Democratic Republic of Congo Mining Report Q1 2011

Report Summary

An improvement in conditions both domestically and overseas looks set to continue to favour the Democratic Republic of Congo (DRC) in 2011 and beyond, with the country's mining sector well-placedto benefit. While the DRC continues to prop up BMI's business environment rating, coming 146th out of167 states analysed, a more stable political environment is attracting increased investment from abroadand persuading firms to up production. An increase in output is expected to lead to average real industrygrowth of 11.1% year-on-year (y-o-y) between 2011 and 2015. A further positive sign has been thegrowing influence of Asian governments in the DRC mining sector with both China and South Koreaboth recently pursuing cash-for-infrastructure deals with the Congolese government. It is hoped the latterwill pave the way for the construction of a new, state of the art deep-sea port on the country's Atlanticcoast.

The Congolese government has also shown signs of tackling the endemic corruption and poor regional leadership which have dogged the mining sector's expansion over recent years. In Q410 the governmentannounced a ban on mining operations in the country's volatile eastern provinces, a region that accountsfor 80% of the country's tin production of approximately 14,000 tonnes a year, in an effort to undermineillegal networks fuelling the region's violence. The ban affects all minerals extraction, processing andmarketing activities in minerals-rich North Kivu, South Kivu and Maniema provinces. The government'sdecision was borne out of concerns that proceeds from the sale of minerals obtained from widespreadillegal mining are being used to support rebel groups responsible for violence that has escalated in the eastof the country.

However, we caution that some of the recent initiatives introduced by the government threaten to do more harm than good. A case in point is the recently-introduced tax on semi-processed copper and cobaltexports which, at US$60/t, aims to encourage to carry out value-added production of mineralsdomestically rather than exporting raw materials at low cost. While borne of good intentions, the movehas so far appeared to have backfired with a number of companies speaking out against the tariff anddissuading foreign firms from investing.

Meanwhile, the long-running and much-publicised dispute between the Congolese government and Canadian miner First Quantum Minerals concerning the future of the Kolwezi Tailing Project continuesto drag on and to undermine business sentiment in the country. In September 2010 the governmentremoved First Quantum's licenses in two mines due to 'unreasonable behaviour' in the last three years ofnegotiations. The attitude of the government to cancel mining licenses on such highly subjective groundswith little or no notice highlights the risks involved in working in the Congo's mining sector.

Thewithdrawal of First Quantum's exploration permit has led to the initiation of legal action against theCongolese government, but it appears that a resolution to the dispute is still a long way off.

Despite ongoing challenges BMI remains optimistic in our view of the DRC mining sector over the next few years, and we forecast significant growth in output of traditional mined resources such as copper,cobalt and gold, as well as those from less developed sub-sectors including iron ore. Our outlook chimeswith recent estimates by leading mining conglomerate Rio Tinto, who forecast that total African copperproduction will increase from its current annual 1.1mn tonne output to 3mn tonnes by 2015. The DRCcurrently accounts for some 27% of the continent's total copper production and we see the country'sproduction growing to 286,100 tonnes by 2015, resulting in a total mining industry value of US$3.84bn.