Facilitating Africa’s economic turnaround

Gecamines has survived a period of unrest and uncertainty in the Democratic Republic of Congo, and is now on the way to restoring its position as one of Africa’s most important mining companies

 
 

Ahmed Kalej, CEO of Gecamines, may be running a mining company far from the London Metal Exchange, but he takes a close interest in the copper prices it displays. And in mid-March they were showing that the price for delivery of the metal in three months was hovering around the $7,800 mark.

At those prices his ambitions for Gecamines, the copper and cobalt giant that he runs in the mineral-rich Katanga region of the Democratic Republic of Congo, look increasingly achievable. Under Kalej, a former central banker, Gecamines is slated to triple production by 2015 and close in on his goal of making the state-owned group the African equivalent of Codelco, Chile’s state-owned copper producer. At the same time, a revival of Gecamines would go a long way to restoring the country’s much-tarnished commercial reputation in the world’s resources markets, as well as in the wider financial community.

“Gecamines has a great story,” says Kalej. “It is the story of a mining giant that is awakening from its slumber.” Brisk and business-like, he runs the group from its headquarters in Lubumbashi, the region’s mining centre. And that giant is waking up fast. In early March, shortly after World Finance spoke with him, Kalej moved to take complete control of substantial deposits of copper and cobalt in the Kalumines district. Majority-owned by African company Rainbow Materials and Vale, the Brazilian giant, they are seen as plum assets in the resources industry.

As in all its current and future purchases, the Gecamines chief executive wants control, albeit in partnerships. For decades, the company has held unsatisfactory minority stakes in mines run by others. “At Kalumines we want to control all the shareholding – we are going to buy all the shares,” he told Metal Bulletin.

Statement of intent
In an earlier empire-rebuilding step, Gecamines finally wrapped up the ownership in January of two copper sites in Katanga. With about five million tonnes in the ground, the assets fell to the company after protracted negotiations with Copperbelt Minerals, a company registered in the British Virgin Islands. As a statement of intent, the purchase could hardly have been clearer. Capable of producing 200,000 tonnes a year at peak, the deposits are the biggest in the mineral-rich Congo and can only be fully developed by a Gecamines that has been completely restructured. “It’s a very big, magnificent project,” says Kalej, citing them as highly bankable assets in his pursuit of international financing. In the international mining industry, support from global investors amounts to a seal of approval.

The glory days of Gecamines go a long way back. Founded by Cecil Rhodes and Belgium’s King Leopold II when the country was a colony of the European nation, it was first known as the Union Miniere du Haut Katanga and soon became the jewel in the country’s commercial crown.

In its heyday, the company employed over 30,000 people and had under its wing hospitals, schools, flour mills and farmland, rather like a Japanese conglomerate without the banks. A state within a state, it was a proud emblem of the nation’s economic growth. In the boom leading up to the 80s, Gecamines produced some seven percent of the world’s copper and over 60 percent of its cobalt. At peak, its mines dug up nearly 500,000 tonnes of copper a year. No less than 60 percent of the country’s total exports came from Gecamines.

“Gecamines has a great story… It is the story of a mining giant that is awakening from its slumber.”

Then it all changed. In a perfect economic storm, copper prices nosedived. The international financial market blocked access to finance in the country (Embargo 90) due to political problems and, at the same time, breakdowns in the Kamoto Mines. Gecamines was starved of investment. The result was that production collapsed, equipment broke down and infrastructure was allowed to deteriorate. The company’s finances deteriorated rapidly.

The recovery began in 2010. Instead of the usual political appointees, professional managers were installed and the company’s first viable long-term strategy in years was developed to chart a way out of the doldrums. Priority number one was to ramp up production. In 2012, Gecamines mined 35,000 tonnes, a poor fraction of the glory days but a step in the right direction. This year’s production target is 50,000 tonnes. And
by 2015: 100,000 tonnes.

Production volumes would have been higher but for frequent power shortages because of an overloaded national grid. “Mining companies in the region are forced to buy electricity from Zambia next door,” explains Kalej. He hopes to address the latter with a $670m, coal-powered, 500 megawatt electric grid, not just for the benefit of Gecamines, but for other mining companies in the region. “The grid could be operational in 36 months,” he says.

Also requiring Kalej’s urgent attention when he assumed control was the company’s $1.5bn burden of debt. With production low, the management employed a law firm and an investment bank to audit the debt in order to propose a single repayment scheme. Negotations are currently well advanced, and the main creditors look set to cancel a substantial part of the debt. At the same time, the Congolese government signed a decree to take over all non-insurance liabilities, representing more than half of the total liability.

The need for finance
Attracting finance of the right kind remains a problem, particularly after the IMF pulled the plug on its support for mining in the Congo. Its patience with kleptocratic officials tested to the limit, the IMF recently suspended loans to the country. Almost simultaneously, the World Bank more than halved its loans to the country from $25m in 2010 to $10m in 2011. After extracting certain guarantees, the World Bank did raise loans to $15m in 2012.

The company Chairman Albert Yuma, an ally of the DCR’s President Joseph Kabila, is trying to turn around the country’s reputation for wasting loan monies. A technocrat on good terms with the central bank, he’s a vocal proponent of boardroom reform and routinely lambasts examples of commercial corruption. In this he’s also an ally of reformist Prime Minister Augustin Matata Ponyo.

By general agreement, Gecamines is heading in the right direction. In January, Kalej engineered the company’s first-ever acquisition outside the Congo when it joined two respected resources companies to buy a cobalt chemical refinery in Finland for about $435m.

Meanwhile, Katanga’s deposits of rich earth are not in dispute. Roughly the size of Spain, the region already attracts many billions in investment from resources giants such as Glencore, Freeport McMoRan and others. Most of these companies have important future investment plans.

There’s sporadic violence in the region, mainly between tribes and secessionists that resent the central government in Kinshasa. Inevitably, any outbreaks of violence deter outside investment, but Prime Minister Matata Ponyo has played down the possibility of an escalation of trouble. “We want to reassure investors there’s no big security risk in Katanga,” he said. “In any post-conflict state there will be some residual elements that we will permanently neutralise.” For the sake of Gecamines, Kalej hopes he’s right.

King of copper
Copper prices are not as high as they were two years ago when, in mid-2011, they nearly hit $10,000. However, the long-term outlook augurs well for the ambitions that Kalej holds for Gecamines because of insatiable demand for copper by a voracious China and a fast-recovering US economy. As Goldman Sachs researchers pointed out in their forecast for 2013, “five-year copper forwards have averaged almost $8,000 over the past two years.”

Kalej is acutely conscious of what a fully restored Gecamines would do for the reputation of the nation. “It’s a huge responsibility and a challenge,” he says. A true central banker, he outlines his strategy in terms of numbers and precise goals, describing them as stepping stones that can only be taken one-by-one.

One stepping stone is the company’s Kambove copper plant, which may prove to be the proxy for what would be one of the biggest turnarounds in African history. Broken-down and under-performing, it lies in the heart of the mining region, but has been starved of investment for years and is running far below capacity. Although there are ample raw materials for the plant to process, it cannot do so without a few years of heavyweight capital expenditure. The day that blue-chip resources investors come to the party at Kambove will be the one that shows once-mighty Gecamines has been awakened from its slumber.