Editorial: When Kipushi comes to shove (September 25, 2006)

In a battle now at the stage of competing advertisements in mining and business publications, Canada’s First Quantum Minerals and South Africa’s Kumba Resources have threatened legal action against companies seeking to acquire the Kipushi zinc-copper mining complex through a new international tender process launched by a mining company owned by the government of the Democratic Republic of the Congo (DRC).

Through notices placed in various publications in late August and early September, La Gnrale des Carrires et des Mines (Gcamines) has invited tenders for a partner interested in redeveloping the past-producing mine and concentrator in Katanga province, some 30 km southwest of Lubumbashi, near the border with Zambia.

Kipushi, originally known as the Prince Leopold mine, was put into production by Belgium’s Union Minire (today’s Umicore) in 1925. The mine was nationalized by Gcamines in 1967, and had produced continuously for 42 years until 1993, when it was placed on care and maintenance owing to a lack of foreign exchange and reinvestment. During that period, 60 million tonnes exceeding 6% copper and 11% zinc were mined and processed from surface to a depth of 1,300 metres.

Today, Kipushi hosts a National Instrument 43-101-compliant measured and indicated resource of 16.9 million tonnes grading 16.7% zinc and 2.2% copper. This resource remains open along strike and downdip.

Gcamines says it’s seeking a partner “with proven credibility on the international market” and expertise in copper and zinc, along with the financial and human resources to develop Kipushi.

Mining companies participating in the new tender will need to submit a letter of intent to Gcamines, pay a non-refundable deposit of US$25,000, and sign a confidentiality agreement. Companies would then receive a technical file on the project, and be privy to technical briefings slated to be held during site visits between Sept. 20 and Oct. 13. Formal bidding would follow.

This is all too much for First Quantum and Kumba, who believe they are equal partners in a still-valid option agreement to acquire a full interest in Kipushi.

And so, they have responded by placing notices (including one in this newspaper last week) warning any interested party that they intend to assert and protect their “various valid rights,” and those of their affiliates, through “all necessary legal actions.”

The companies also advised that any discussions with Gcamines relating to the Kipushi mine and related facilities “could be qualified as a violation” of those rights.

First Quantum has been one of the great success stories of base metal mining during the past 10 years, and this Kipushi kerfuffle is its first major setback. The company currently produces copper and gold at its 80%-held Kansanshi mine in Zambia, and copper at its wholly owned Bwana-Mkubwa operation in Zambia, which also trucks in high-grade copper ore from its Lonshi deposit just across the border in the DRC.

The company has other advanced projects in Africa, and ostensibly secured rights to Kipushi and the massive Kolwezi cobalt-copper tailings project in the DRC by acquiring 100% of Jean-Raymond Boulle’s Adastra Minerals (previously named American Mineral Fields) in mid-August.

American Mineral Fields had signed a framework agreement with Gcamines to revive and rehabilitate Kipushi in 1996. This was early on in the DRC’s 5-year civil war, when Western mining companies were flying in behind the front lines to cut deals with rebel leader Laurent Kabila. He eventually became the DRC’s president but was later assassinated and replaced by his son Joseph Kabila, who now stands to win next month’s runoff presidential election — the country’s first democratic national election since its independence in 1960.

During those difficult years, Adastra primarily focused on advancing Kolwezi, but did spend at least US$3.5 million at Kipushi identifying commercially viable rehabilitation options that would include generating sulphuric acid needed at Kolwezi.

Pretoria-based Kumba Resources is the 1999 spinoff of Iscor’s mining division, and ranks as Africa’s largest producer of refined zinc. Kumba became involved in Kipushi in 2002 after finalizing a joint-venture agreement to earn a 50% interest by paying Adastra a small sum of money and completing a bankable feasibility study, among other things.

Adastra and Kumba formalized their agreement at Kipushi a year ago, and continued negotiations with the DRC government regarding “the appropriate fiscal regime” while their technical and economic assessments were taking place.

Kumba is also a major producer of high-purity sulphuric acid, increasingly used at new or proposed mines treating oxide copper resources through the solvent-extraction electrowinning process. In its new call for tenders, Gcamines noted that in addition to zinc and copper, the Kipushi underground mine is an important potential source of sulphur, “enabling Gcamines to produce acid sufficient to fill a large part of the needs of the Katanga mineral region.”

Adastra had thought that the final agreement it had struck with Gcamines at its more advanced Kolwezi project would be a template for Kipushi’s development. At Kolwezi, where resources total 113 million tonnes of 1.49% copper and 0.32% cobalt, ownership of the project was finally settled at: Adastra (65%); Gcamines (12.5%); the Industrial Development Corp. of South Africa (10%); the World Bank’s International Finance Corp (7.5%); and the DRC government (5%).

Some media reports suggested that First Quantum and Kumba had bristled at Gcamines’ demand for a large carried interest in Kipushi, but the partners have been publicly mum on the details of their negotiations.

Those who are optimistic that First Quantum and Kumba will retain Kipushi would do well to take a look at Kumba’s experience at the Kamoto copper-cobalt project, also in Katanga province.

A few years ago, Kumba had an option agreement to develop Kamoto in partnership with Gcamines, exploiting a juicy resource pegged at the time at 57 million tonnes grading 4.5% copper and 0.6% cobalt.

And yet, despite Kumba’s 70 years of mining experience in southern Africa, Kamoto wound up in the hands of TSX-listed junior Katanga Mining, which has had strong connections to entrepreneur George Forrest as well as Kinross Gold and its former upper management (though Kinross sold off its remaining shares in Katanga Mining two weeks ago).

Under Katanga Mining’s Kamoto joint-venture agreement, which was ratified a year ago, the company holds a 75% interest while Gcamines is carried at 25%. There are also various revenue royalties payable to both Gcamines and the national government.

Kamoto’s recent history gives us a good indication of the final deal we may see at Kipushi, whoever ends up developing it.