Decoding $440 million Glencore’s Discount on Its Congolese Mines

In early November 2017, the Paradise Papers – a massive leak of confidential documents – revealed that a company now operated by Glencore, the Swiss multinational commodity trading and mining company, negotiated a signing bonus in 2008 that was $440 million less than what the state-owned company Gécamines had initially requested in exchange for access to a mining complex in the Democratic Republic of Congo (DRC). This bonus – or “pas de porte” – was four times lower than the rate nearly all other investors had accepted for access to Congo’s copper reserves.[

The DRC is one of the poorest countries in the world; at the time, $440 million was more than the entire national education budget. Documents disclosed in the Paradise Papers suggest that the discount was secured with the help of controversial Israeli businessman Dan Gertler, a close friend of Congolese President Joseph Kabila. Several organizations and governments have investigated serious allegations of corruption involving Gertler, according to Bloomberg News and other media outlets. Gertler and his holding company have consistently denied any wrongdoing.

Glencore told reporters covering the Paradise Papers that the signing bonus amount was “broadly correct,” and that the terms were set before Gertler became involved in the negotiations.

Resource Matters analyzed Glencore’s response and reached a different conclusion. The discount is real: the company in question, Kamoto Copper Company (KCC), paid a signing bonus of $140 million instead of the $585 million initially requested by Gécamines. This reduction stems from several underlying factors.

The most important relates to the KOV open-pit mine, an extremely rich copper-cobalt deposit and one of the first assets acquired by Gertler and his associates in the Congolese copper belt. Civil society groups, lawyers, and members of the Congolese parliament had criticized the KOV contract during its initial negotiations in 2004 and 2005, claiming the agreement did not provide the Congolese side with a fair share of the revenues.

Subsequently, Congolese authorities decided to renegotiate this contract along with dozens of other mining agreements between 2007 and 2009, with the goal of standardizing the compensation terms for mining assets granted by state-owned enterprises to private investors. One of the key compensations to be standardized was the signing bonus: investors were expected to pay $35 per ton of copper reserves transferred into the partnership.[viii] This standard was accepted by the vast majority of investors, who on average agreed to pay around $33 per ton of copper reserves.

For KOV, the signing bonus should have been $240 million under this industry standard. However, contractual documents show that investors only paid $5 million – 48 times less than the applicable rate. Excluding the KOV open-pit mine from the calculations reduced the signing bonus by at least $235 million.

Secondly, Glencore and the other KCC shareholders will not pay any signing bonus on the 4 million tons of copper reserves that Gécamines promised to secure for KCC. If these reserves are found, they should have generated an additional signing bonus of $140 million – a substantial amount the Congolese state company will no longer receive.

Finally, KCC appears to have relied on a different definition of “reserves” than most other investors when calculating the signing bonus for the remaining deposits,[xiii] leading to a further $65 million reduction.

Glencore told Resource Matters it would not provide additional comments on this matter,[xiv] while Gertler’s Fleurette Group did not provide any substantive responses to the questions posed. Gécamines did not respond to a request for comment.

Resource Matters calls on Glencore, Gertler’s Fleurette Group, and other investors involved in negotiating this signing bonus to clarify how and why they obtained such a significant discount.

The French summary is available here: Resource Matters – Rabais de $440 million pour les mines de Glencore en RDC – Novembre 2017 – Résumé FR

The full analysis and source references are only available in French.