Wednesday, 23 November 2011

DRC Report

Initial Report – October 2011

1.      Background

We have been asked to prepare an assessment of the Democratic Republic of the Congo (the “DRC”) in respect of its obligations to the International Monetary Fund (the “IMF”) under its current three-year Extended Credit Facility (the “ECF”).  In particular, we have been asked to examine the DRC’s management of its substantial mineral wealth since the extension of the ECF in order to evaluate whether the current DRC government, headed by Joseph Kabila Kabange (“Kabila”), has honoured its commitments to the donor community.  

On 11 December 2009 the IMF approved a US$551.45 million ECF for the DRC.[1]  A key structural benchmark of this programme is the implementation of governance and transparency reforms in extractive industries.  These measures include, inter alia:

1. Publication within 60 days:
        Of partnership agreements between public and private enterprises (including information on bonus signing shares, taxation system, private shareholders, and members of the board of directors. (Structural benchmark)
        Of the negotiation results between mining companies and the government regarding the review of mining contracts.
2. Implement the Extractive Industries Transparency Initiative.
3. Establish an independent anti-corruption agency.[2]

The latest IMF review of this programme, dated April 2011 and published in July 2011, concludes the following:

Structural reform progressed as planned (Table 6). The government reported that it published all new partnership agreements between public entities and private enterprises…”[3]

Implementation of governance and transparency reforms in extractive industries is proceeding satisfactorily, in close collaboration with the World Bank. The reform agenda includes 30 broad measures covering forestry, mining, and oil sector activities and focuses on transparency and accountability in the management of these resources; ensure best practice in the sale of public assets; and the immunity[4] of contracts (Appendix II contains the full complement of measures and an update of the status of each measure). Implementation has been initiated on all 30 measures and seven have been completed thus far; the timing of some measures has been slower than envisaged but progress is being made on all fronts….[5]

Despite the positive assessments of the IMF, we can find almost no evidence to support the IMF’s conclusions.  In fact, the evidence we have collected and analysed to date suggests the opposite.  At best, the DRC has complied with neither the spirit nor the letter of these IMF structural benchmarks.  At worst, it has acted in a manner inconsistent with these criteria and with prior reform initiatives.

2.      Scope of This Initial Report

This assignment arose out of continued reports of secretive and/or commercially-questionable dealings in DRC mineral and hydrocarbon assets, including (among others) Gecamines’ sales of its interests in the Mutanda and Kansuki concessions, and Sodimico’s disposition of its interest in Sodifor.  There was growing concern that the structural benchmarks of the ECF (set forth above) were neither being honoured by the DRC nor effectively monitored by the IMF.  We have been asked in that context to prepare an analysis of the sales of Mutanda, Kansuki, and Sodifor (which holds the Frontier and Comisa concessions), as well as all other the sales or other transfers (including joint-venture or concession arrangements) of mineral or hydrocarbon assets either directly or indirectly (i.e., through wholly-owned public enterprises) held by the DRC since the commencement of the IMF programme on 11 December 2009.  Our report is to include:

  • relevant background information on the transferred assets;
  • background information on the private counterparties to these transactions, including beneficial ownership, corporate structure and financial capacity;
  • financial terms of the transaction (i.e., was the deal, based on the available information, done on market or otherwise commercially-reasonable terms?)
  • If the deal was completed on seemingly commercially unreasonable terms, an analysis of the potential losses to the DRC;
  • whether public disclosures regarding the transaction were made by the DRC/Gecamines/Sodimico (was the asset offered via public tender or were the proposed deal terms disclosed prior to the transaction?)

To that end, we have prepared a matrix of the information (Appendix I) that should have been disclosed for each identified asset as required under the IMF structural benchmark noted above[6] and whether this information has in fact been published as required.

Subject to budgetary constraints, to the extent we have found a common pattern between the post-ECF transactions and any other transactions since Kabila was sworn in as the DRC’s elected president in December 2006, we were asked to prepare a brief summary of those transactions (see Appendix II).  If the evidence suggests non-compliance with the IMF programme and/or mismanagement, we were asked to prepare a list of possible investigative avenues for the subsequent phases of this project.

Finally, if the evidence suggests that the DRC has not properly managed its mineral resources, we have been asked to formulate policy recommendations that might limit or otherwise discourage such practices.

3.      Methodology

This report is primarily based on documentary evidence.    Where we lacked  documentary evidence to substantiate information received from non-documentary sources, it is noted.  We have also noted where our evidence could be supplemented by documents known to exist, but that were unavailable to us.  We have limited our analysis to transactions entered into by either Gecamines or Sodimico, as well as those involving the DRC itself in relation to the Lake Albert oil concessions.  Other transactions may be worth examining, but we have not yet been able to obtain the necessary transactional documents nor has the government published them. 

Despite the strength of the documentary evidence we have gathered to date, we want to point out the following caveats respecting this report:

  • there could be additional evidence that contradicts our evidence or otherwise leads to a different interpretation of the facts;
  • valuing mineral assets can be difficult and imprecise.  In certain cases, fair value can be relatively easy to determine, as when an asset has been almost immediately sold or “flipped” to a third party.  In the absence of a contemporaneous sale, however, we have relied in this report upon valuations prepared by reputable, publicly-traded companies or independent, third party analyses;
  • due to the sensitivity of the investigation, we have not approached all potential sources at this time.  This can be a topic of discussion for subsequent phases;

We have only exhibited the documents that are not publicly-available (or readily publicly-available).  To the extent that a document is available on the internet from a reliable source, the url of the document is noted in the footnotes.

4.      Executive Summary

Since 11 December 2009, the DRC government directly or through its wholly-owned mining parastatals, Gecamines and Sodimico, has entered into or cancelled[7] the following deals in relation to its mineral and hydrocarbon assets (in rough chronological order):

  • December 2009/February 2010: the sale of Gecamines’ 50% interest in the JV company SMKK to ENRC via Emerald Star Enterprises Limited (beneficially owned by Dan Gertler);
  • January 2010:  the cancellation of Gecamines’ contract with First Quantum Minerals (“FQM”) pertaining to KMT; FQM has commenced arbitration proceedings at the ICC;
  • January 2010/August 2010:  the granting of KMT to the Highwind Group (beneficially owned by Dan Gertler); parent of Highwind selling 50.5% of this and other Congolese assets to ENRC;
  • February 2010:  Gecamines enters into a JV agreement regarding the Chabara concession with Dino Steel International SPRL (apparently beneficially owned by Groupe Bazano); contract unpublished; terms unknown;
  • February 2010:  Gecamines enters into the SECAKAT Sprl JV; contract unpublished; terms/private partner unknown;
  • Spring 2010:  Failure to renegotiate and/or issue Presidential Decrees granting Lake Albert blocks 1 and 2 to Tullow and Heritage; Tullow has apparently dropped all legal claims;
  • Spring 2010:  Failure to issue Presidential Decree granting Lake Albert Block 1 to the Divine Inspiration Group consortium, potentially leading to legal claims;
  • May 2010:  Congolese court strips FQM of its Lonshi and Frontier properties and grants them to Sodimico, leading to ICSID arbitration;
  • May 2010:  DRC enters into Production Sharing Agreement for Lake Albert Blocks 1 and 2 with Caprikat and Foxwhelp (beneficial ownership unclear);
  • May 2010/March 2011:  DRC enters into Amended Production Sharing Agreement with SacOil for Lake Albert Block III;  SacOil selling a 60% interest in the concession to Total;
  • June 2010:  Sodimico enters into a JV Agreement with Fortune Ahead Limited (beneficial ownership unknown) re Comisa and Frontier;
  • July 2010/August 2010:  Gecamines enters into a JV agreement regarding the Kansuki concession with Kansuki Investments SPRL (beneficial ownership unknown); Kansuki Investments SPRL selling 50% of its interest in Kansuki to Glencore;
  • August 2010:  Gecamines enters into the Grande Cimenterie du Katanga (GCK Sprl) joint venture; contract unpublished; terms unknown; partner unknown;
  • September 2010:  Gecamines executes lease (amodiation) contract with Chemaf SPRL; contract unpublished;
  • Spring 2011:  Gecamines sells its interest in Mutanda and Kansuki to Rowny Assets Limited and Biko Invest Limited (both beneficially owned by Dan Gertler) (see Appendix III);
  • March 2011:  Sodimico sells its remaining 30% interest in the JV company holding Comisa and Frontier to Sandro Resources Limited and Garetto Holdings Limited (beneficial ownership unknown; same BVI registered agent as Rowny and Biko);
  • Summer 2011:  Gecamines “buys” EGMF’s (George Forrest) interest in CMSK by forcing it to sell (and obtaining a court order doing so) its shares after EGMF had received an offer for those shares (but had not accepted it); a claim has been brought by EGMF in front of the ICC in Paris. 

As set forth in detail in this report, these transactions share one or more of the following characteristics:

  • Sales/transfers of state assets at well below market value (e.g., SMKK/Emerald Star; Mutanda/Kansuki, Comisa/Frontier, Sodifor, Lake Albert); based on our analysis, the money lost to the government (and gained by private parties) as a result of these below-market sales in the last two years alone exceeds US$3 billion;
  • transfers of state assets at unknown terms/prices to unknown private parties (potential losses unknown);
  • To the best of our knowledge, none of the assets listed above that were sold/transferred to private parties were open to public tender;
  • The mere existence of most of the transactions listed above, if disclosed at all, was not disclosed until many months after the transaction had closed;
  • Unilateral cancellation of contracts and/or expropriations which have left the DRC and Gecamines with potential legal liability topping US$4 billion and significant delay in the receipt of dividends, royalties and tax revenues from these assets (easily topping US$300 million to date);

These losses are summarized in Appendix IV to this report.

DRC has almost entirely failed to fulfil its obligations to the IMF in respect of the disclosure-related structural benchmarks described earlier in this report.  As previously noted, Appendix I to this report is a matrix setting forth the information that the DRC was supposed to publish, and what it actually did publish.  The IMF has stated that: “[s]tructural reform [has] progressed as planned….The government reported that it published all new partnership agreements between public entities and private enterprises.”  While the government may have “reported” that it published this information, as Appendix I shows, in fact the DRC has published virtually none of what was required.  It would appear that the IMF is simply taking the DRC government at its word and not conducting any due diligence to confirm that the DRC is in fact complying with this structural benchmark.

To summarize the DRC’s lack of compliance:

  • Not a single contract amended as a result of the 2007-2010 mining contract revisitation has been published except for the amended Tenke Fungurume joint venture agreement.  Hence, no concrete and verifiable information on the renegotiated signature bonuses, tax regimes, royalties, etc. has been provided by the government;
  • No information has been published by the government regarding the beneficial ownership of the private partners to any of these transactions (although since some of the partners are publicly-traded, some of this information is available through other sources, although not confirmed by primary documentation).  A very significant number of the private partners to these transactions are hidden behind a web of offshore companies and trusts.  Hence, beneficial ownership cannot be readily identified and the ultimate beneficiaries of many of these highly lucrative deals are unknown;
  • Outside the amendments arising from the DRC 2007-2010 mining contract revisitation, a number of new agreements between Gecamines and private parties for the sale and/or transfer to joint ventures of Gecamines’ assets have not been disclosed, including:  Sales agreement for of 50% of SMKK; CHEMAF Sprl contract; GCK Sprl JV agreement; Kansuki Sprl JV agreement; Chabara Sprl JV agreement; Secakat Sprl JV agreement; Sales agreement for Gecamines’ interest in Kansuki Sprl; Sales agreement for Gecamines’ interest in Mutanda Mining Sprl.  Taking into account SMKK, Kansuki, and Mutanda alone, Gecamines appears to have sold those assets for roughly a billion US dollars under market value.

In summary, and as developed in detail in the subsequent section, since the IMF granted the DRC the ECF worth US$551.45 million, the DRC has:

  • Apparently lost over a billion US dollars in below-market asset sales;
  • left further billions in the hands of offshore companies that have flipped state assets in exchange for cash and/or carried interests in mining and hydrocarbon assets;
  • incurred significant legal exposure likely in excess of US$4 billion by cancelling contracts and expropriating assets;
  • has significantly delayed the receipt of state revenues from these cancelled/expropriated projects (not to mention the loss of thousands of jobs in the formal economy); and
  • has almost entirely failed to comply with the disclosure requirements set by the IMF as a structural benchmark.

We have also identified commonalities between the post-ECF transactions and other, earlier transactions that have occurred during the Kabila presidency.  The commonalities include an explosion in BVI shell companies affiliated with trusts, persons or law firms located in Gibraltar and which companies end up with ownership interests and/or intermediate transactions involving DRC mining and hydrocarbon assets.  The documentary evidence suggests that some of these companies are owned by or are otherwise associated with Dan Gertler, who has also been involved in many of the post-ECF transactions noted above.  The ownership of other similar companies, however, remains unknown or unverified.

Given these commonalities, we have prepared a brief summary of companies that fit this pattern, including the assets they hold and whether their beneficial ownership in known.  This summary is Appendix II to this report.

The penultimate section of this report includes limited policy recommendations, mostly confined to an examination of the IMF’s current programme. 

The final section has to do with potential next phases of the investigation.  Throughout the report, we have noted a number of potential avenues that lend themselves to further inquiry. 

5.      Detailed Analysis of Post-ECF Transactions

The organization of this section is mostly chronological.  In cases where several events are related to one asset, however, we have grouped those events together.

5.1.   Sale of Gecamines’ 50% interest in SMKK to ENRC via Emerald Star Enterprises Ltd.

Although ENRC[8] is perhaps best known for its acquisition of 50.5% of First Quantum Minerals’ erstwhile KMT asset through BVI companies owned by Dan Gertler, that transaction was actually the last of a series of acquisitions of Congolese mining assets by ENRC in roughly an 11-month period.  The second of these transactions occurred on 21 December 2009 – just 11 days after the ECF closed.[9]  (The first transaction – the purchase of CAMEC - is noted in Appendix II). 

It was common knowledge that Société Minière de Kabolela et de Kipese SPRL (“SMKK”), a joint venture company, was owned 50% by ENRC (through its acquisition of CAMEC) and 50% by Gecamines.  SMKK controls the Kabolela copper and cobalt project, which consists of two exploitation permits, 495/2003 and 496/2003, allowing for the research, development and exploration of copper, cobalt, gold and nickel in the Kambove area.

When reviewing various ENRC documents in relation to the Highwind/KMT transaction, we noted the following:

On 21 December 2009, a fellow group company acquired an option for a cash consideration of US$25,000,000 to purchase the outstanding 50% of the issued share capital of SMKK by acquiring the entire issued share capital of Emerald Star Enterprises Limited ('ESEL'), the owner of the outstanding 50% of SMKK. The fellow group company exercised this option and the acquisition of ESEL was effectively completed and control obtained by ENRC PLC In June 2010. The total cash consideration in respect of the outstanding SMKK shares, inclusive of the US$25,000,000 option, amounted to US$75,000,000.[10]

Only a few months earlier, CAMEC (acquired by ENRC) had stated that Gecamines (not Emerald Star Enterprises Limited (“Emerald Star”)) owned this 50% of SMKK.[11]

Our local sources reviewed Gecamines’ board minutes from 2009, but found no reference to the sale from Gecamines to Emerald Star.  The first reference was in the board minutes dated 2 February 2010, which states that an option was offered by Emerald Star to Gecamines to acquire Gecamines’ interest in SMKK for US$15 million.  The second reference to the sale was made in the 9 April 2010 Gecamines’ board minutes.  In those minutes, the board notes that the Prime Minister had asked Gecamines to transfer to the state the US$15 million it had received from the sale of its shares in SMKK.  A copy of these minutes is Exhibit 3 to this report. 

We have not seen a copy of the sales agreement.  These Gecamines’ board minutes strongly suggest, however, that Gecamines agreed to sell its 50% of SMKK to Emerald Star in January/February 2010 for US$15 million.

On 23 March 2011 ENRC announced its preliminary 2010 results.  That report states that Emerald Star “is an entity controlled by the Gertler family trust”.[12]  We have confirmed that Emerald Star was incorporated in the British Virgin Islands by Equity Trust (BVI) Limited (“Equity Trust”) on 24 October 2009.[13]  Equity Trust has incorporated/served as the registered agent/office for dozens of entities associated with Dan Gertler.  A list of the currently known companies is included as part of Appendix II to this report.

At the very least, the available evidence suggests that Dan Gertler sold an asset to ENRC for US$75 million, which he bought for US$15 million from Gecamines, meaning that Gecamines lost US$60 million on the deal by not selling directly to ENRC.  ENRC owned the other half of SMKK and was thus the logical buyer for this interest, particularly as it seems to have had a right of first refusal on any sale of Gecamines’ interest in SMKK.

The SMKK JV agreement has been published on the Ministry of Mines website.[14]  Although this agreement has certainly been amended (although the amendments have not been published by the DRC as required by the IMF), Article 23 in the published version, regarding transfers and sales of interest, contains a clause commonly found in mining joint venture agreements:  the right of first refusal (“ROFR”) (see, in particular Article 23.3):

23.3. S'il advenait que le Vendeur est disposé à procéder à la Cession, il doit exiger une offre d'acquisition écrite de toute personne qui désire se porter acquéreur (l'Acheteur).Le Vendeur doit ensuite aviser l'autre Partie par écrit de son intention de vendre, de l'identité de l'Acheteur ainsi que des modalités, conditions et considérations (lesquelles considérations doivent être nécessairement monétaires) auxquelles cette Cession doit être effectuée (l‘Avis). Sur réception de l'Avis, l'autre Partie aura l'option, pour une période de soixante (60) jours commençant dès la réception de l'Avis, d'acquérir le droit ou l'intérêt faisant l'objet de l'offre aux mêmes modalités, conditions et considérations que celles mentionnées dans l’Avis.

If this clause survived any subsequent amendments, it is unclear why ENRC (who owned the other 50% of SMKK through its purchase of CAMEC and thus would seemingly have the ROFR over Gecamines’ 50%), would have bought the other 50% of SMKK from Emerald Star for US$75 million when it would appear to have had the right to buy it from Gecamines for US$15 million under the ROFR.  Perhaps the ROFR was removed by a subsequent amendment, but we can only speculate given that the DRC has failed to publish the amendments as required by the IMF.

A further note regarding the fair value of this asset:  while the fair value can obviously be said to be the value paid by ENRC (US$75 million), it is hard to imagine how Gecamines could have arrived at a valuation for its 50% of SMKK of only $15 million.  Barely over a year before this transaction, CAMEC (again, later acquired by ENRC), had bought the other 50% of SMKK from Kara Enterprises Limited[15] (“Kara”)[16] for US$85 million in CAMEC shares.[17]  This price was further verified by CAMEC in various public filings.[18] 

We note that Kara was, like Emerald Star (and dozens of other companies involved in dealing in the DRC), incorporated by Equity Trust in the BVI.  Equity Trust is one of over 100 registered agents in the BVI.[19]  The Kara Share Sale Agreement identifies the director of Kara as Dino Chincotta.  Mr Chincotta is at attorney at a law firm in Gibraltar called Hassans[20] and a company manager at its affiliated corporate and trusts services companies (Line Management[21] and Line Trust).  Persons affiliated with Hassans, as well as Line Trust and Line Management, are linked to a number of the entities incorporated by Equity Trust that are involved in dealings in DRC assets.

In some cases, these entities have been reported by publicly-traded partners to be owned by the Gertler Family Trust.  In other instances, the beneficial ownership is unknown.  In the case of Kara, CAMEC in its regulatory filings denied that Gertler owned Kara (or the Vendor, as it is called in the CAMEC press release).  CAMEC states that an “independent third party” from Prairie (a company affiliated with Gertler) acquired SMKK, and that CAMEC subsequently acquired SMKK from this independent third party.[22]

Thus, while we have identified a pattern within the corporate structuring of entities involved in many of these transactions, this does not necessarily imply that there is common beneficial ownership.

Obviously, much of this uncertainty as to the beneficial ownership of certain assets (whether involving Equity Trust/Hassans or not) would be resolved if the government were simply to comply with the disclosure requirements set by the IMF.

In summary:

·         Gecamines appears to have sold an asset worth at least US$75 million for US$15 million;
·         A basic internet search would have revealed the asset was worth in the range of US$85 million;
·         Gecamines’ loss of US$60 million appears to have been a gain of US$60 million to a privately-owned BVI shell company, Emerald Star;
·         According to ENRC, Emerald Star is owned by Dan Gertler;
·         The DRC has made no disclosures regarding this transaction – the sales agreement has not been published, nor were any amendments to the original SMKK JV agreement published, nor has any statement been made by the government regarding the beneficial ownership of the private party (Emerald Star) to this deal.

5.2.   Cancellation of KMT/Kolwezi

In April 2007, the DRC government created a commission to “revisit” all mining contracts that had been signed prior to that date. A detailed overview of this process can be found on the Carter Centre website.[23]

One of the primary justifications for the mining contract revisitation process was that certain contracts had been entered into with no serious attempt on the part of the DRC or Gecamines to value the assets beforehand.  These assets were then transferred to entities with neither experience in the mining sector nor the financial capacity to develop them.  The technical requirements under these prior contracts were made so vague that it was difficult for the DRC or Gecamines to cancel these contracts even when these financially and/or technically deficient partners had essentially done no work.  Moreover, these partners (having invested little time or money to acquire or develop the assets and without any genuine capability to do so) would then flip the assets to “real” mining companies (i.e., companies that did have the technical and financial resources necessary to develop serious mining operations) for very substantial profits.  By failing to properly value the assets and by dealing with counterparties who had no practical ability (or even desire) to develop these substantial mining properties, the government lost very likely billions of US dollars and allowed significant sums to be pocketed by entities that were nothing more than asset flippers.

Despite this real concern, the manner by which the current administration undertook the “revisitation” process was dominated by opacity, as noted by the Carter Centre.[24]  Many of the contracts that were considered by experts to be the most problematic sailed through the review process with few disclosures about what went on behind closed doors.  Indeed, as noted earlier in this report, despite its obligations to the IMF, the DRC has published only one of the revisited contracts – the amended Tenke Fungurume agreement –out of the dozens of contracts revisited and renegotiated.

Instead of focusing on the most questionable deals, the DRC demanded significant concessions from its two most substantial and serious joint venture partners – Freeport McMoran (“Freeport”) and First Quantum Minerals (“FQM”).  Unlike many of the private JV partners, Freeport and FQM had invested several hundred million US dollars (in the case of Freeport eventually over US$1 billion) developing their respective mining operations (Tenke Fungurume and KMT[25]/Kolwezi).  Both companies are publicly-traded and had made substantial disclosures regarding their operations in the DRC.  In the case of FQM, its JV partners included the International Finance Corporation (the “IFC”), a division of the World Bank, and South Africa’s Industrial Development Corporation (the “IDC”).  In short, these were reputable partners that had invested significant sums to develop some of the largest mines in the DRC.

What happened to FQM is detailed in its Statement of Claim[26] filed with the BVI court.  In particular, FQM states that it had reached an agreement with the DRC and Gecamines regarding the renegotiated contractual terms on 6 March 2009 (see paragraphs 31-34 of the Statement of Claim).  Despite this, the DRC government in August 2009 began a series of steps to revoke FQM’s rights to KMT, including sealing KMT’s facilities and a series of spurious legal actions.  Detailed descriptions of these actions can be found in various FQM press releases.[27]  On 7 January 2010 Gecamines’ board (along with the DRC government) unilaterally cancelled its contract with FQM in respect of KMT.

In response to these apparent breaches of contract, FQM commenced arbitration at the International Chamber of Commerce (the “ICC”) against the DRC and Gecamines.  Their claim is believed to be in excess of US$2 billion.  This is in line with independent valuations of FQM’s assets, including one prepared by Numis Securities Ltd. in July 2010.[28]  They have calculated a net present value for FQM’s 65% share of KMT/Kolwezi at US$2.498 billion.

Regarding FQM’s likelihood of success in the arbitration, most observers consider it very likely that they will obtain a substantial award from the ICC.  As noted by Numis Securities:

First Quantum have, unfortunately for its shareholders, provided a textbook case study in the perils of applying high corporate governance standards to a region where the rule of law is clearly not independent from political interests. We believe that the company has been the victim of a classic shakedown, simply because it refused to play the “brown envelope game”. As a consequence, in our view it has always seemed that FQM have excellent grounds to dispute both the Kolwezi and the Frontier/Lonshi court rulings.[29]

Furthermore, FQM has brought suit in the BVI against the companies that were subsequently awarded KMT by Gecamines (see Exhibit 9).  As this legal action does not involve the DRC, but rather private parties, we have not included it in this analysis.  For the sake of completeness, however, a judgment recently handed down by the BVI court is Exhibit 10 to this report.

Beyond the very significant legal exposure the DRC/Gecamines has brought upon itself by cancelling KMT, the costs to the DRC go far beyond that.  As noted in a recent FQM press release:

When the Kolwezi Project was cancelled First Quantum had already invested over $400 million in a plant on site, which was 75% completed, and prior to the DRC’s cancellation, was scheduled for commissioning by no later than May of 2010….[30]

Regrettably, as a result of the illegal cancellation of the Kolwezi Project over 750 Congolese workers have already lost their jobs and the RDC is now foregoing direct revenues of up to $150 to $300 million a year while the Kolwezi Project sits idle.[31]

Even using the low end of these numbers, US$150 million, the DRC has thus lost at least US$225 million since the KMT/Kolwezi asset should have commenced production 18 months ago.

In summary this questionable cancellation of a substantial mining contract has cost the DRC:

·         potentially US$2.5 billion in legal claims;
·         at least US$225 million in direct revenue as of today, which number grows daily; and
·         750 jobs

It is worth noting that the ECF is a three-year facility for US$551.45 million.  Over the course of three years, KMT alone would have generated at least US$450 million (and up to US$900 million) in direct revenues for the DRC.

5.3.   Awarding KMT to the Highwind Group/Flipping 50.5% to ENRC

On the same day – 7 January 2010 - that Gecamines’ board approved cancelling FQM’s contract for KMT,[32] it signed a new joint venture agreement, creating a company known as Metalkol SARL, with four BVI shell companies.[33]  These companies – like Emerald Star – are all incorporated by Equity Trust, and also have a Gibraltar connection.[34]  The signatory to the contracts is Sydney Attias, and the JV Agreement lists an address for him in Gibraltar.[35]

For months, few, if anyone, outside the parties to this deal even knew that it had been executed.  As noted by the Carter Centre in November 2007, a historical problem with some of the DRC mining contracts was that:

There was no valuation of the assets prior to the contract. No known economic modeling was done by the parastatal prior to entering into these agreements, making the question of whether the DRC is getting an appropriate return for its asset contribution very difficult to answer. The absence of valuation points to haste, which could be due to a number of factors, including corruption, intense pressure from the corporation, or simple lack of resources and representation of the parastatal. [36]

In the case of KMT, however, an asset in which a publicly-traded company and its partners had invested US$750 million, was 75% complete and slated to be operational within a matter of months (had it not been taken from FQM), valuations were plentiful.  As noted above, Numis Securities values FQM’s 65% share of KMT at US$2.498 billion, making 100% of the asset worth US$3.84 billion.  Yet, Gecamines transferred 70% of this asset to these four BVI companies (collectively, the “Highwind Group”), for upfront consideration of only a US$60 million signature bonus.  There was no public tender for this asset. 

Furthermore, the construction and engineering involved in building KMT was known to be extremely complex (possibly why 1.5 years after it was supposed to be operational, it still is not).  Nevertheless, in a transaction precisely of the kind that the mining contract revisitation process was purportedly designed to identify and weed out, the DRC awarded these highly complex and extremely valuable assets to four recently-formed shell companies without a public tender or indeed any publicity at all.

As it turns out, the Highwind Group did not need to possess technical nor financial capacity.   Within months it had flipped these assets (at a significant profit) to ENRC, a company with substantial mining operations and financial capacity.

On 20 August 2010, ENRC announced that it had purchased 50.5% of Camrose Resources Ltd.[37] (“Camrose”), the parent company of the Highwind Group, for US$175 million.[38]  Cerida Global Limited[39] (“Cerida”), a company reported by ENRC as being owned by the Gertler family trust, continued to own the other 49.5% of Camrose (and thus indirectly 49.5% of Highwind). ENRC also provided a loan of up to US$400m to Camrose to provide working capital, repay committed loans and fulfill existing payment obligations.[40]

Regarding this US$175 million purchase price, not all (although most) can be attributed to KMT.  Through this transaction, ENRC also acquired other assets held by Camrose, including 45,400,000 shares of Africo Resources.  On 20 August 2010 (the date of the sale to ENRC) Africo Resources was trading at CDN$0.91/share.  Thus, the market value of 50.5% of those shares was approximately CDN$20 million (also US$20 million). 

Camrose also held part of a minor mining asset through Comide SPRL (“Comide”).[41]  Comide owns a property called Mashitu, which one of our sources, an expert on DRC mining properties, described as “garbage”.  We have no way of independently evaluating his assessment other than to note that Africo Resources had previously decided to terminate an agreement[42] to purchase Mashitu, apparently following an independent valuation of the property.[43]  We will, thus, (perhaps generously) ascribe a value of US$10 million to 50.5% of Mashitu.

Netting out the value of the shares of Africo Resources and (US$20 million) the possible value of Mashitu (US$10 million), the value ascribed by ENRC to 50.5% of the Highwind Group would be US$145 million.   That is, the Highwind Group paid US$60 million for 70% of KMT, then sold 50.5% of that 70% for US$145 million.  This implies that 100% (of that 70%) would be worth cash consideration of US$287 million.  Putting aside the well-publicized valuations of KMT, which indicate a value well in excess of this, the transaction with ENRC alone suggests that at the very least the market value of 70% of KMT was worth US$287 million.[44]  Yet, the DRC and Gecamines sold it months earlier without public tender to the Highwind Group for US$60 million[45] implying that the government lost at least US$227 million in just the cash consideration for this 70% of KMT by not dealing with ENRC directly – a party with which the DRC/Gecamines was already partners in other mining operations.

The losses to the government from the Highwind transaction do not stop there.  The 20 August 2010 ENRC press release also states that ENRC is to provide a working capital loan of US$400 million to Camrose.  As KMT was almost complete and likely required less than US$200 million of capital to make it operational,[46] it seems that the owner of the other 49.5% of Camrose would not have to invest any capital to make the mine operational.  This interest would effectively be carried.  49.5% of 70% is 34.65% - giving ultimately the Gertler family trust that controls Camrose an apparent 34.65% carried interest in KMT (which is now held through the Metalkol JV).  To further put this in perspective, the DRC’s and Gecamines’ combined carried interest in the Metalkol JV is only 30%.

If ENRC was willing to shoulder 100% of the development costs for a 35.35% ownership interest (50.5% of 70%) and if it assigned cash value of approximately US$287 million for just 70% of KMT, it is puzzling why did the government not deal directly with ENRC. 

In summary,

·         The government’s actions were antithetical to the entire purpose and justification of the mining contract revisitation;
·         once again, the DRC did not place a valuable mining asset out to public tender;
·         instead, behind closed doors, the DRC awarded the mining rights to shell companies lacking any discernable financial and technical capacity to carry out the project themselves – precisely the kind of transaction the three-year mining contract revisitation sought to revise or cancel.
·         the DRC failed to offer any rationale for the sales price or division of ownership interests;
·         within months, the shell companies had flipped the assets for a significant gain to a substantial mining company, ENRC;
·         by not dealing directly with ENRC, which already had significant interests in the DRC, the DRC/Gecamines lost approximately US$227 million in cash and an additional 34.65% carried interest in the project.

5.4.   Undisclosed JV Agreements

On 8 September 2011, the Mining Ministry sent a letter to all state-owned mining companies requesting that they transmit copies of all revisited contracts to the Ministry.[47]  Gecamines, however, apparently refused and submitted a list (which appears incomplete) of its current partnership agreements.[48]  This list not only revealed dozens of contractual amendments that have not been published, but several completely new joint ventures which have never been disclosed.  The post-ECF joint ventures of which we can find almost no public reference before the publication of this list by the Mining Ministry includes:

·         Chabara SPRL:  the original JV agreement was signed in February 2010 and an amendment was signed in November 2010.  Based on information on Gecamines’ website, the JV partner appears to be Dino Steel International SPRL[49] (which by virtue of common directors seems to be affiliated with Groupe Bazano – discussed below).  Regardless, the contract is unpublished, the terms are unknown and there is no certainty regarding the beneficial ownership of the private partner.
·         SECAKAT SPRL:  the JV agreement was signed in February 2010.  The contract is unpublished; deal terms and private partner unknown;
·         GCK SPRL:  The JV agreement was signed in August 2010.  The contract is unpublished; deal terms and private partner unknown;
·         Chemaf SPRL:  Gecamines entered into a lease agreement with Chemaf SPRL in September 2010.  Although the owner of Chemaf is generally known to be Shiraz Virji, the contract is unpublished and the terms of the deal are known.

A number of JV agreements pre-dating the ECF, but post-dating the mining contract revisitation, were also disclosed in this list published on the Mines Ministry website.  There has been no public disclosure of their terms.  They are listed in Appendix I to this report.

As one can see from the Highwind/KMT/Metalkol deal noted above, even when the value of an asset is well-known, the DRC and Gecamines have still managed to sell them for substantially below such value.  In respect of the joint ventures listed above, it is unclear what assets they hold, let alone what steps, if any, Gecamines took to value those assets prior to entering into the joint venture.  We can find no evidence that any of these assets were offered via public tender before these joint venture agreements were signed.

As nothing is known about these deals beyond their mere existence, it is impossible to evaluate the financial benefit (or detriment) associated with these deals.  This only underscores the need for the IMF to demand compliance with the structural benchmarks associated with its programme.

5.5.   Failure to renegotiate and/or issue Presidential Decrees granting Lake Albert Blocks I and II to Tullow and Heritage

Subsidiaries of Tullow Oil PLC (“Tullow”) and Heritage Oil PLC, both proven mid-size oil companies, signed a production sharing agreement (“PSA”) with the DRC in July 2006 regarding Blocks I and II on the Congolese side of Lake Albert.[50]Tullow and Heritage had already secured licences on the Ugandan side of Lake Albert. 

Kabila, however, refused to sign the presidential decree approving the Tullow/Heritage PSA.  In 2008, Block I was awarded to Divine Inspiration Group (see subsequent section).  Kabila also failed to issue a presidential decree for this subsequent contract.  In May 2010, both Blocks I and II were awarded to two BVI shell companies, Caprikat Ltd. and Foxwhelp Ltd. (discussed below), and for these companies, Kabila issued the needed presidential decree.

Tullow initiated legal proceedings against the DRC for breach of contract.  However, these proceedings were recently discontinued.  From Tullow’s 2010 annual report:

In 2006, Tullow was awarded two Congo (DRC) licences adjacent to its Ugandan acreage on Lake Albert through a transparent bidding process. In June 2010, the Government awarded the licences via Presidential decree to two British Virgin Islands-registered companies. Tullow commenced legal proceedings to challenge that award and obtained an interim injunction preventing those companies carrying out any work until Tullow's rights had been legally determined. In subsequent proceedings, it became clear that Tullow's rights were not likely to be upheld so long as the DRC Government maintained its position that it had the right to ignore or revoke the earlier award to Tullow. Given the expense of further proceedings and the difficulty in enforcing any award against the DRC even in the event of success, the Board has regretfully taken the decision to discontinue the legal proceedings and withdraw from the DRC.[51]

Although the DRC’s legal risk has vanished thanks to Tullow having abandoned this litigation, it is important to note the very different paths Uganda and the DRC have taken in respect to developing Lake Albert’s significant oil reserves.  In the past five years, while Uganda has become a “new oil province” to borrow Tullow’s words, the DRC side of Lake Albert has essentially been locked in a state of paralysis.  As noted, however, by Peter Pham,[52] a well-regarded academic focusing on Africa:

The problem is they’ve either sold the blocks several times over, or where there is [clearly] one licensee -- for one reason or another -- Kabila has withheld the final presidential approval that would permit them to go on ahead.  And as a result, they have virtually no production.[53]

The following is a summary of Tullow’s developments in Uganda since it took over the licenses in 2004:

During 2004 and 2005 extensive 2D seismic data was acquired in both Blocks 2 and 3A and this data identified structures with good hydrocarbon trapping potential. The existence of a working seal and reservoir to trap oil in commercial quantities could only then be understood through drilling.  In early-2006, Tullow and its partners drilled the first well, since 1938, in the Kaiso-Tonya region….
Tullow then embarked on a major exploration campaign to discover sufficient volumes for commercial development.  Over 35 wells have been drilled in the basin from Kingfisher-1 in the south to Buffalo-1, 150km to the north. All but one of these wells has encountered hydrocarbons and proven up 1.1 billion barrels of oil resources (P50). This is sufficient volume to exceed the commercial threshold for development with an additional 1.4 billion barrels (P50) yet to find.[54]

Tullow and its partners, CNOOC and Total, have made plans to invest over US$10 billion in Uganda to develop upstream (production), midstream (pipeline), and downstream (refining) assets.  Meanwhile, the DRC has chosen to award its perhaps two most valuable blocks – I & II – to BVI shell companies, with unknown ownership and no apparent experience in the exploration or production of oil, let alone operating offshore fields in the middle of a continent. 

Sources have told us that 1) it is questionable that a major oil company will be willing to invest the billions of dollars necessary to build an export pipeline through the DRC (assuming such project were even technically feasible) and 2) that Tullow will not allow oil produced on the DRC side of Lake Albert to flow through its pipeline on the Ugandan side without appropriate compensation (i.e., being given a percentage of the DRC blocks). 

We have not approached Tullow to attempt to verify this, nor do we feel that they would comment.  Regardless, this raises a serious question:  what are the DRC’s plans for developing its Lake Albert oil resources?  Does it have a viable plan to do so without the participation of Tullow?  If not, the oil will remain in the ground, placing Congo even further behind Uganda than the five years it has lost to date.

In summary:

·         while the DRC may have dodged a bullet in respect of legal claims brought by Tullow, the development of the DRC side of Lake Albert has seen little progress in over five years;
·         it is unclear if the government has a viable plan to develop the Congolese side of the lake independent of the infrastructure being constructed by Tullow on the Ugandan side;
·         continued inertia in the development of a very significant oil play will only insure that the DRC will continue to look to the donor community for years to come instead of relying upon its own resources;
·         it is unknown what the IMF (or World Bank) is demanding from the DRC in respect of Lake Albert – are they content to see little development in the DRC side of the lake?

5.6.   Failure to issue Presidential Decree granting Lake Albert Block I to Divine Inspiration Group/H-Oil

On 21 January 2008 – exactly 18 months after executing the PSA with Tullow and Heritage – the DRC government executed a PSA with other parties covering one of the same blocks – Block I.  The ownership interests in this new PSA were as follows:

Divine and HOIL entered into a Joint Production Contract (hereinafter the “JPC”) dated January 2008 whereby Consortium Divine Inspiration Group (Pty) (hereinafter “Divine”), H Oil Congo Ltd (hereinafter “HOIL”), La Congolaise Des Hydrocarbons (hereinafter “CDH”), Congo Petroleum And Gas Sprl (hereinafter “CP&G”), Sud Oil Sprl (hereinafter the “SO”) (Divine, HOIL, CDH, CP&G and SO collectively the “Consortium”) are granted exclusive exploration rights on Block I in Graben Albertine (hereinafter the “Block I”) in the Democratic Republic of Congo (hereinafter “DRC”), with the following percentages:

Title Holders (Consortium)     Participating Interest/Working Interest
Divine                                      51%/58%
HOIL                                        37%/42%
CDH                                         7%/0%
CP&G                                       3%/0%
SO                                            2%/0%[55]

CDH is the Congolese state-owned oil company, also known as Cohydro.  As noted in the chart above, along with Cohydro, CP&G and SO – local privately-owned companies - ended up with carried interests in the project.

Once again, for over two years following the execution the PSA, President Kabila did not sign the presidential decree approving this agreement with Divine and HOIL.  His failure to issue the decree may have been complicated by an unexecuted Option Agreement, which we believe to be authentic.  This agreement is dated 26 February 2010, but apparently was never executed. On its face, this Option Agreement was linked to the issuance of the presidential decree:

WHEREAS, the JPC requires to become effective the DRC Presidential Order, which to-date has not been received;….

WHEREAS Buyer [Yewville] has an in-depth knowledge of the DRC and the issues surrounding the final approval of the JPC, and is a long-term investor in the DRC, having established a strong track record of successful partnership with the Government of DRC;….

WHEREAS Buyer believes that Buyer joining the Consortium with the largest Participating Interest and in no case less than forty per cent (40%) would provide a much-strengthened profile for the Government of DRC; [emphasis supplied]

The financial terms of the Option Agreement seem to be favourable to the recipient of the option, Yewville:

·         For the option to buy this 40% participation, Yewville will pay Divine and H-Oil $1.00 each (Articles 2.1.1, 2.1.2, 2.2);
·         When Yewville chooses to exercise the option, it can do so for 45.49% of Divine and H-Oil’s past costs of US$13,642,614.46, or US$6,206,025.32 (Articles 2.4.1, 2.4.2).
·         Yewville does not have to pay this amount until two months after exercising the option, but will pay the consideration before selling this 40% interest (Articles 4.1 and 4.2) (i.e., Yewville can essentially have a buyer lined up for this 40% before it has to pay Divine or H-Oil anything)
·         Yewville does not have to pay any development costs of the block – Divine and H-Oil have to carry Yewville (Article 6) or they have to buy out Yewville at market value (Articles 6.2 and 6.3)

We have no definitive proof regarding the provenance of this Option Agreement.  We, however, note the following commonalities with other DRC transactions:

·         First, the company that would “purchase” the option (and the alleged author of the Option Agreement), Yewville Enterprises Limited[56] (“Yewville”) was incorporated in the BVI by Equity Trust, as were dozens of companies known to be affiliated with DRC mining interests (see Appendix II);
·         Secondly, the Option Agreement states that all correspondence sent to Yewville is to the attention of Maximilian Torres and Abigail Harrison, two attorneys at Hassans/Line Management[57] –entities that have been involved in other DRC dealings (e.g., Camrose, Kara Enterprises as noted above and Caprice Enterprises noted below).

As noted above, Divine and H-Oil were never issued a presidential decree.  Whether their purported failure to sign the Option Agreement had anything to do with it, is likely never to be known. 

Despite the government’s failure to issue the decree, Divine and H-Oil did raise and spend several million of dollars on the block, only to have their investment held hostage by the lack of a presidential decree.  Furthermore, Divine has assigned a portion of its legal claims to SACOil (and received consideration from SACOil for those claims),[58] and it is possible (although not certain) that legal actions may be brought against the DRC. If the Option Agreement is genuine, its existence does not inspire investor confidence in the DRC as it creates the impression that executive decisions may be linked to private commercial arrangements.

5.7.   DRC entering into Production Sharing Agreement for Lake Albert Blocks I and II with Caprikat and Foxwhelp

On 5 May 2010, the DRC awarded the Lake Albert Blocks I & II not to major oil companies, but rather two recently-formed BVI shell companies, Caprikat Ltd. and Foxwhelp Ltd.[59]  A copy of the Production Sharing Agreement can be found on the Minister of Mines website.[60]

The signatories to the PSA for Caprikat and Foxwhelp were Khulubuse Zuma and Michael Hulley.  Khulubuse Zuma is the nephew of South African President Jacob Zuma, and Michael Hulley is Jacob Zuma’s lawyer.   Prior to his foray into the Congolese oil patch, Khulubuse had no known experience running an oil company.  Moreover, the latest news (October 2011) out of South Africa regarding Khulubuse’s business practices hardly inspires confidence in the DRC’s apparent choice of partners:

The politically connected directors of Aurora Empowerment Systems are in danger of being declared personally liable for bringing Pamodzi Gold's East Rand and Orkney gold mines to their knees.

This follows the ratification yesterday by the Pretoria High Court of a R9-million Aurora liquidation application by Copper Eagle.

If the directors are found to be personally liable, their personal assets could be attached to recover creditors' money.

Aurora's four directors are President Jacob Zuma's nephew, Khulubuse Zuma; Nelson Mandela's grandson, Zondwa Mandela; Jacob Zuma's attorney, Michael Hulley; and Thulani Ngubane….

Aurora took over management of the two Pamodzi mines in 2009. Two months ago, an assets audit by provisional liquidators found that the mines had been stripped of their assets to the extent that huge capital expenditure would be necessary to restore them to operation.

Many of the company's employees have not been paid since February last year.[61]

Although it is common knowledge that various large, multinational oil companies had been in Kinshasa in the winter/spring of 2010 expressing interest in those blocks, it does not appear that the DRC formally put the blocks out to public tender.  Sources have stated that certain companies had offered signature bonuses several times what was paid by Caprikat and Foxwhelp (US$6 million – article 12.8 of the PSA).  We cannot verify these statements, but had transparent public tender procedures been in place, this would be public knowledge.

In any event, given the evident value of these concessions, these signatures bonuses appear to be very low.  Only a few months after these oil blocks were awarded to Caprikat and Foxwhelp – companies with no apparent technical or financial ability to develop offshore oil concessions – Heritage Oil sold a 50% interest in adjacent Ugandan concessions to Tullow for US$1.305 billion.[62]  It is unknown what, if any, work has been performed by Caprikat and Foxwhelp since being awarded those blocks nearly 1.5 years ago.

Once again, despite the IMF structural benchmarks, the DRC has not given any information on the beneficial ownership of Caprikat and Foxwhelp.  Although it has been made to appear that it is Khulubuse Zuma, there are credible rumours that others may be involved in this transaction.  As such we looked for connections to others within our body of documentary evidence. The following is a summary of what we can verify to date, however limited it may be.  The PSA lists two different addresses for Caprikat and Foxwhelp;

1st Floor North Wing
54 Melville Road
The Reserve
Illovo, 2196
South Africa

23 Glenhove Road
Melrose Estate
Johannesburg. 2401
South Africa

A search of the South African and UK corporate records reveal that both addresses are associated with Mark Willcox and affiliates of Africa Management Limited.[63]  A press release by one of the partners in Africa Management Limited provides background information on the company and confirms that Willcox is its CEO.[64]

Although we can find no public disclosures of Africa Management Limited’s involvement in this deal, it appears in the BVI corporate records that they have previously provided funding to one of Gertler’s companies, Camrose.  In connection with Camrose’s CAN$100 million private placement with Africo Resources (briefly touched upon in the section of this report involving ENRC and Metalkol), Camrose borrowed money from Vipar Investments Limited (“Vipar”), which was secured by 45,400,000 shares of Africo Resources (that is, Camrose’s entire holding in Africo).[65]

According to the BVI records, on 20 November 2008, Camrose’s Articles of Association were amended.  In this document, “Affiliate” is defined as “in respect of Vipar, (a) any company which is its subsidiary or holding company or another subsidiary of any such holding company from time to time; and (b) any partnership or other entity that is managed, advised or controlled by, or which receives any investment management services from Africa Management Limited or its successors and assigns….”  “Africa Management Limited” is defined as “means Africa Management Limited, a company incorporated in Guernsey with registered number 47651 and whose registered office is at Ogier House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, Guernsey….”[66]  The Guernsey corporate records confirm that this is the same Africa Management Limited established by Och-Ziff and Mvelaphanda Holdings.[67]

Thus, Vipar, which is lending money to Camrose, appears to be affiliated with Africa Management Limited, which is run by Mark Willcox, whose addresses correspond to those in the Caprikat and Foxwhelp PSA.

At the very least we can establish that Africa Management Limited, through Camrose, has previously invested in companies with interests in the DRC.  It is unclear what Mark Willcox or Africa Management Limited’s interests are in Caprikat or Foxwhelp

Any speculation would obviously be rendered unnecessary were the DRC to comply with the terms of the IMF conditions and publish verifiable information on the beneficial ownership of its partners.  At a minimum, it may be said that the DRC’s failure to make these contractual arrangements transparent has again obfuscated the terms and conditions under which the DRC has sold a State asset that is clearly worth hundreds of millions, if not billions, of dollars. 

5.8.   Amended Production Sharing Agreement with SACOil for Lake Albert Block III; Total Farm-in

The case of SACOil further underscores the losses to the DRC when it chooses to contract with partners that do not have the financial or technical expertise to develop complex mines, offshore concessions, etc.  These companies inevitably seek to sell, farm-in or otherwise flip their interests to a major oil company – which raises the question why in the first place the DRC did not sell these assets through public tender with minimum financial and technical requirements for bidders.

On 26 May 2010, SACOil signed an amended PSA for Lake Albert Block III with the DRC government.  SACOil had 85% of the concession; the DRC has 15%.[68]  Under Article 12.8 of the PSA, SACOil was required to pay the following bonuses to the government:

Signing of Amendment
Granting of Exploration Permit
Renewal of Exploration Permit
Granting of Exploitation Permit
Renewal of Exploitation Permit
First Barrel of Production
10 millionth Barrel

Ten months later, SACOil, through its new subsidiary Semliki SPRL, entered into a Farm-In Agreement with Total, one of the world’s largest oil companies.  The rationale behind this decision is unsurprising.  According to SACOil’s Board:

The Board has concluded that, in order to effectively explore and evaluate the oil deposits of Block III, it is necessary to form a relationship with a major international oil company which has the necessary financial capacity, technical skills and operating expertise to operate the asset. Following careful consideration of a number of potential participants, SacOil entered into detailed discussions with Total during 2010. These discussions have resulted in the conclusion of the Agreement.[69] [emphasis added]

Under the terms of its agreement with Total, SACOil was to receive the following payments[70] (structured for easy comparison to payments due from SACOil to the DRC shown above):

Signing of Amendment
Granting of Exploration Permit
Renewal of Exploration Permit
Granting of Exploitation Permit
Renewal of Exploitation Permit
First Barrel of Production
10 millionth Barrel

Thus, should this block be fully developed, Total will have to pay SACOil US$94,250,000 more than the DRC is due under the PSA.  Furthermore, according to SACOil, it apparently had only incurred US$6 million in expenses prior to entering into the agreement with Total:  In consideration for the Block III Sale Interest, Total shall make payment to Semliki in an aggregate amount of US$15.0 million (including compensation for Semliki’s back costs in an agreed amount of US$6.0 million)….”[71]

In addition, SACOil and its partner Divine Inspiration Group retain a 25% carried interest through the exploration phase of the investment, meaning that Total will fund the entire exploration phase.  That is, they do not have to risk any of their money during the riskiest phase of any oil play – figuring out if oil is actually there.[72]  Once oil is discovered and reserves are proven, the value of SACOil’s 25% will increase dramatically, meaning that it could sell its interest for a substantial amount without having taken any financial risk.

In summary, by once again failing to deal directly with a major oil company in a transparent and open bid process, the DRC has let private parties substantially benefit from state assets. 

5.9.   DRC Strips FQM of its Lonshi and Frontier Properties; Grants them to Sodimico;

Following the cancellation of FQM’s Kolwezi/KMT concession in January 2010 (discussed above at Section 5.3), the DRC then sought to divest FQM of all of its assets in the country following FQM’s decision to commence international arbitration.  What happened to FQM’s Lonshi and Frontier assets is detailed in it 24 May 2010 press release:

First Quantum Minerals Ltd. (“First Quantum” or the “Company”, TSX Symbol “FM”, LSE Symbol “FQM”) announces that on May 21, 2010 the Company's subsidiaries Comisa SPRL and Frontier SPRL, which operate the Lonshi and Frontier copper mines respectively, received notification of a decision of the Democratic Republic of Congo (“RDC”) Supreme Court of Justice with respect to a case introduced by the state owned mining company, Société de Développement Industriel et Minier du Congo (“SODIMICO”). This case was brought by SODIMICO against its own shareholder, the RDC, requesting the annulment of a letter of a former RDC Minister of Mines of February 5, 2000 pursuant to which the RDC allegedly withdrew exploration rights belonging to SODIMICO. As a consequence, SODIMICO requested its rights be reinstated on the "exclusive exploration zones" which SODIMICO previously held and which were allegedly converted into a number of exploration and exploitation licences now held by Frontier and Comisa. Comisa and Frontier were named in the proceedings and therefore lodged submissions on April 5, 2010. The main defendant, the RDC, never defended the proceedings.

A hearing was held on May 14, 2010. Neither the Company nor Frontier or Comisa were notified of the hearing. The Supreme Court rejected all arguments submitted by Frontier and Comisa and canceled the Minister of Mines February 5, 2000 letter and "rehabilitated (SODIMICO) in its [mining] rights and titles". The Supreme Court does not address what impact, if any, the rehabilitation has or will have on the valid and still existing mining licences held by Comisa and Frontier. To date no direct action has been taken by the RDC authorities against either Frontier or Lonshi as a result of the Supreme Court decision and our operations continue.

“We are extremely concerned with the orchestrated attack on the Company’s Frontier and Lonshi operations in the RDC in obvious retaliation for our commencement of international arbitration with respect to the illegal cancellation of our Kolwezi Project and our refusal to resolve this dispute by agreeing to submit to arrangements with unspecified third parties” said Philip Pascall, Chairman and CEO of First Quantum. “In addition to our $750 million investment in the Kolwezi Project, First Quantum has invested over $300 million at Frontier in reliance on mining licences granted under the World Bank sponsored Mining Code having obtained all necessary government approvals and permits.[73]

Again, two valuable properties were stripped from FQM based on dubious legal pretexts.  On 25 August 2010, Sodimico (the state-owned company that, 10 years after the fact, claimed it was the rightful owner of the concessions), sent FQM letters, copied to President Kabila and a large portion of the government, telling FQM to abandon Lonshi and Frontier within 24 hours or risk criminal charges.[74]  After receiving these letters, FQM shut down its operations at Lonshi and Frontier. 

At the time Lonshi was undergoing exploration work, but Frontier was actively producing minerals and had months earlier received an award for being the largest taxpayer in DRC history.  As noted in FQM’s 23 May 2010 press release:

“In addition to our $750 million investment in the Kolwezi Project, First Quantum has invested over $300 million at Frontier in reliance on mining licences granted under the World Bank sponsored Mining Code having obtained all necessary government approvals and permits. More than 1200 Congolese workers and contractors are currently employed at Frontier, with an additional 250 Congolese workers at Lonshi. In addition, both Frontier and Lonshi have contributed immensely to the local economy, social facilities and way of life. Frontier recently made a tax payment of $55 million, the largest ever made in the RDC. It is simply inconceivable that the well being of so many Congolese citizens and the largest source of revenue for the RDC, not to mention our valid mining rights, could be put at risk as a result of a dispute between the RDC and its own company almost a decade after the matter in dispute arose.  [emphasis added]

It is believed that neither property is currently operational.  After the expropriation of these assets, FQM commenced arbitration proceedings against the DRC at the International Centre for Settlement of Investment Disputes (“ICSID”).[75]  Numis Securities has valued FQM’s stake in Frontier at US$1.568 billion and its stake in Lonshi at US$408 million, for a total of US$1.976 billion.[76]  While unconfirmed, it is believed that FQM is seeking approximately US$2 billion in damages in this arbitration, which would be consistent with Numis’s valuation.  As in the KMT/Kolwezi ICC arbitration, observers feel that FQM has a high chance of succeeding in the arbitration.

In summary,

·         In what FQM calls retaliation for its bringing ICC arbitration proceedings against the DRC in respect of KMT, the DRC courts quickly and with very questionable due process stripped FQM of its remaining assets in the DRC;
·         The DRC now faces additional legal claims of approximately US$2 billion;
·         The DRC’s largest taxpayer has been shut down, and it is likely the government has lost at least US$55 million (the last annual tax payment by Frontier) since end-August 2010;
·         Between Lonshi and Frontier, 1,450 Congolese workers lost their jobs;
·         These seemingly baseless actions against proven investors have only further eroded the DRC business climate for, and its ability to attract legitimate, serious investors.

5.10.                    Sodimico JV Agreement with Fortune Ahead Limited re Lonshi/Frontier

On 10 June 2010 – just weeks after the Congolese courts stripped the Lonshi and Frontier properties from FQM and granted them back to Sodimico – Sodimico entered into a joint venture agreement with a company called Fortune Ahead Limited (“Fortune”), creating SODIFOR SPRL.[77]  As noted above, Numis Securities weeks later would value these properties at almost US$2 billion.   Indeed, Frontier was a fully operational mine generating significant revenues.  For 70% of the JV company, Fortune paid Sodimico a signature bonus of US$30 million.[78]  70% of US$2 billion is US$1.4 billion.

Like many of these partnerships, the beneficial ownership of Fortune Ahead is unknown.  Fortune was incorporated in Hong Kong on 10 May 2010 – approximately two weeks before the DRC court ruling.  The signatory to the Sodifor JV agreement is Saul Valt.  The Hong Kong records list Saul Simao Valt, of Brazilian nationality, as the director of Fortune.[79]  The Hong Kong records list a Gibraltar address for Mr Valt.[80]  We have seen documentation which states that Pieter Deboutte is the managing director of Sodifor.  We have, however, been unable to verify this.  Mr Deboutte is a known associate of Mr Gertler (see, for example, Article 13 of Exhibit 21, in which Mr Deboutte is listed as the contact for Comide SPRL).

Once again, the DRC has sold an extremely valuable state asset for an apparent pittance, without public tender, to a shell company with unknown beneficial ownership.  Moreover, the fact that Fortune was incorporated just weeks before the DRC court gave the properties to Sodimico, and the JV agreement was signed a few weeks later, leaves the impression that this transaction was engineered before FQM’s properties were taken.

5.11.                    Kansuki SPRL JV/Kansuki Investments selling 50% of its interest in Kansuki SPRL to Glencore

The sale of Gecamines’ 25% of Kansuki SPRL[81] to Biko Invest Limited, “an entity associated with Dan Gertler,”[82] which transaction is discussed below, has already generated media (and IMF) attention.  Another aspect of the Kansuki JV, however, appears to have been overlooked to date:  the July 2010 creation of the Kansuki SPRL JV between Kansuki Investments SPRL (“Kansuki Investments”) and Gecamines, and the immediate on-sale by Kansuki Investments of 50% of its interest in the new Kansuki SPRL JV to Glencore International PLC (“Glencore”).  Again, the DRC did not provide any public information about this transaction, let alone the information required by the IMF.  The only known publicly-available details of this transaction were discovered in documents published by Glencore, including its prospectus which was published on 3 May 2011. 

Inter alia, the prospectus stated:

Glencore holds a 50 per cent. interest in Kansuki Investments Sprl which in turn holds a 75 per cent. interest in Kansuki Sprl, the owner of the Kansuki concession (thereby giving Glencore an effective interest of 37.5 per cent. in Kansuki). The remaining 25 per cent. in Kansuki was recently acquired by Biko Invest Corp. from Gecamines. Glencore is the operator.

Kansuki Sprl was granted its rights in the Kansuki concession under its incorporation in July 2010. Kansuki is a 185 square kilometre copper and cobalt pre-development project which borders the Mutanda concession.[83]

A document later posted on the Ministry of Mines website states that the Kansuki SPRL JV agreement was signed on 6 July 2010.[84]  According to that document, about a month after the JV agreement was signed, Glencore acquired 50% of Kansuki Investments’ interest (75%) in the Kansuki SPRL JV, giving Glencore an effective 37.5% interest in the Kansuki SPRL JV, on the following terms:

In August 2010, Glencore acquired an ultimate 37.5 per cent. interest in the Kansuki concession, a 180 square kilometre copper and cobalt pre-development project which borders Glencore’s partly owned Mutanda concession in the DRC. In exchange, Glencore has (i) an obligation to finance the first U.S.$400 million of development related expenditures, if any, as and when such expenditure is incurred, (ii) the right to operate the operations, and (iii) a life of mine off-take agreement for all copper and cobalt produced by Kansuki. In addition, one of the partners in Kansuki has the right to sell an additional 18.75 per cent. ultimate interest to Glencore at the then calculated equity value of the operation, at the earlier of the date the operation produces a minimum annual 70,000 metric tonnes of copper and August 2013.[85]

That is, for 37.5% of the joint venture, Glencore is willing to fund what could very well be 100% of the development costs, giving the other 50% owner of Kansuki Investments (currently unknown[86]) an apparent carried interest of 37.5% - larger than Gecamines’ carried interest of 25% (which interest Gecamines then sold to Biko, as discussed below). 

Moreover, Kansuki Investments sold this interest to Glencore only a month after Gecamines signed the Kansuki SPRL JV agreement with Kansuki Investments.  It is unclear why Gecamines first contracted with Kansuki Investments and did not simply do the deal directly with Glencore.  Glencore, after all, is one of the largest investors in the DRC mining sector.  Not only does it own approximately 90% of Katanga Mining Limited, but it operates the very significant Mutanda concession (discussed below) that is directly adjacent to Kansuki and has extended financing to other entities in relation to DRC mining interests.[87]

Deutsche Bank values Glencore’s 37.5% interest in Kansuki at US$313 million.[88]  Kansuki Investments’ share is the same Glencore’s, but apparently without the obligation to fund.  Indeed, if Deutsche Bank is correct that “Kansuki has the larger concession area [than the adjacent Mutanda] and therefore the potential to be a bigger producer,”[89] then Deutsche Bank’s valuation may be on the conservative side.

In summary, by failing to negotiate directly with Glencore, who was apparently willing to finance 100% of the Kansuki JV development costs for 37.5% of the joint venture, Gecamines appears to have handed over a 37.5% carried interest to Kansuki Investments (for terms unknown; beneficial owners of which unknown), which entity entered into the Kansuki SPRL JV with Gecamines only a month before selling half of its interest to Glencore. 

5.12.                    Gecamines’ sale of its interest in Mutanda and Kansuki to Rowny Assets Limited and Biko Invest Limited

It is fair to say that the Glencore IPO has brought more transparency to the DRC government’s dealings than the IMF conditions have to date.   Glencore’s prospectus revealed Gecamines’ sales of its interests in the Mutanda and Kansuki concessions for the first time, and, in respect of Mutanda, Glencore provided significant financial details that establish the net present value (“NPV”) of Gecamines’ interest in Mutanda.  Mutanda began producing copper in September 2010.[90]

The prospectus revealed that Gecamines had “recently” sold its 20% interest in Mutanda Mining SPRL (“Mutanda”) to Rowny Assets Limited (“Rowny”), which is “associated with” Dan Gertler:

Glencore holds a 50% interest in Samref Congo Sprl which in turn holds an 80% interest in Mutanda. The remaining 20% interest in Mutanda was recently acquired by Rowny Assets Limited (entities associated with Dan Gertler) from La Generale des Carrieres et des Mines (“Gecamines”), a State-owned mining company in the DRC.[91]

The prospectus also revealed that Gecamines had “recently” sold its 25% interest in Kansuki SPRL to Biko Invest Limited (“Biko”), another entity “associated with” Dan Gertler.[92] Both Rowny and Biko were incorporated in the BVI on 23 February 2011.[93]  Thus, these sales must have occurred sometime between 23 February 2011 and 3 May 2011 (the date of publication of the prospectus).

The prospectus states:

It is understood that Rowny Assets Limited (as a successor to Gecamines) is entitled to receive royalty, dividend and Pas de Porte payments from Mutanda over the life of the mining project.[94]

That is, Rowny will not only be entitled to 20% of Mutanda free cash in the form dividends, but will also be entitled to receive Gecamines’ royalty and pas de porte (i.e., signature bonus) payments.  As the amendments to the Mutanda JV agreements have not been published by the government, we do not know the quantum of the pas de porte yet to be paid.

For Mutanda, the prospectus contains a detailed valuation report prepared by Golder Associates Africa (Pty) Ltd (“Golder”).  This report provides enough data to calculate the NPV of the dividend and royalty that Rowny will now receive instead of Gecamines.  Regarding this data, Golder stated the following in its report:

Mutanda is an operational mining company. Its resources and reserves are well-defined, and a comprehensive body of technical information on its current and planned operations is available. This information allows the future cash flows of Mutanda throughout the life of the mine to be projected. This is compatible with the discounted cash flow (“DCF”) methodology, which determines the value of an asset by calculating the net present value of the future cash flows over the useful life of that asset….The valuation was based a financial model provided by Glencore. GAA [Golder] verified the integrity and structure of the model to ensure that calculations are performed correctly and that the model is comprehensive and fully accounts for all cash flows of the project.[95]

The data from the Golder report have been recreated in Appendix III to this report.  Using the same methodology as Glencore/Golder, one can calculate the following NPV for the Gecamines’ dividend and royalty, now held by Rowny:

Total Rowny Royalty - Life of Mine
Total Rowny Free Cash - Life of Mine
Total Rowny Cash - Life of Mine
Discount Rate (rate used by Glencore)
NPV Rowny

That is, the net present value of the dividends (free cash) and royalties is nearly US$850 million.

Since Kansuki is still in the development phase, similar numbers were not provided by Glencore/Golder for Kansuki.  As noted in the previous section, Deutsche Bank values Glencore’s 37.5% share of Kansuki at US$313 million.[96]This would make 100% of Kansuki worth US$834.7 million and 25% (Gecamines/Biko’s share) worth US$208.7.  The value of the Gecamines piece of Kansuki should also be increased by its 2.5% royalty.  As shown above, the royalty from Mutanda is roughly 39% of the value of the dividend, so this added value could be quite significant to the NPV of Gecamines’ share of Kansuki.  For the sake of simplicity and the fact that we have no insight into the Deutsche Bank methodology, we will simply use the US$208.7 number as an approximate value of the 25% interest in Kansuki.

Combined, the Gecamines’ pieces of Mutanda and Kansuki would thus represent an approximate NPV of US$1.057 billion. 

Over the summer of 2011, various articles appeared in the press regarding these sales. Gecamines apparently refused to comment on the sales prices of these assets.  Based on a document posted on the Ministry of Mines website, entitled “Réponses de Gécamines Sarl au questionnaire du FMI sur la Cession des Parts Sociales dans MUMI Sprl.”, it appears that the IMF at some point asked Gecamines about its sale of Mutanda (aka MUMI).  Gecamines response in respect of the sales price is as follows:

Gécamines Sarl a évalué ses parts sociales dans MUMI Sprl à 137 millions de Dollars américains, bien au-delà de la valorisation qu’en a faite BNP Paribas, en avril 2010, soit 108 millions de Dollars américains, dans une approche « basée sur un escompte des flux de trésorerie ».[97]

Gécamines Sarl values its shares in MUMI Sprl at US$137 million, far beyond the valuation done by BNP Paribas, in April 2010, which was US$108 million, an approach based on a discount cash flows." [Translation]

This comment leaves the clear impression that Gecamines sold its shares in Mutanda at “far beyond” the valuation given to them by BNP Paribas.  As discussed below, not only is this inaccurate and misleading (the sales price for both Mutanda and Kansuki was US$137 million – see below), doubts had previously been raised about the BNP valuation and, moreover, the BNP valuation was as of 31 December 2009, a nearly year before Mutanda started producing copper and over 15 months before the sale in question.

In August 2011, Gecamines had prepared a business plan in which it states the following:

La cession des parts sociales minoritaires ciblées détenues dans les partenariats non stratégiques dont les revenues futurs trop lointains.  Une première transaction a été faite en cédant au partenaire majoritaire les parts détenues dans MUMI et KANSUKI pour une valeur totale de 137 millions, négociée sur base d’une évaluation de notre participation faite par une banque d’affaire internationale…. [98]

The sale of minority shareholdings held in targeted non-strategic partnerships with very distant future revenues. The first transaction was made by selling the majority partner our shares in MUMI and KANSUKI for a total of 137 million, negotiated on the basis of an evaluation of our participation made by an international investment bank .... [Translation]

This document not only contradicts what Gecamines told the IMF (that the purchase price for Mutanda alone was US$137 million), but contains its own misleading statements: the first in respect of the “very distant future revenues”.  As shown in Appendix III, the Glencore/Golder data shows very significant current cash flow to Gecamines from Mutanda.  In fact, its cash flows over the next five years alone are over US$633 million:

Rowny Total Cash (KUSD)

It is also curious why Gecamines, after the government sought to increase the DRC’s participation in mining joint ventures through the three-year mining contract revisitation process, would now be looking to cash out of its carried interests in very lucrative mining concessions.

The second misstatement by Gecamines is that it sold its interest to the “majority partner” in the joint ventures.  From the available data, Dan Gertler (who Glencore reported as the owner of Rowny and Biko) has no ownership interest in SAMREF Congo SPRL (the majority partner in Mutanda), which is believed to be owned 50% by Glencore and 50% by Groupe Bazano.[99] 

Regarding the BNP valuation report, a source showed us (but would not allow us to copy) a document prepared by the Conseil Permanent de la Comptabilité au Congo.  This report, which was prepared in November 2010 states the following regarding the BNP valuation of Gecamines’ assets:

Cette Sous Commission a présenté les résultats de ses travaux a deux reprises. Les résultats de ses premiers travaux reposaient essentiellement sur l’examen des données comptables et l’exploitation des conclusions de la valorisation des titres de 8 partenariats effectuée par BNP Paribas.

Ces résultats n’ont pas été approuvés par quelques membres de la Commission Technique qui estimaient que le nombre de partenariats miniers retenus par BNP Paribas était trop limite et que l’évaluation de BNP ne reposait pas sur un revenu certain. Ainsi, ii a été demandé a la Sous Commission de tenter de recourir a d’autres approches d’évaluation ou de préparer un memo sur les limites d’applicabilité des méthodes généralement admises.

This Sub-Commission presented its findings on two occasions. The results of its early works were mainly based on the review of accounting data and use of the results of the valuation of eight partnership interests performed by BNP Paribas.

These results have not been approved by some members of the Technical Committee who felt that the number of mining partnerships reviewed by BNP Paribas was too limited and that BNP’s assessment was not taking into account certain income. Thus the Sub-Commission was asked to try to use other approaches to assessment or prepare a memo on the limits of applicability of generally accepted methods. [Translation]

It seems that the Congolese government, through its statutory body the Conseil Permanent de la Comptabilité au Congo, had serious issues with the BNP valuations.  Furthermore, as a joint venture partner, Gecamines should have routine access to Glencore’s data.  To get anywhere near a US$108 million NPV for Mutanda requires a 90% discount rate (see Appendix III).

Although we have not been able to obtain a copy of the BNP valuation report, another source gave us a document that is (at least apparently) based in part on that valuation.[100] The date of that valuation is as of 31 December 2009.  Since Mutanda did not start producing copper until September 2010, any valuation of the asset as of 31 December 2009 is going to be lower than when the asset was sold in the spring of 2011.  As far as Gecamines’ claim that the prices for both Mutanda and Kansuki were “negotiated on the basis of an evaluation of our participation made by an international investment bank”, Kansuki did not even exist as a joint venture until July 2010 and thus could not have been captured by a 31 December 2009 valuation.

In summary, it appears that Gecamines:

·         sold assets worth approximately US$1.057 billion for US$137 million (or approximately 13% of their value), a difference of roughly US$920 million;
·         made misleading statements to the IMF regarding the purchase price (by failing to note the price also included Kansuki);
·         made misleading statements in its publicly-disseminated business plan in respect of both the timing of cash flows to Gecamines (immediate, not in the “very distant future”), and the purchaser (it was not the “majority partner”, but rather “entities associated with Dan Gertler”);
·         Relied on an out-of-date and apparently discredited valuation in an attempt to justify the sales price;
·         Did not put either asset up for public tender; and
·         Has refused to publish the purchase and sale agreement for either of these assets.

5.13.                    Sodimico sells its remaining 30% interest in Comisa and Frontier to Sandro Resources Limited and Garetto Holdings Limited

Around the same time Mutanda and Kansuki were being secretly sold to Rowny and Biko, two companies with the same registered agent as Rowny and Biko (out of over 100 possible agents in the BVI) and incorporated mere weeks before Rowny and Biko, purchased Sodimico’s remaining 30% interest in Sodifor – the joint venture it had set up not even a year before with Fortune Ahead Ltd.  These companies, Sandro Resources Limited (“Sandro”)[101] and Garetto Holdings Limited (“Garetto”)[102] purchased Sodimico’s 30% interest for US$30 million on 28 March 2011.[103]  As set forth previously in this report, analysts have valued the assets now held by this joint venture at almost US$2 billion, making 30% of that worth US$600 million.  At the very least, this contract has been published on the Minister of Mines website.

5.14.                    Gecamines forces a so-called ROFR on George Forrest; Forrest brings ICC Arbitration against Gecamines in Paris

The details of what actually happened are a bit murky.  According to a Reuters report:

Mining magnate George Forrest's EGMF will cancel a planned US$250 million cobalt processing project in the Democratic Republic of Congo if the country does not back down from an attempt to take away its stake in a mine there, the company said on Monday.

EGMF, or Entreprise Generale Malta Forrest, is seeking international arbitration in a Paris court over claims Congo's state mining firm Gecamines is trying to force it to sell a 60 percent stake in the CMSK copper and cobalt project in the southern province of Katanga for $15 million, it said.

"Of course it won't happen, (if we're forced to sell)" EGMF spokesman Henry de Harenne told Reuters, when asked if the cobalt processing plant project would go ahead.

In May, George Forrest offered to buy EGMF's stake in CMSK for $15 million but EGMF refused, according to Harenne. He did not explain why Forrest had made a bid on a holding that was controlled by a company his family already owned through Forrest Group.

When EGMF told Gecamines, which holds the other 40% of CMSK, about the approach by George Forrest, Gecamines activated a clause in the contract for first refusal:

"Gecamines says that EGMF accepted the bid by George Forrest, (but) EGMF never intended to sell its stake in CMSK," Harenne said, adding that Gecamines had the right to first refusal but only if there was an official intention to sell the stake.[104]

Apparently, Gecamines delivered EGMF a check for US$15.7 million and, according to Bloomberg, obtained a judgment from a Lubumbashi court backing up Gecamines’ right to purchase EGMF’s shares in CMSK.[105]  According to press releases made by the Forrest Group, EGMF brought arbitration proceedings in Paris on 24 August 2011.[106]

If the story is accurate that Gecamines attempted to exercise a right of refusal on the basis that EGMF received an offer (as opposed to “accepting” an offer), Gecamines will not prevail in the arbitration proceedings.  According to Gecamines’ own numbers, EGMF’s stake in CMSK is worth far more than the US$15,700,000 that Gecamines attempted to pay (the word “attempted” is used as it seems that EGMF has refused to deposit Gecamines’ check).  As of 31 December 2009, Gecamines valued its 40% stake in CMSK (using the discounted cash flow method) at US$34 million[107], making the other 60% held by EGMF worth US$51 million.  As such, it is not unreasonable to think the EGMF would ultimately be awarded at least that amount by an arbitral tribunal.

The potential costs of Gecamines’ actions go beyond the value of any arbitration award.  According to the Forrest Group, a US$250 million investment is being held up as a result of Gecamines’ taking EGMF’s shares, and 600 jobs are “threatened”.[108]

5.15.                    Summary of Losses from Actions since Approval of ECF

As set forth in detail in Appendix IV, the above-described actions of the DRC have cost the DRC:

-          US$3.8 billion in cash and assets;
-          US$4.5 billion in legal claims;
-          2,800 jobs; and
-          other losses that are difficult to quantify based on currently-available information

6.      Compliance with IMF Structure Benchmarks re Transparency and Governance

Under the conditions set for the ECF, the DRC was supposed to do the following:

“1.  Publication within 60 days:
        Of partnership agreements between public and private enterprises (including information on bonus signing, shares, taxation system, private shareholders, and members of the board of directors). (Structural benchmark)
        Of the negotiation results between mining companies and the government regarding the review of mining contracts.
2.  Implement the Extractive Industries Transparency Initiative.
3.  Establish an independent anti-corruption agency.”

Appendix I to this report is a matrix regarding the DRC’s compliance with the structural benchmark and is based on the information the government is supposed to be publishing, but has not published, to the Minister of Mines website.[109]  For the DRC to be in compliance with the structural benchmark, the very large number of boxes currently stating “No” in the matrix would have to become “Yes”.   In summary,

·         Many contracts have not been published at all;
·         of the joint venture agreements published by the government, most are significantly out of date (and in some cases no longer in effect), having been amended various times;
·         Almost none of these amendments have been published, meaning that there is no way to evaluate the status of signing bonuses, shareholding, or tax regimes;
·         Nearly all of Gecamines’ joint venture agreements (dozens) were amended or restated as a result of the mining contract revisitation.  Of these, only the Tenke Fungurume contract has been published;
·         No information that would allow one to identify the beneficial ownership of the private shareholders has been published by the government; and
·         While seemingly less significant than the other criteria, no information has been published on the members of the boards of directors of these joint ventures.  Such information provides a clear picture of who actually controls the joint venture and serves as a cross-check to the beneficial ownership information.

Regarding the other criteria:

·         the negotiation results of the mining contract revisitation will only effectively be disclosed once the government publishes all of the missing documents noted in the matrix;
·         the government has made limited EITI disclosures, but for only the first three months of 2011, and it is unclear if they capture all of the data that they should.  For instance, they contain no information on payments to any of the state-owned mining companies or the state-owned oil company.[110]
·         We cannot find any reliable information on an anti-corruption commission, let alone enough to verify its independence from the government.

7.      Commonalities with Other Dealings

As we noted in the main part of the memorandum, we found a number of BVI companies all with the same registered agent – Equity Trust (although a new registered agent has appeared in the most recent transactions involving BVI companies).  According to the BVI Financial Services Commission, there are over 100 registered agents in the BVI, making it unlikely that, were these companies unrelated, all BVI companies owning interests in DRC mining companies would all choose the same registered agent. 

Furthermore, we note that many of them have established connections to Gibraltar, most to Hassans/Line Trust.  It seems likely that these BVI entities are owned by either Gibraltar companies or trusts.  In some cases, disclosures made by publicly-traded companies have indicated that certain BVI entities are owned by the Gertler family trust.  In many cases, no beneficiary of the company is identified.  In at least one case (Kara Enterprises), it was stated that Gerlter was not the beneficiary.  In another case, Caprice Enterprises (discussed below), the Congolese National Assembly has suggested that the actual beneficial owners are within the management of Gecamines or the Lubumbashi judiciary.

A list of these BVI companies, the deals they are/have been involved in, their connections to Gibraltar, and any disclosures regarding their beneficial ownership are included at Appendix II to this report.

Caprice Enterprises Limited

In approximately May 2010, copies of two judgments were circulated by various NGOs and human rights organizations.  These judgments were referenced in a report published by Global Witness earlier this year.[111] One was a judgment from the Lubumbashi court awarding a company called Caprice Enterprises Limited (“Caprice”) US$23.7 million against Gecamines.[112]  This judgment states that Caprice had recently been assigned a decades-old debt, on which it immediately proceeded to sue Gecamines.  In this judgment, the directors of Caprice are identified as Dino Chincotta and Maximilian Torres.  Both are lawyers at Hassans and both are affiliated with BVI companies previously referenced in this report (Chincotta – Kara Enterprises, Camrose Resources; Torres – Yewville Enterprises).  A search of the BVI records revealed that Caprice was incorporated by Equity Trust.[113]

According to a report of the Congolese National Assembly, this judgment was paid in full by Gecamines with the pas de porte Gecamines was set to receive from its minerals-for-infrastructure deal with China.[114]  The other judgment is an appeal of this decision to the Lubumbashi Appeals Court.[115]

The report of the Economic and Financial Commission (“ECOFIN”) of the Congolese National Assembly states: 

Dossier GECAMINES (Gestion Pas de porte Chinois)

Le rapport sur l’affectation de la première tranche des pas de porte chinois fait ressortir la connivence de certains cadres de l’entreprise en association avec la justice locale à Lubumbashi, laquelle a facilité la ponction de 23.722.036 dollars sur les 50 millions de dollars américains qui étaient destinés à la Gécamines.

RECOMMANDATION : La remise à la Gécamines, des pas de porte doit tenir compte de ses besoins réels étant donné que ce sont les entreprises bénéficiaires des concessions minières qui sont engagées dans les activités de production. Il y a lieu de redimensionner la Gécamines et lui faire jouer le rôle d’entreprise conseil et de bureau technique du Gouvernement au lieu de continuer à lui allouer d’énormes ressources financières qui devraient alimenter le trésor public étant entendu que les concessions minières ne sont pas la propriété de la Gécamines mais plutôt de l’Etat congolais. Il faut craindre une surliquidité qui renflouerait les poches des dirigeants alors que ceux qui produisent sont ailleurs.

That is, the ECOFIN report suggests a conspiracy between the Lubumbashi judiciary and certain management of Gecamines, implying that some or all of them are the beneficiaries of Caprice.  We were told the name Caprice Enterprises (and the names of the individuals alleged to be involved) were censored from the final report.

8.      Policy Recommendations to Improve the DRC’s Governance and Transparency Issues

The first and obvious recommendation is that the IMF actually verify that the government is complying with its structural benchmarks.  What is worse, however, is for the IMF to publish statements suggesting the government has complied with these benchmarks when it clearly has not. 

Secondly, the disclosure requirements, in any event, do not go nearly far enough.  In many of these cases, information on transactions subject to the existing disclosure requirements do not trickle out at all (e.g., Emerald Star) or only do so many months if not years after they have closed.  If the IMF does not even know about the existence of a transaction, how can it confirm that all relevant information and documentation has been published? 

One possible measure would be to require the publication of the minutes of the DRC’s council of Ministers, the minutes of the parastatal mining companies and the minutes of the joint venture companies holding state mineral rights.  While any of the above minutes could certainly omit the existence of certain transactions from their boards, they would do so at the peril that the transactions have not been duly approved and thus could be invalidated.  Indeed, many of these documents are supposed to be publicly-available at the various Congolese Commercial Courts, but they are often difficult to obtain or only at substantial cost to many Congolese NGOs that are operating on limited budgets.   For relative insignificant sums, the IMF could ensure these documents are publicly-disseminated on a government website. While it is certain that the DRC will raise the usual objections of confidentiality, sovereignty, etc., it is increasingly clear the donor community is not getting the benefit of its bargain and must demand accountability before committing further resources to a country that continues to mismanage its own resources. 

To put this in perspective, in addition to the ECF, donor countries recently (July 2010) provided US$12.3 billion in debt relief to the DRC.[116]  As noted in Appendix IV, the DRC since December 2009 has incurred (between below-market asset sales and legal liability) preventable losses of US$8.3 billion – meaning that the equivalent of 2/3rds of the benefit of substantial HIPC debt relief has already been squandered by the DRC in a very short period of time.

9.      Potential Next Steps

Were the IMF to force the DRC to comply with the structural benchmarks, much of this proposed additional investigative work would be unnecessary.  Failing that, potential areas for further work would include:

·         obtaining the documentation that the government has refused to publish;
·         seeking additional information so that asset valuations can be made more precise;
·         investigating the beneficial ownership of the nearly four dozen shell companies that have been identified as dealing in DRC assets;
·         undertaking asset tracing exercises to determine where the proceeds of some of these deals may be ending up.


Matrix of Compliance with IMF Structure Benchmark re Transparency
List of Shell Companies Holding DRC Interests
Mutanda Valuations
Summary of Economic Costs on Post-ECF Mineral Dealings

[1]IMF Executive Board Approves US$551 Million PRGF Arrangement for the Democratic Republic of the Congo and US$73 Million in Interim HIPC Assistance.  11 December 2009.
[2]Democratic Republic of the Congo. Letter of Intent.  30 November 2009.  p. 23.
[3] Third Review of the Three-Year Arrangement Under the Extended Credit Facility, Financing Assurances Review, and Request for Modification of Performance Criteria.  April 14, 2011.  International Monetary Fund.  p. 7
[4] ndlr – sanctity?
[5]Id. p. 11.
[6] The IMF structural benchmark required publication of partnership agreements between public and private enterprises (including information on bonus signing shares, taxation system, private shareholders, and members of the board of directors), as well as the publication of the negotiation results between mining companies and the government regarding the review of mining contracts (see language quoted above from IMF reports).
[7] Cancellations of various deals by the DRC/Gecamines are noted as they not only expose the DRC and/or Gecamines to substantial legal liability, but also have the potential to harm the economic viability of certain assets and thus negatively impact the royalties, dividends and taxes that would otherwise be collected by the DRC and/or Gecamines.
[8] Eurasian Natural Resources Corporation PLC, a UK-incorporated company listed in London.
[9] Exhibit 1 – ENRC Africa Holdings Limited Financial Statement for the year ended 31 March 2010 (filed 30 September 2010).  p. 21 (see post balance sheet events)
[10] Id.
[11] Exhibit 2 – Excerpts from CAMEC 2009 Annual Report.  24 September 2009.  p. 20.  The entire report is located at:  On 24 September 2009, CAMEC had released its annual report for the year ending 31 March 2009.  This report confirmed, “the remaining 50% of SMKK is held by Gecamines, the DRC state owned mining company.”
[12] ENRC PLC Announcement of 2010 Preliminary Results.  23 March 2011. p. 67.
[13] Exhibit 4 – Emerald Star BVI Corporate Records
[14] The JV agreement, which has likely been amended one or more times, can be found at:
[15] Exhibit 5 – Kara Enterprises BVI Records
[16] Exhibit 6 – Share Sale Agreement between Kara Enterprises Limited and CAMEC PLC.  10 October 2008.
[17] See p. 2 of the Share Sale Agreement, specifically the definition of “Sale Shares”.
[18] Exhibit 7 – CAMEC 23 October 2008 press release.
[19] A complete list of BVI registered agents can be found at:
[20] Exhibit 8 – Information of Hassans and affiliated trust and corporate management companies.
[21] Gibraltar Financial Services Commission:
[22] Exhibit 7
[23]The Carter CenterReview of DRC Mining Contracts - Update and Recommendations. November 30, 2007.
[25] Kingamyambo Musonoi Tailings
[26] Exhibit 9 – Statement of Claim
[28] Exhibit 11 – Numis Securities Ltd. report on FQM dated 7 July 2010. p.  7.
[29]Id. p. 8.
[30] FQM Press Release . 19 September 2010.
[31]FQM Press Release.  23 May 2010.
[32] Exhibits 12and 13 – 7 January 2010 Gecamines’ Board Minutes.
[33] This contract is available on the Minister of Mines’ website:
[34] Exhibits 14-17 – BVI Records for Highwind Properties Ltd., Pareas Ltd., Interim Holdings Ltd. and Blue Narcissus, Ltd.
[35]This address corresponds to Castiel Winser, an “Independent Financial Consultancy” that services that “life assurance, investment portfolios and pension policies of over 9,000 people in Gibraltar”. Castiel Winser website:  Sydney Attias is the Managing Director of Castiel Winser. Castiel Winser website:  We note that Hassans/Line Wall is apparently in the same office building – NatWest House and 57/63 Line Wall Road.
[36]The Carter CenterReview of DRC Mining Contracts - Update and Recommendations. November 30, 2007. p. 4
[37] Exhibit 18 – BVI Corporate Records of Camrose Resources.  NB that Camrose was also incorporated by Equity Trust.  Also, the link between Camrose and Hassans/Line Wall is also established by an agreement between Camrose and Africo Resources – see Exhibit 19 – Subscription Agreement dated 17 April 2008.  Note that notices are to be sent to Dino Chincotta (who also executed the agreement between Kara Enterprises and CAMEC noted above) and that the agreement was executed by him on behalf of Camrose. 
[38] ENRC Press Release - Acquisition of 50.5% of the Shares of Camrose Resources Limited.  20 August 2010.
[39] Exhibit 20 – BVI Corporate Records of Cerida Global.  NB – Cerida was also incorporated by Equity Trust.
[40]See 20 August 2010 ENRC press release.
[41] Based on documents obtained by the Carter Centre, the ownership of COMIDE is divided 75% Simplex Holdings SPRL and 25% Gecamines.  It is thus assumed that Camrose holds an ownership interest in Simplex Holdings.  This document, which appears to have been prepared by the DRC in relation to the mining contract revisitation, was published on the website funded and/or managed by the Carter Centre.
[42] Exhibit 21 – Agreement between Comide SPRL and Africo Resources Ltd. 17 April 2008.
[44] There is believed to be a dispute regarding what Metalkol the new JV company actually owns.  The Congolese legal actions stripped FQM of its mineral rights, but not necessarily title to the improvements it had constructed on the site.  That is the purported reason why the Congolese courts awarded a judgment of US$12 billion in favor of Gecamines:  so that Gecamines could then put KMT in liquidation and grab the improvements.  It is our understanding that the ICC has enjoined Gecamines from taking any such action.  We are unsure how the value of KMT is split between the mineral rights it lost and the improvements to which it still apparently has title.
[45] Coincidentally, the amount of the signature bonus paid by these Gertler companies is the exact amount apparently made by Emerald Star on the SMKK transaction.
[46] KMT’s private partners – FQM, IFC, and IDC – owned 82.5% of the asset and were responsible for 100% of the funding.  Oriel Securities in a 28 September 2010 report (p. 30) states that as of the time of the contract cancellation, FQM had already spend $440 million of its $550 million required to make the mine operational.  Based on FQM’s ownership of 65% of KMT, this would mean that this additional US$110 million would be 65/82.5ths of what was needed to complete the mine, implying that 82.5/82.5ths would be roughly US$140 million.  Quote from Oriel Securities re FQM:  “By Q3 2009, development of the project was approximately 75% complete and approximately US$440m of the US$550m capital budget had been committed to. The project was expected to come online in 1H 2010….”
[49]  Note that Dino Steel is represented by Mr. Lenge Masangu, who in Panamanian corporate records pertaining to the Mutanda JV (discussed below), is an apparent representative of Groupe Bazano.
[50] To reduce the volume of exhibits, this contract has not been included.  It is available online at:
[51] Tullow Oil PLC 2010 Full Year Results.  p. 7
[52] J. Peter Pham, nonresident Senior Fellow in Africa Policy Studies, is Senior Fellow and Director of the Africa Project at the National Committee on American Foreign Policy in New York City. He also holds an academic appointment as Associate Professor of Justice Studies, Political Science, and African Studies at James Madison University in Harrisonburg, Virginia. Dr. Pham is Vice President of the Association for the Study of the Middle East and Africa (ASMEA) and Editor-in-Chief of its new flagship publication, The Journal of the Middle East and Africa.
[53] DRC Mismanagement Frustrates Investors.  9 September 2010.
[54] Website of Tullow Oil PLC:
[55] Exhibit 22 - 26 February 2010 Option Agreement (unexecuted).
[56] Exhibit 23 – Yewville Enterprises BVI Records
[57]See Exhibit 8
[58] See 16 March 2011 Circular to Shareholders. p. 44
[59] See Exhibits 25 and 26 – Caprikat and Foxwhelp BVI Records
[61] Aurora directors may be criminally charged.  The Times.  5 October 2011.
[62] Heritage Oil Press Release. 
[63] Exhibit 27 – Willcox/Africa Management Limited Corporate Records
Mvelaphanda Holdings (Proprietary) Ltd ("Mvela Holdings"), OZ Management LP ("OZ Management"), a subsidiary of Och-Ziff Capital Management Group LLC (NYSE: OZM - News; "Och-Ziff") and Palladino Holdings Ltd ("Palladino") have announced the creation of a joint venture, Africa Management Limited….As part of the joint venture, Africa Management Limited has established African Global Capital I, L.P. ("African Global Capital"), as a platform to invest in both the private and public markets across Africa, with a bias towards natural resources and related businesses…..Mark Willcox, Chief Executive Officer of Mvela Holdings and newly appointed Chief Executive Officer of Africa Management (UK) Limited, said: "We have a strong pipeline of transactions across a broad spectrum of industries and geographies. We are excited by the opportunities available to African Global Capital and feel our partnership with Och-Ziff and Palladino places us in a prime position to capitalise on them."
[65] See Exhibit 18 – Camrose BVI Corporate Records.
[67] These records have not been exhibited, but will be provided upon request.
[68] The PSA is available on the Minister of Mines website:
[69] SACOil Press Release. 4 March 2011.
[71] SACOil Press Release. 4 March 2011.
[72] SACOil Circular to Shareholders.  17 March 2011. p. 3
[73] First Quantum Provides Update on Sodimico Proceedings Conference Call on Monday.  24 May 2010.
[74] Exhibit 24 - Letter from Sodimico to FQM. 25 August 2010.
[75] FQM Press Release.  1 October 2010.
[76] See Exhibit 11, p. 7.
[77] Contract is available on the Ministry of Mines website:
[78]Id. Article 6.2.4
[79] Exhibit 28 – Fortune Ahead Hong Kong Corporate Records
[81] Note that the Carter Centre website,, calls this JV Kansuki Mining SPRL, rather than Kansuki SPRL as it is called in various Glencore documents.
[82] Glencore Prospectus.  p. 70 (NB -  pdf is over 1600 pages)
[83]Id. p. 88
[85]Id. p.  182.
[86] The Carter Centre website,, lists the owner of this 50% of Kansuki Investments as Simplex Holdings.  As noted above in footnote 41, other documents obtained by the Carter Centre state that Simplex Holdings is the only private partner in Comide (the other public partner being Gecamines).  As noted in ENRC press releases, Comide (and thus Simplex Holdings) is partially owned by Dan Gertler (and now ENRC) through Camrose Resources.  We have been unable to independently the information obtained by the Carter Centre.
[87] See the BVI corporate records of Lora Enterprises Limited, Zuppa Holdings Limited, Greenworth Limited, Holdgreen Finance Limited, Caramia Enterprises Limited – Exhibits 29-33.
[88] Glencore - The value in volatility, Initiating with a Buy.  6 June 2011.  Deutsche Bank.  p. 117.–-a-tier-1-greenfield-development-asset
[89]Id. p. 99.
[90] “The first module is a 20 000 tpa plant, of which the Cu Plant had been operational since September 2010 whilst the Co Plant was expected to be commissioned in February 2011.” Glencore Prospectus.  Page 110 of Golder Associates’ valuation; page 938/1637 of pdf.
[91] Glencore Prospectus.  Page 2 of the Golder Associates’ valuation of Mutanda, page 830/1637 of the pdf.
[92]Id. p 70.
[93] Exhibits 34 and 35 – BVI Corporate Records of Rowny and Biko
[94] Glencore Prospectus. Page 125 of the Golder Associates’ valuation of Mutanda, page 953/1637 of the prospectus pdf.
[96] Glencore - The value in volatility, Initiating with a Buy.  6 June 2011.  Deutsche Bank.  p. 117.–-a-tier-1-greenfield-development-asset
[97] Réponses de Gécamines Sarl au questionnaire du FMI sur la Cession des Parts Sociales dans MUMI Sprl.  16 September 2011.
[98] Exhibit 36 – Gecamines August 2011 Business Plan.  p. 8
[99] Exhibit 37 – Panamanian corporate records of SAMREF Overseas S.A., the company which owns SAMREF Congo SPRL.  The representatives of the company are split between two shareholders.  The representatives of one have an address the corresponds to Glencore in Switzerland; the other has an address that corresponds to Groupe Bazano in the DRC.
[100] Exhibit 38 – Valuation of Gecamines’ assets as of 31 December 2009.
[101] Exhibit 44 – Garetto BVI corporate records
[102] Exhibit 43 – Sandro BVI corporate records
[103] Contracts are available on Ministry of Mines website.  Sales agreement:  Price Agreement:
[104]EGMF threatens to cut $250 mln project in DRC row. Reuters.  6 September 2011.
[105] Congo’s George Forrest Takes Gecamines to Arbitration Over Forced Sale.  Bloomberg. 2 September 2011.
[106]EGMF veut poursuivre ses activités au sein de CMSK.  2 September 2011.
[107] See Exhibit 38.
[108]EGMF veut poursuivre ses activités au sein de CMSK.  2 September 2011.
[111] China and Congo – Friends in Need.  Global Witness.  March 2011.  p. 24
[112] Exhibit 39 – Lubumbashi Commercial Court judgment against Gecamines.
[113] Exhibit 40 – BVI Records for Caprice Enterprises Limited
[114] Exhibit 41 – Report of the Economic and Financial Commission of the Congolese National Assembly.
[115] Exhibit 42 – Lubumbashi Appeals Court judgment against Gecamines.
[116] IMF and World Bank Announce US$12.3 billion in Debt Relief for the Democratic Republic of the Congo.  1 July 2010.

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