litany of difficulties means Congo is stuck in a perennially weak bargaining position. The high quality of its mining assets is discounted by the parlous state of its infrastructure and governance. That's only partially compensated for by the fact that taxes are still relatively light.

A better equilibrium would see higher tax rates paying for state-building, roads and electricity generation, bringing down the cost and risk of mining in Congo. That would be wonderful — but in a war-torn country where government revenues are frittered away on graft, it's little wonder mining companies balk at paying tomorrow in return for the weakest hint of hope for the future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.