Bungle in the Jungle

Last week, the Democratic Republic of Congo (DRC) made a good attempt at shooting its own foot off.

Its move could cripple that country’s mining industry. And send cobalt prices soaring like a surfer riding a tidal wave.

Previously, the DRC announced plans to raise taxes and royalties. However, the higher tax plan was supposed to exempt companies that already held mining licenses for the next 10 years.

Then, last week, DRC parliament voted to immediately lift the exemption. This means mines and projects run by Randgold Resources (Nasdaq: GOLD), Ivanhoe Mines (OTCQX: IVPAF), Glencore (OTC Pink: GLNCY), Katanga Mining (OTC Pink: KATFF) and China Molybdenum (OTC Pink: CMCLF), will immediately be subjected to higher royalties on the metals they mine: Gold, copper, cobalt.

The new rules allow the DRC to raise the royalty on that metal to 10% from 2% if the government categorizes the mineral as a “strategic substance.”

PLUS, the DRC is imposing a 50% tax on so-called “super profits.” That’s income realized when commodity prices rise 25% above levels included in a project’s bankable feasibility study.

There’s plenty of gold and copper around. But the DRC is the world’s largest producer of cobalt, accounting for roughly 53.6% of global production.

Sources: Northern Miner/USGS

So what this does is significantly raise the cost of doing business for miners in the Congo.

The new measures await the signature of Congolese President Joseph Kabila to become law.

Could this be just a negotiating tactic? Or is the DRC going to press ahead?

I think it doesn’t really matter. The damage is done. With the stroke of a pen, the DRC has shown mining companies it is a banana republic. No one in their right mind would invest another dollar in the DRC mining industry, given another choice.

No wonder cobalt prices are soaring.

Why are prices higher? Because demand for the metal is soaring. It’s vital for the manufacture of lithium-ion (li-on) batteries. The kind used in electric vehicles. China is putting the pedal to the metal on an EV future, and the rest of the world is going along for the ride.

Meanwhile, annual production of cobalt is only around 100,000 metric tons. Global production of li-on batteries is projected to more than double by 2021. And there’s a lot more cobalt than lithium in those batteries.

There’s only one new cobalt mine coming online in 2018. It’s jointly owned by Glencore and Katanga. And it’s in the DRC. Dang it! You can bet Glencore is watching its profit potential from that mine evaporate.

So, companies operating in the DRC are potential losers. Who are the winners?

Companies outside the DRC with near-term production. And I can think of a fistful of them in the U.S., Canada and Australia.

These projects have potential. And they’re in countries where governments won’t develop a sudden case of the “grabbies.”

I think that makes those projects suddenly a lot more valuable. And the DRC will rue the day it decided to yank taxes higher.

Right now, the market is running from cobalt due to the problems in the DRC. But the tide will turn soon enough. Grab your surfboard and be ready to ride that rising tide. It could make you rich.

All the best,
Sean Brodrick

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