Inflation Hinders Growth in Democratic Republic of Congo's Mining Boom

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Researched by Industrial Info Resources (Sugar Land, Texas)--The renegotiation of mining contracts in the Democratic Republic of Congo is scheduled to start in mid-July, according to government statements. This should clear the uncertainty, which has dogged mining start-ups and deals since the government launched a review of 61 contracts. A group of senior government ministers have formed a task force to review mines. The group will look at contracts signed during the country's civil war, which ended in 2003, and other contracts that have roots going further back, past the dictatorship of Mobutu Sese Seko, to the time when the vast, mineral-rich country was a Belgian colony. As of the first meeting, no timetable has been announced for the review process. The government is still collecting outstanding corporate debts to finance the work of the task force and seeking legal and technical assistance from international auditing companies.

A government spokesman told Reuters that although a boom in the mining sector is expected to boost national growth from 8%to 12% in 2008, inflation is eroding some of the benefits of growth. The cumulative inflation rate for 2008 in the capital Kinshasa is now forecast at more than 27%, more than doubling the 12.1% agreed upon with the International Monetary Fund earlier in the year. The rising cost of food and fuel is said to contribute to 80% of the inflation bloat. Under the dictatorship, the country suffered under hyperinflation with a rate of 10,000% in 1994.

It appears, notwithstanding the ongoing contract review, that official attitudes are less doctrinaire and more pragmatic than was once feared by international miners. At the beginning of June, nine companies in the Katanga province were given clearance to resume cobalt concentrate exports as others had bans extended until upgrades were made to treatment plants. The operations of Congo Dongfang International Mining, a subsidiary of China's Huayo Cobalt Company, were closed in May because the government accused it of breaking the ban on exporting raw ore. Two of those cleared had government connections, and a number of the others were companies with ties to South Africa.

Chinese investment is one of the major factors driving the mining boom and the sale of mining rights, in a less-than-transparent political/business environment. In April, details of a $2.9 billion investment by China Railway Group Limited (HKG:0390) (Beijing) into copper and cobalt mining saw financing and loans of $1.83 billion, including interest-free loans of $550 million. China Railway will fund about 40% of the first phase of infrastructure for the mining projects, which is estimated to be about $3 billion. Local, state-owned Gecamines, with a local businessman, will hold about 32% of Sino-Congo Mining, 43% of China Railway and 25% of SinoHydro Corporation.

The government is offering 10 million tons of copper and associated cobalt in the venture to the Chinese company, which will fork out a $530-million entry fee. The mining project has a proven copper reserve of 6.8 million tons and a cobalt reserve of 420,000 tons. Overall, the Democratic Republic of Congo holds 10% of global copper reserves and 33% of cobalt reserves. The Chinese will get control of reserves worth $14 billion and will invest $9 billion into building and refurbishing infrastructure projects.

In addition to Chinese companies, global mining majors and minors are restaking their future in the country's mining sector and publishing positive technical reports on yields and prospects across a wide range of mineral resources. Local connections will, no doubt, help with contract reviews -- Gecamines has interests in a number of new ventures.

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