By Ergen Ege & Leïla Hubeaut
Recent developments in Tanzania and South Africa which have materially modified their mining legislations triggered negative reactions of the international mining companies. Perceived as the revival of the resource nationalism, this trend now includes the recent revision of its mining code by the Democratic Republic of Congo (“DRC”) and the country’s state-owned mining company Gécamines’ willing to renegotiate existing mining agreements to cure their “imbalances”.
Traditionally, the manifestation of resource nationalism follows the cycles of the commodity prices. The host states tend to strengthen the regulations when the prices are high to get a bigger share of the profits.
As the global boom for smart phones and electric cars results in an increased demand for batteries, the price of cobalt, which is the key ingredient, has almost quadrupled during the last two years. The DRC is by far the world’s biggest cobalt producer where last year 67% of the global cobalt supply was extracted. In this context, it comes as a no surprise that DRC has rewritten its mining code in order to secure greater benefits of the exploitation of the natural resources for the country’s economy.
On 9 March 2018, President Joseph Kabila signed the new mining code (the “New Mining Code”) which was adopted by both chambers of Parliament on 27 January 2018. The New Mining Code which amends substantially the former legislation of 2002 (“2002 Mining Code”) came into force upon its publication in the Official Journal on 28 March 2018.
The philosophy of the New Mining Code is clear: greater ownership for the State, increased local content requirements and more revenues for the tax authorities. However, the real impact of the modifications for the operators will be fully assessed after the publication of its implementation decree which is due to clarify among others the classification of minerals subject to different rates of royalties and the practical modalities of application of the 50% tax on excess profits. In accordance with article 334 of the New Mining Code, the implementation decree is to be adopted within 90 days from the publication of the New Mining Code, being end of June 2018.
Some of the major modifications of the New Mining Code include:
State participation. State free carry non-dilutable equity share increased from 5% to 10%. Upon each renewal of an exploitation permit, an additional 5 percent interest in the holder of the exploitation permit will be transferred to the State, in addition to its existing shareholding. Provided that it will be applicable to existing mining projects, the increase of free state participation in addition to different taxes and royalties, can be perceived as a “hidden expropriation” by foreign investors.
Equity obligation. At least 40% of the funds for the development, construction and operation of the mine to come from equity funding. Provided that the proof of this funding structure needs to be submitted in a very early stage, as part of the exploitation permit application, this may disadvantage juniors.
Local ownership. 10% of the shares of mining companies to be held by Congolese citizens. Even though this participation is not free carry, the question is whether the international mining companies can find creditworthy local partners considering the 40% equity obligation rule to develop exploitation projects.
Permit duration. Duration of the exploitation permits are reduced from 30 to 25 years.
Taxation of super profits. A special 50% tax on excess profits applicable when the commodity price exceeds the price used in the project’s feasibility study by 25 per cent or more. In the approach, the project’s feasibility study seems to become contractual. The mining company seems to be subject to excess profits based on the commodity prices’ increase only, and this is unclear whether any cost overrun both for the construction and operation will be taken into account to ponderate the final figure.
Repatriation of funds. During the period of investment amortization, obligation to repatriate funds increased from 40% to 60%. After the amortization, 100% of the funds shall be repatriated.
New royalties. Creation of a special 10% royalty on minerals classified as “strategic” by the Congolese government. Although this classification will be specified in the implementation decree, cobalt is very likely to be in this list.
Registration fee. Creation of a registration fee upon the transfer of the mining title of 1% of the sale price and the possibility for the authorities to review such transfer price. The right of the authorities to review the transfer price is rather concerning. The implementation decree must specify objective criteria on the basis of which for such review can be made and set a time limit for its exercise.
Change of control. Any direct or indirect change of control in the holder of a mining right or its merger with another company is subject to the prior approval of the State.
Community development. At least 0.3% of the turnover of a mining company to be allocated to community development projects.
Domestic processing. Holders of exploitation rights are required to process or procure the processing of minerals extracted in DRC within the national territory. Exceptionally, subject to ministerial authorization, the minerals can be processed outside DRC for a period of one year. Existing mining right holders are granted a transition period of three years. Even though the purpose of this principle is perfectly justified from a local content perspective, until the full development of the local processing industry, this will be costly and hard for the mining operators to comply with.
Subcontractors. Tax and custom incentives provided under the New Mining Code can be extended to subcontractors only if they are controlled by Congolese shareholders. Therefore the international contractors will clearly be disadvantaged.
Immediate application. Subject to transition period applicable to local processing obligation, the provisions of the New Mining Code are immediately applicable to the holders of mining rights. provided that the 2002 Mining Code provided for a ten year stabilization period, the interaction of the immediate application of the New Mining Code with the stabilization principle of the 2002 Mining Code is likely to raise interpretation issues.
Even though the implementation decree may address some of the uncertainties of the New Mining Code, this text operates a clear shift in the favour of the State. Considering the materiality of the modifications made, the mining companies will have to deploy significant efforts to comply with its provisions, if they wish to pursue their operation in the DRC.