Anvil rises on new mining contracts in DRC

Vancouver – The biggest copper producer in the Democratic Republic of Congo (DRC) has finalized mining contract re-negotiations for two of its three mining operations. After over a year of discussions, Anvil Mining (AVM-T) is in possession of an amended lease agreement for its Kinsevere mine and has been assured that the mining convention for its Dikulushi mine will remain unchanged.

Anvil owns 95% of the Kinsevere copper mine, which is situated 30 km north of Lubumbashi in Katanga province. A local, privately-owned Congolese company called Mining Company Katanga owns the other 5%. The joint venture (JV) partners now have a lease agreement with Gecamines, the state-owned mining company of the DRC, to mine and process ore from Kinsevere until 2024, followed by an automatic 15-year extension.

Anvil and its partner did not attain the new agreement for free. However, the added fees are not dramatic. In short, Anvil has to hand an additional US$15 million over to the DRC government and its payout per tonne of copper produced has climbed roughly one percentage point to 2.5%.

More specifically, the new agreement contains several key changes compared to the previous Kinsevere agreement. First, and most importantly, the old agreement required Anvil to pay the government a US$5-million entry premium; Anvil handed over US$1 million in December 2005 and paid the remaining US$4 million in January 2007. Now Anvil is facing another entry premium. The company has to pay US$10 million within six months and another US$5 million within 12 months.

Second, the original agreement required Anvil to pay rent to Gecamines per tonne of copper produced, the amount based on a sliding scale. The floor price rent was US$35 per tonne of copper, given a London Metal Exchange (LME) copper price of US$1 per lb.; the ceiling price was US$70 per tonne of copper, based on a LME copper price of US$1.80 per lb. copper. That works out to a payment of 1.6% to 1.75% of the attained copper price. In the new agreement the rent rate is simpler but also higher: 2.5% of gross turnover.

The re-negotiated agreement also requires Anvil and its JV partner to adhere to some new rules. First, an advisory committee comprising three people from Gecamines and three from the Kinsevere JV will be responsible for following the progress at Kinsevere. Second, Anvil and its partner have to welcome a member of Gecamines into the management of Kinsevere.

Third, Anvil and its partner have agreed to provide priority employment opportunities to former Gecamines employees, provided they possess equivalent qualifications and capabilities. Fourth, Gecamines will be given a preferential opportunity to supply Kinsevere with services and materials, on commercially competitive terms. And finally, the economic and social development programs that Anvil and Mining Company Katanga have already initiated for the communities around Kinsevere are now required as part of the mining lease agreement.

Importantly, finalizing the Kinsevere re-negotiation enables Anvil to move ahead with its efforts to secure funding for the project’s stage II expansion. Key to the expansion is a solvent extraction-electrowinning (SX-EW) plant, which is expected to cost US$380 million. At the end of October Anvil had already spent US$136 million on the plant and committed a further US$56 million, but that leaves another US$190 million in expenditures over the next year to complete the project.

It’s money that Anvil does not have – in the middle of November the company had roughly $90 million in cash and short-term investments. Last July the company had arranged a US$297-million private placement with Catala Global, which would have given the fund a 25% stake in Anvil, but in September that agreement fell through.

As such, in November Anvil placed construction of the SX-EW plant on hold. The company says it expects to have financing arranged in time to get the plant built in the third quarter of the year, enabling commissioning in early 2010. The mine already produces via a heavy media separation plant; in 2008 production was expected to total 27,000 tonnes of copper.

Anvil and Gecamines also held a series of discussion about the Dikulushi mining convention. Dikulushi, which sits 25 km west of Lake Mweru in Katanga province, was Anvil’s first mine in the DRC. The original mining convention was ratified in early 1998. Now Anvil has received guarantees that the original convention will remain in place, unchanged. Anvil is still guaranteed exclusive rights to exploitation at Dikulushi for a minimum of 20 years from the date the convention was ratified, which leaves the company another 9 years.

The good news about Dikulushi’s convention is perhaps overshadowed by the fact that Anvil suspended operations at the mine in early December. Citing low copper prices, Anvil suspended copper production, postponed work to develop an underground operation at what was previously an open pit mine, and initiated a care and maintenance program.

Anvil says the decision will deliver savings of roughly US$2 million each month because the cash cost to produce a pound of copper at Dikulushi is well above the current copper price. Part of the problem is that Dikulushi is at a transition point. Feed of late has come from low-grade stockpiles while development work prepares the underground mine for full operations. Anvil had planned to produce 17,000 tonnes of copper from underground operations at Dikulushi in 2009.

The only Anvil project for which a new agreement remains elusive is Mutoshi. Mutoshi is a copper mine 10 km east of Kolwezi, in Katanga province. Anvil says it is still in discussions with Gecamines to complete an amended Mutoshi agreement, using the commercial terms to which Anvil and Gecamines agreed in October as a basis, and is confident an agreement can be reached.

Mining at Mutoshi is also suspended, however, following a year of underperformance at the mine. Since mining was suspended in September the Mutoshi plant has been processing stockpiled ore, but stockpiles are now depleted. The mine produced roughly 8,000 tonnes of copper in 2008.

The falling copper price has certainly taken its toll on Anvil, which recorded a third quarter loss of US$17.3 million. Concentrate sales totaled US$42.3 million, down 44% compared to the third quarter of 2007. Year-to-date net income at the end of September was US$12.6 million compared to US$95.5 million in the first nine months of 2007.

But news that contract negotiations were successful pleased investors, who lifted Anvil’s share price 23¢ or 18.5% to close at $1.47. The company has a 52-week trading range of 45¢ to $14.70 and has 71.2 million shares issued.