November 18, 2017

Mining in the DRC, a palatable endeavour?

 

According to global reports, 30% of the world’s global mineral reserves are found in Africa, yet less than 5% of the total global mineral exploration and extraction budget is invested in the continent.

Mining is an industry of strategic importance in Central and Southern Africa. Minerals contribute greatly to several African Countries gross national product and employment, and many of them depend on mineral exports for their foreign exchange earnings. Mining, in addition, provides essential minerals without which the most basic and the most advanced industrial production would be impossible.

In Africa, infrastructure building is critical for the continued growth of the mining sector. Reports by leading global advisories suggest that African governments are at present unable to meet demand for key infrastructure including rail, ports and energy projects. In response, private participation and investment is being actively encouraged and sought after. Hence, many African governments, as part of the quest to diversify and capitalise upon their mineral rich countries, are realising the need for modern, open and transparent regulatory frameworks.

The Democratic Republic of Congo (DRC), formerly known as the Republic of Zaire, is a country with vast resources. Geographically, it is the largest state in Southern and Central Africa covering an area of 2,345,095 km² spans, which is equivalent of two-thirds of the European Union. With 80 million hectares of arable land and over 1,100 minerals and precious metals identified (extensive deposits of copper, cobalt, and coltan, as well as diamonds, gold, silver, tin, iron ore, zinc and oil), the DRC has the potential to become one of the richest countries on the African continent and a driver of African growth. However, similarly to many African countries, although DRC’s opportunities for mining, resources and infrastructure developments are impressive, there are many obstacles and challenges faced.

Mining in the DRC

There is great potential for the mining sector to propel economic growth in the DRC, but significant obstacles to progress remain – mainly the unstable political climate. The country, with all its abundant natural resource wealth, still faces challenges such as poor governance, a lack of infrastructure, stable legal systems, a predictable fiscal regime, power shortages, and recurring security challenges which means that the DRC has yet to effectively profit from its natural resources. Nevertheless, its pursuit of sustainable positive change is gathering momentum, and the DRC government is taking meaningful steps to progress beyond this impasse.

In the last five years, the DRC mining sector has boosted activity. According to reports of the Banque Centrale du Congo, the mining sector contributed 4.7 percentage points to the estimated 9.5 percent real GDP growth in 2014 and a similar amount in 2010-2013. Large amounts of foreign direct investments were attracted by the high-ore grades on offer in the DRC and high commodity prices as demand for minerals such as copper and coltan boomed. The DRC recently passed Zambia as the number one copper producer in Africa, and the healthy competition between the two countries will undoubtedly encourage improvements in both countries’ industries.

Legal Framework

The mining industry in the DRC is governed by the Mining Code, Law No. 007/2002 of 11 July 2002 (“the Mining Code”), and by the subsequent mining regulations enacted by Decree No. 038/2003 of 26 March 2003 (“the Regulations”). In addition to the Mining Code, other sources of law contain provisions affecting the mining industry. These include tax legislation (particularly the Tax Code), the Customs Code, Law No. 11/009 of 9 July 2011 establishing basic principles for the protection of the environment (the Legal Framework on the Environment), the Investment Code, Law No. 004/2002 of 21 February 2002, the Labour Code, Law No. 015/2002 of 16 October 2002, and various laws that deal with corporate matters such as shareholdings and public-private investment issues.
During the post-war period (1999 to 2006) the transitional government was put in place and its first steps toward extractive industry reform came in July 2002, when President Kabila ratified the country’s new code. The transitional government was keen to pass new legislation hastily to ensure that the country’s natural resources could be properly managed. Many of the laws were considered inadequate, for instance, companies were allowed to start operating without producing Environmental Impact Assessments (EIA), thus the need for additional laws being created and in light of the new laws, the status of some of the agreements signed during the immediate post-war period are still disputed.

The Mining Code is intended to reduce government intervention in the mining sector while strengthening its regulatory role, and to encourage private investment through the establishment of a sound legal framework. It provides a comprehensive set of rules applicable to all aspects of mining, including acquisition, transfer, operation and termination of mining rights, environment protection, cultural heritage, protection of neighbouring communities, tax and customs incentives, regulations on the transportation and sale of resources, and a framework for artisanal mining. It also covers the quarrying activities on a self-contained basis.

In terms of the Mining Code, the Minister of Mines is responsible for overall policy formulation and implementation, this includes granting, refusing, and cancelling mining rights. The Mining Registry, established in June 2003, is tasked with enforcing the Mining Code’s regulations and carries out a number of administrative functions, including the processing, re-issuing, expiry, withdrawal, or cancelling mining exploration and exploitation permits.

There are currently 2 mechanisms for the acquisition of rights in the mining sector, namely: conducting a reconnaissance (a research permit – the Prospecting Certificate does not confer a priority to obtain future mineral rights), conduct exploration (an Exploration Permit must be obtained), which entails obtaining the relevant requisite type of exploration permit to conduct mining activities (Production Permit, Tailings Exploitation Permit, Small Mine Permit). Procedures applicable to different minerals are the same for different minerals, but not to minerals declared as “reserved substances”. Moreover, procedures applicable to different types of land are the same, but not to lands declared as an “off-limits area” for mining activities and/or quarry works.

It is worth to note that there are no special rules for foreign applicants. Congolese and foreign applicants are treated equally under the Code. Foreign natural and legal persons may own unrestricted mining rights as long as they elect domicile with a mining and quarrying agent (mandataire en mines etcarrières – which is a sort of government-registered notary), through whom the foreign investor is obliged to act. Small-scale miners (where investment is less than $2m and reserves do not exceed 10 years of operation) must operate in association with one or more persons of Congolese nationality whose participation in the capital of the company cannot be less than 25%, i.e.: the local investor must own 25% or more of the share capital.

The Mining Code stipulates that the President is entitled to classify, declassify or reclassify mineral substances as mines or as quarry products, or as an area prohibited for mining or quarrying activities.

With regards to beneficiation, which can be summarised as the process of transformation of a primary material (produced by mining and extraction processes) to a more finished product (higher grade product) which has a higher export sales value, while there are no specific provisions relating to the processing and further beneficiation of mined materials, the installation and operation of a processing plant are subject to environmental regulatory provisions that are set forth in the Mining Code and in specific environmental legislation, including the Legal Framework on the Environment.

No environmental authorisation is required to conduct reconnaissance operations, but the holder of a Prospecting Certificate is required to make a commitment to respect the environmental provisions for reconnaissance activities specified in the Mining Code. To conduct exploration operations, the holder of the Exploration Permit must obtain prior approval for a Mitigation and Rehabilitation Plan before commencing activities, and the holder of a Production Permit, Tailings Exploitation Permit or Small Mine Permit must submit its Environmental Assessment Study and Environmental Management Plan to the Minister of Mines, in collaboration with the Minister of Environment, for approval.

In terms of the Mining Code, 60% of royalties remain in the hands of central government, 25 percent is paid to the provincial administration where the mining project is located, and 15 percent to the town or administrative territory in the area where the mining takes place. The funds are allocated exclusively for the building of basic infrastructure in the interest of the community. The Mining Code makes provision to ensure that revenue distribution favours social development and those impacted by mining activities.

Mining companies must compensate for the damages caused by the works carried out in connection with mining activities, even if they are authorized. The Mining Code and the Regulations make it clear that consultation over potential loss of assets and land with affected parties is required for fair compensation to be paid. Compensation should be at the actual replacement value plus 50%, or the assets must be returned to their original condition.

Business Climate

In 2012 the DRC joined the African business law harmonisation organisation (OHADA), which rendered OHADA legislation applicable in the DRC. Subject to a number of challenges which are encountered and dealt with, the adhesion of the DRC to OHADA provides investors, financiers and litigants with enhanced legal protection for the conduct of business.

The World Bank released its report on Doing Business 2016 which ranks 189 countries of the world according to ease of doing business. The DRC is ranked 184 out of 189, and is one of the country which has most improved its business environment in the areas covered by Doing Business report, in 2014/2015. The report shows an improvement in the ranking with regards to starting a business (by creating a one-stop shop for business creation in April 2013), improved access to credit information (by establishing a credit registry), and dealing with construction permits. This has reduced both the number of procedures (from 13 to 3) and time (from 58 to 3 days). This evidences the government’s good intention to take steps to simplify the business environment in the DRC.

To reduce its energy deficit (in the form of power shortages which have become an increasing impediment) and stimulate further growth, the country is engaged in the construction of the Inga III hydroelectric dam in the Lower Congo, which will have a production capacity of 4800 megawatts (MW), compared with 351 MW and 1400 MW for the existing Inga I and Inga II dams. The project is envisaged to be completed by 2020 with a significant contribution from the private sector in a public-private partnership.

The Country seeks to give great importance to educating the government about the importance of mining to the entire economy as well as encouraging direct public sector participation in mining projects, including partnering with state-owned enterprises and local communities to ensure that the benefit of mining is transferred to citizens.

Conclusion

Confidence in the DRC is growing and the introduction of the Mining Code has been instrumental in attracting investment. As the DRC’s largest source of export income, the mining industry will play an important role in the country’s stabilization. Once the 2016 elections are out of the way, a recovery in prices as well as a lasting improvement in the power situation and regulatory framework, will probably rejuvenate investor interest in the mining sector in the DRC.

Despite potential challenges of mining in the DRC, the Mining Africa Country Investment Guide 2015 includes the DRC in its top twenty, the only Central African country to make the list.

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