China may profit from Glencore’s DRC woes

Arow in the Democratic Republic of Congo is threatening to have consequences that reach as far as the White House and Silicon Valley. Think of it as mining’s version of the butterfly effect – the theory that the flap of an insect’s wings can cause a hurricane on the other side of the world.

A group of international miners are at loggerheads with the government of the central African country, bitterly opposed to a new mining code that will slap higher taxes on the key metals they dig up – especially copper and cobalt, which are likely to be in high demand for electric vehicles and consumer devices such as smartphones. The latter material, used in batteries, is particularly dependent on supply from the DRC.

Two months of talks with the ministry of mines have come to nothing. A letter from the group, circulated this week, warns the government they will now be forced “to resort to judicial means to protect our rights” – in other words, they will seek international arbitration.

The row is all down to the DRC – one of the world’s poorest countries – wanting a bigger slice of the pie. With metal prices rising, this is hardly a surprise. The miners, which include FTSE 100 giants Glencore and Randgold Resources, are also caught in a political game. President Joseph Kabila is facing an election later this year, and standing up to foreign interests could play well with the electorate.

The miners point out that they are responsible for a large chunk of the country’s GDP, and that without their investments the economy would be nowhere. For Glencore, the mining code is just one headache. There’s also the small matter of its legal dispute with the DRC’S state-backed miner Gecamines (over the debt held by their joint venture) and a rumoured inquiry by the UK’S Serious Fraud Office into its earlier dealings with a former partner, Dan Gertler, an Israeli businessman. The SFO will neither confirm nor deny its interest in the company.

It is also being sued by Gertler for $3bn (£2.3bn) in royalties he says he is owed from two copper mines it runs in DRC. Glencore stopped paying Gertler last year after he was hit with US sanctions over alleged fraudulent deals. The Israeli, who has always denied wrongdoing, has succeeded in putting an asset freeze on the mines in DRC, though in practice they continue to operate as normal.

Gertler’s claim is being heard in London as the contract is under English law. Glencore cannot countenance paying him a penny – even if he is entitled to it – because it cannot be seen to materially assist an individual under sanctions. It, in turn, could be hit with secondary sanctions that would make it impossible to do business in dollars.

Glencore may reckon that it is too big to be shut out by the US completely. But that would be a huge risk. The miner’s share price has slumped as investors appear to be writing off the value of its DRC assets altogether. A nightmare scenario for Glencore would see Gertler’s case heard in the DRC, where it might run the risk of losing the mines altogether.

Ivan Glasenberg, the miner’s chief executive, is the type of dealmaker Donald Trump fancies he is. Some might say Glencore is reaping what it sows: after all, Glasenberg has long prided himself on doing deals where others fear to go. He is comfortable operating in Russia, for example, where, in 2016, he helped engineer the sale of a stake in state-backed gas producer Rosneft to the Qataris, despite the company being under an earlier set of US sanctions.

At a conference earlier this year, Glasenberg reminded investors that, to secure future supply of metals, miners will have to go to more “challenging” geographies like the DRC. He noted that Chinese operators are increasingly pushing into Africa to tap its mineral wealth. China, which devours 50pc of the world’s raw materials, needs to secure supply for its own benefit. By 2020, Glencore reckons, Chinese companies will be responsible for almost as much copper production as the current number one and two players put together.

The implicit message is that the West will lose its grip on the materials it needs to power the electrical vehicle and battery boom. China, already present in the DRC and a member of the group protesting against the new code, could spy an opportunity in Glencore’s woes.

As analysts at Exane noted: “US sanctions on Mr Gertler, in a twisted way, could open up an opportunity for China to take advantage of the ensuing chaos to get hold of mining rights, and therefore of copper/cobalt assets.”

Hardly the outcome that President Trump would want.

‘The implicit message is that the West will lose its grip on the materials it needs’