16 Apr On the new DRC mining code – to promote greater economic and social development?
On 09 March 2018, the Democratic Republic of Congo (“DRC”) promulgated its new mining code, namely the 2018 Mining Code. The 2018 Mining Code substantially amends the previous mining code, the 2002 Mining Code. The preamble of the 2018 Mining Code states that the liberalized approach adopted by the 2002 Mining Code was in line with the country’s goal to be more competitive in attracting mining investment. Although the 2002 Mining Code succeeded in increasing the activity of the sector as a whole, the expected revenue, economic and social development were less than satisfactory.
It is worth noting that the 2002 Mining Code was adopted one year before the official end of the Second Congo War, also known as the African World War, which lasted five years, between August 1998 and July 2003, involving nine African states and claiming millions of lives. The DRC’s mining sector was reduced to almost nothing, with less than ten mining companies active between 1997 and 2002.
To overcome this shortcoming, the 2002 Mining Code set up legislation with the objective of a fast and transparent procedure for granting mineral rights within a wider favorable tax, customs and foreign exchange framework. For fifteen years the tax regime of the 2002 Mining Code was relatively generous by international standards.
The 2018 Mining Code appears to have three main objectives, namely: greater State participation, increased local ownership and increased mining royalties and tax revenues. The hope is that these more onerous requirements will lead to greater economic and social development and result in increased revenue for the country flowing from the exploitation of its mineral resources.
The “free-carry non-dilutable” equity share for the State has been increased from 5% (under the 2002 Mining Code) to 10% (under the 2018 Mining Code). Additionally, the mining exploitation license is renewable on condition that the holder transfers 5% of the shares or the shares of the capital of the company at each renewal, in addition to those ceded previously.
The 2018 Mining Code introduces a mandatory requirement of 10% of the shareholding in mining companies to be held by Congolese nationals.
Preference is further given to Congolese nationals with regards to subcontracting. The new code requires mining companies to comply with law 17/001 of February 2017, applicable to subcontracting in the private sector. The law aims to promote small and medium enterprises with Congolese capital, to protect the national workforce. It is the responsibility of the mining company to find suitable subcontractors.
The increase of mining royalties has been one of the main concerns of industry regarding the 2018 Mining Code.
In the 2002 Mining Code mining royalties were calculated on the basis of the amount of sales of the merchant products after the deduction of certain charges such as the cost of transport, insurance and the quality control of the commercial product for sale, amongst others. The royalty rates under the 2002 Mining Code were 0% for standard construction materials, 0.5% for iron or ferrous metals, 2% for non-ferrous metals, 2,5% for precious metals, 4% for precious stones and 1% for industrial minerals, solid hydrocarbons and other substances not specified.
The royalty rates under the 2018 Mining Code are calculated on the basis of the gross commercial value. The royalty rate increases vary from 0,5% to 2% with the new rates, going from 0% for commonly used building materials, 1% for iron and ferrous metals and for industrial minerals, solid hydrocarbons and other substances not specified, 3.5% for non-ferrous or basic metals, 3.5% for precious metals and 6% for precious and coloured stones/gems.
The 2018 Mining Code also introduces a new royalty: the 10% royalty for strategic substances.
A new super tax?
According to Decree n° 18/042 of 24 November 2018, cobalt, germanium and colombo-tantalite (coltan) are the three substances considered strategic in the DRC. This is due to their use in high technological industrial sectors, the ICT sector, the renewable energy sector and the military. With the increased demand for batteries, the price of cobalt has increased globally and the DRC is regarded as world’s largest cobalt producer. Cobalt’s price quadrupled between 2016 and 2018 and according to Bloomberg New Energy Finance estimate’s, by 2030 the substance’s global demand could be 47 times it was in 2017.
In addition to the mining royalties, the 2018 Mining Code provides for a 50% special tax on windfall gains or super-profits. Windfall gains or super-profits refers to profits made when the prices of materials or commodities experience an exceptional increase, greater than 25% compared to those included in the bankable feasibility study of the project.
Both the 50% tax on super-profits and 10% the royalty on strategic substances are significant in light of the strategic substances becoming hot mining commodities in the recent past.
Security of tenure
The stability clause of the 2002 Mining Code is reduced from a period of ten years to five years under the 2018 Mining Code. The freezing clause guarantees stability that the law of the 2018 Mining Code will apply to the fiscal, customs and foreign exchange regimes until the end of a period of five years. This may be the biggest concern and grievance of the industry players, many of whom may have based their investment on the ten-year period under the 2002 Mining Code.
The strides taken by the DRC to increase greater State and local participation as well as to increase mining royalties and tax revenues are part of what has been termed as “resource nationalism”. In this way, the DRC joins other Francophone and Anglophone African countries (including South Africa and Tanzania) in its increase of the local content requirements in its mining sector. From 2010, mining codes throughout Francophone Africa have been characterised by the turning away from the past trend of liberalisation by giving way to greater regulation, state participation and beneficiation. What remains to be seen is whether the 2018 Mining Code will indeed result in greater economic and social development for the country? Or whether the more onerous provisions will deter potential investors in one of Africa’s most mineral rich nations?
Tshiamo Maseko-Poisson, Executive at LNP Attorneys Inc.
Athi Jara, Director at LNP Attorneys Inc.