UK-listed Swiss commodities giant Glencore PLC recently announced a huge merger deal with miner Xstrata. As the preparations for the merger get underway though, there remain worrying and unresolved issues from Glencore’s little known Congo operations.
In July 2011 Bloomberg reported about an opaque series of deals in the Democratic Republic of Congo involving two mines that Glencore operated and co-owned via subsidiaries. In September 2011 the story briefly made the news again, and in November UK MP Eric Joyce tried to bring the issue to the attention of the UK government. He presented documents suggesting that the deals, and three others like it involving several other companies, could have cost the citizens of the DRC $5.5 billion.
What one Congo diplomat suggested could be the ‘treasury scandal of the year’ has been largely underreported, and seems set to pass out of the public eye, lost in the mire of previous opaque deals in the country. There are serious concerns that, yet again, the ordinary citizens of the DRC may be losing out to unaccountable powerholders.
Glencore in Africa
The Democratic Republic of Congo possesses vast natural resources within an immensely fragile political structure. Environmental regulations are almost non-existent, state capacity is extremely weak in many areas, and violence is commonplace. Monitoring in such an environment is extremely difficult.
The risks involved in operating in the DRC means that few major companies are prepared to set up operations there. In the lucrative mining sector it is often the mining ‘juniors’ – smaller companies with less reputation to protect – that are often the most active, taking on the risk in the hope of large returns.
Glencore PLC though, has in recent years made advances on Congo mining assets, entering into joint ventures with smaller companies and DRC state-owned enterprises like Gecamines and Sodimco. “The spirit of their controversial founder Marc Rich is still very much in Glencore’s DNA,” says Andreas Missbach, co-author of a recent book on Swiss commodities traders. “They’ll go where other major companies fear to tread.”
The processes for securing mining concessions in the DRC are notoriously non-transparent, with few watchdogs to maintain the integrity of state processes. Key decisions on granting concessions and licences often end up in the hands of localised and unaccountable strongmen, with access to these fragmented networks of power mediated through local power-brokers.
In this context there is a high risk of human rights, environmental integrity and community development being overrun by private interests. Thus, in 2011, suspicions arose concerning two mining ventures in Katanga province.
The controversial mining deals
Katanga is rich in copper deposits and Glencore operates, via subsidiaries, a number of mines in the region. Glencore owns 50 per cent of a company that owns an 80 per cent stake in a mine called Mutanda, and owns 50 per cent of a company that owns a 75 per cent stake in a concession called Kansuki. When Glencore initially entered into these agreements, the remaining stakes (20 per cent of Mutanda and 25 per cent of Kansuki) were held by Gecamines, the DRC state-owned mining company.
In early 2011 though, Gecamines decided, under uncertain circumstances, to sell its stakes in both Mutanda and Kansuki. This was a type of privatisation, and theoretically the proceeds from the deal should have gone to the DRC state via Gecamines.
Instead of putting the stakes up for public tender though, Gecamines quietly sold them to shell companies listed in the British Virgin Islands, a tax haven and secrecy jurisdiction. In fact, the only reason we know of these transactions is that Glencore revealed them in its May 2011 IPO prospectus. In that document, two footnotes mention that the stakes have been transferred to two shell companies (Rowny Assets and Biko Invest Corp) ‘associated’ with a man named Dan Gertler.
Gertler is a well-known, and controversial, DRC businessman, starting out as a diamond dealer before diversifying into owning mining assets and other businesses. Back in 2006 Gertler set up a company called Nikanor, which was listed on the London AIM market and later sold to a Glencore subsidiary called Katanga Mining. He is rumoured to have close personal ties with DRC president Joseph Kabila and even attended his wedding.
In and of itself, there is nothing necessarily controversial about Gecamines selling the stakes to Gertler. Given that Gertler is however, a ‘politically exposed person’, the issue warrants immediate scrutiny, especially considering the deals went through with little transparency and no public tender processes.
The most serious accusations that have been leveled by some, including Labour MP Eric Joyce, is that the stakes were sold to the Gertler-associated companies at hugely discounted prices. The implication, if this is true, is that, a) Gertler got a suspiciously good deal, b) Gecamines came off very badly, and c) whoever was conducting the sale might thus have either been under political pressure to sell to Mr Gertler for an artificially low price, or else obtained a large kickback for doing so.
In September 2011 the IMF started probing these irregularities, demanding that Gecamines account for the deals. It has not yet done so. The Ecologist tried unsuccessfully to contact Gecamines .
Billions of dollars in lost revenue
Joyce reckons that the losses to the DRC government from the Mutanda and Kansuki deals was $920 million. Key to Joyce’s assertions are major disparities between independent valuations of the value of the stakes that Gecamines sold, and evidence about what Gecamines actually received for them. Some of Joyce’s documentary evidence can be traced to an apparently leaked report to the IMF which was written, it seems, by an unnamed consultant. It is difficult to establish the exact origin of the report, but it comprehensively traces a number of questionable deals.
Joyce is concerned that these are just the latest examples of a recurrent pattern in which state mining assets are sold at artificially low prices to shell companies (often associated with Gertler) that later flip them on for windfall profits to bigger companies. An example of this is the highly controversial Kolwezi tailings case, in which the DRC state confiscated mining assets from Canadian company First Quantum and sold them to Gertler for a very low price, allowing him to flip them to London-listed company ENRC. Joyce reckons the citizens of the DRC lost $2.6 billion from that particular case and $1.9 billion from the sale of other First Quantum assets.
How much does Glencore know?
The Mutanda/Kansuki deals involved Glencore’s business partners, but it would be surprising if Glencore, as the operator and part-owner of the mines, was not aware of them. Indeed, in the case of the Mutanda deal, their subsidiary had ‘right of first refusal’: In plain language, this means that before Gecamines could sell their stake, they had to offer the Glencore subsidiary the stake first. The implication of this is that Glencore would likely have significant knowledge of how the sales were taking place.
Glencore spokesperson Simon Buerk asserts that Glencore is neither party to, nor responsible for, the business dealings of its partners in Mutanda and Kansuki, and that it is those partners who should be contacted directly for comment. The only problem is that key players in these deals are unlisted shell companies with no public directors and no contact details. Gertler – who is assumed to be the beneficial owner of the shell companies – has no official company representation and certainly no press office.
It is obviously possible that there is a legitimate explanation for the Mutanda/Kansuki deals. The opaque nature of the transactions and the difficulty in obtaining any information though means it is very difficult to conclusively prove anything, and it is this very lack of transparency that is the problem.
In a recent briefing to Parliament, Global Witness stated that it believed there was a ‘high likelihood of malpractice’ in Mutanda and other deals:
'We have mines being sold off in secret, to companies whose ownership is secret. In one case, the immediate beneficiary is an individual known to have a history of close relations with the current president, and with his predecessor, Laurent Kabila.'
Glencore shareholder pressure
Glencore’s DRC business partners have thus far managed to ignore attempts to clarify the case. As a publically-listed company in the UK though, Glencore is under pressure to reassure the public, and its shareholders, that the citizens of DRC have not been grossly short-changed.
Glencore's first public AGM is scheduled for Wednesday 9th May. Louise Rouse, Director of Engagement at responsible investment campaign group FairPensions, says: 'A well-targeted question at a company’s annual general meeting can be a powerful way of holding executives to account. Anyone with a share in Glencore can use its first public AGM as an opportunity to speak directly to board members on any issues they may have with the company.'
Brett Scott is a writer and independent consultant specialising in financial activism and innovative finance
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