How First Quantum settled with ENRC for compensation over Congolese mine

Vancouver’s First Quantum Minerals says its mine in the Congo was stolen, so it deserved $1.25 billion in compensation. But how did First Quantum get that mine in the first place?

(Sven Torfinn/Panos)

It’s a bit like discovering your spouse’s name on a marriage certificate—to somebody else. Written in French and bearing official-looking stamps in red and black ink, the 56-page contract detailed a joint venture between a collection of mysterious shell companies and the government of the Democratic Republic of the Congo. The happy new partners had agreed to harvest a valuable collection of mining scrap heaps called the Kolwezi Tailings. But for executives at First Quantum Minerals, the implication seemed clear: its crown jewel had just been stolen.

This was not entirely unexpected. Founded in the mid-1990s, Vancouver-based First Quantum developed a reputation for mining in difficult frontier countries. The Congo is the frontier of frontiers, where one either takes or is taken. Since Belgium’s King Leopold II ran the country as a private fiefdom in the late 19th century, a dominant theme of Congolese history has been plunder of this abundant natural endowment by those in power. Beneath its soils lie some of the world’s richest reserves of copper, cobalt, uranium, gold, diamonds and other resources. First Quantum coveted the copper- and cobalt-rich scrap heaps; it invested years and billions of dollars building the necessary infrastructure to harvest them. But then its relationship with the Congolese government went to hell. Losing its mining licence to someone else was just a formality.

First Quantum’s Congolese adventure followed an all too familiar trajectory. Governments in resource-rich underdeveloped countries often bend over backward to attract foreign investment. “Only after costs are sunk and major investments have been made do new cycles of resource nationalism restart,” explains a recent report by political risk consultancy Eurasia Group. Then come windfall taxes and revised contracts. “The First Quantum case is one of the more recent indicators of governments using more draconian tactics against investors,” says Riyaz Dattu, a lawyer with Osler, Harcourt & Hoskin in Toronto. “What we’re now seeing, globally, is increased resource nationalism.”

For resource companies, the good news is that they can fight back. Aiming to regain control or get compensation, First Quantum retaliated with an aggressive, multi-faceted campaign on three continents. This exhibited deft use of political pressure, international law and the powerful weapon of shame. And that’s why, a couple of months ago, the first instalment of a $1.25-billion peace offering arrived in the company’s bank accounts. This is the story of how the company got taken for a ride in one of the world’s most corrupt countries, fought back and won.

First Quantum actually lost the Kolwezi Tailings twice.

Katanga, Congo’s southeastern province, is home to some of the world’s richest deposits of copper and cobalt. In the early 1950s, the state-owned mining giant La Générale des Carrières et des Mines (Gécamines) began operating an open-pit copper-cobalt mine just north of the town of Kolwezi. Gécamines converted the area into a hellish wasteland of abandoned pits and rock dumps; it discarded tailings behind a massive dam and deposited them along an 11-km stretch of a nearby river valley. This waste contaminated surrounding areas, but it contained significant concentrations of copper and cobalt.

The Kolwezi Tailings were off-limits to foreigners during the 31-year rule of the western-backed kleptocrat Joseph-Désiré Mobutu. But that changed in 1996 when the obscure rebel Laurent Kabila attempted to depose him. As the rebels advanced, a few bold foreign companies began negotiating with them for mineral concessions. “Kabila had scant regard for property rights,” observed a 2009 report by the South African Institute for International Affairs, “and had promised to allocate major mining assets to certain companies on the strength of the material assistance they had rendered him on his way to power.” American Mineral Fields (AMF), a small mining company, exploited this. In April 1997, just months before Kabila took Kinshasa, it signed a joint venture agreement with Kabila to exploit the tailings.

The question was how long AMF could hold on to its prize.

Not long. Kabila’s advisers warned that AMF might sell Kolwezi to a bigger company, pocketing profits that ought to wind up in government coffers. So Kabila cancelled the deal and held talks with other foreign companies to form a new consortium. That’s when First Quantum entered the picture. Then a nascent, junior mining company, it acquired a 51% stake in four tailings dumps, including two at Kolwezi. AMF was outraged. But the Congo’s mining minister brushed it off as an exceptional case.


 

It’s worth pausing to reflect on Kabila’s wartime mining deals. The United Nations Security Council struck a five-member panel to study the period. The panel concluded that a cabal of about 30 businessmen, politicians and military officers transferred the Congo’s mineral assets (notably those of Gécamines) into joint ventures. Conducted through offshore companies and secret contracts, these transfers allowed Kabila’s inner circle to swap mining licences and export permits for private gain. “In those days, Kabila was doing anything he could to raise money,” says Jim Freedman, a Canadian consultant who served on the panel. “They were selling off assets at outrageous prices. And some operators, they were doing everything they could to grab these assets.” This amounted to what the panel called a multi-billion-dollar theft of the Congo’s mineral assets.

What was First Quantum’s role? The panel claimed it had documents demonstrating the company had made improper payments to the Congo’s national security minister, the director of the national intelligence agency, and other officials. “In its attempts to buy rights to the Kolwezi Tailings, First Quantum offered a down payment to the State of $100 million, cash payments and shares held in trust for Government officials,” claimed its October 2002 report. First Quantum vehemently denied the allegations and demanded a retraction. They were never tested in any court—and Freedman says the document that supported them has since gone missing.

By the time the furor dissipated, First Quantum had already abandoned Kolwezi. Civil war resumed in 1998, consuming five years and millions of lives. First Quantum elected to “await a stable political climate,” chairman Philip Pascall explained to shareholders. In 2001, the company wrote off its Congo tailings projects, then valued at just $1.3 million. By then, First Quantum’s executives should have understood that Congolese contracts weren’t worth the paper they were printed on; capricious autocrats like Kabila might tear them up if more attractive partnerships appeared. That is, after all, how they got their first crack at Kolwezi.

A Katangan, Laurent Kabila regarded himself as protector of the Congo’s natural wealth. This was partly how he justified reneging on mining contracts signed with foreigners. He did that frequently, and lived in constant fear that western corporations would conspire to assassinate him. Actually, it was one of his own bodyguards who shot him dead in January 2001. (The killer’s motive is still debated.) Kabila’s eldest son, Joseph, succeeded him as head of state. The younger Kabila’s prime accomplishment was restarting a stalled peace process, and by 2003 the conflict had ebbed. His government drew up a new mining code aimed at attracting foreign investment, and the scramble for the Congo’s riches resumed.

Among those returning was AMF. Evidently undeterred by its earlier experience, this time it negotiated a 65% stake in Kolwezi Tailings. But First Quantum hadn’t given up, either. It bought AMF in 2006 after a protracted takeover battle, thus acquiring Kolwezi a second time. It and several partners committed to invest nearly $600 million in the project. Soon afterward, it committed $450 million to develop another Congolese mine. When completed, these mines would more than double the company’s production capacity.

But again, it was worth asking: How long could First Quantum hold on?

Kabila’s affinity for property rights ran no deeper than his father’s. Soon after winning a 2006 election, his officials once again began rethinking relations with foreign companies. With the security situation greatly improved, Kabila’s government no longer needed cash from junior or mid-tier companies. Major multinational companies were now prepared to pay top dollar to access the Congo’s riches. Commodity prices were rising. The old deals suddenly seemed raw.

The following year, Kabila’s government declared it would “review” more than 60 mining agreements, including Kolwezi. Bene M’Poko, the Congo’s ambassador to South Africa, became Kabila’s official spokesman on the issue. In an interview with Canadian Business, he explained that many existing mining contracts contained “irregularities.” “Some of these companies were created,” he says, “when people were fighting. The country was in turmoil. So even some rebels had given mining concessions and permits to some companies. We said, let’s harmonize the whole thing so everybody is under the same rules and regulations.”

First Quantum, a mid-tier company, stood on uncertain ground. Yet it adopted an uncompromising stance, insisting its contract remained valid. As M’Poko tells it, all of First Quantum’s contracts featured irregularities that could have been resolved easily. For example, Kolwezi’s permit had been awarded to a corporate entity that was not properly registered in the Congo. “It was signed by the then-minister of mines, who himself also didn’t follow the procedures,” he says. “So they were asked to regularize, and they refused.” M’Poko emphasizes that First Quantum was the only company to do so; all the others reached compromises. “I know they were ill-advised by their lawyers,” he says. First Quantum did not respond to interview requests.

Scheduled to take three months, the reviews dragged on three years. It’s hard to identify the moment at which First Quantum’s position became untenable. Maybe it was in early 2008, when the Congo’s mining minister declared the Kolwezi contract null and void. Maybe it came the following year when the government seized control of the half-built mine. Maybe it arrived when an appeals court in Kinshasa ruled First Quantum should pay Gécamines and the government an astounding US$12 billion. Maybe it was when Kabila’s government seized First Quantum’s other permits as well. By 2010, First Quantum had little choice but to write Kolwezi off for the second time and evacuate its foreign workers.

Congo officials wasted no time. Gécamines signed yet another contract to develop Kolwezi. A lucky new partner, Highwind Properties Ltd., acquired a 70% stake. It paid just $60 million, a fraction of Kolwezi’s estimated worth. (M’Poko insists First Quantum’s property was never expropriated; Highwind paid only for a new permit.)

What—who—was Highwind? At first nobody seemed to know; corporate records revealed that it was incorporated in the British Virgin Islands in September 2009, the same month Kolwezi was seized. But as spectators pondered this mystery, the picture changed yet again: Eurasian Natural Resources Corp. (ENRC), a much larger company with demonstrated capacity in mining, announced that it had bought half ownership of Highwind’s parent for $175 million. Its other mines met similar fates. First Quantum was outraged. ENRC, which is controlled by Kazakh owners but listed on the London Stock Exchange, seemed unconcerned. “Any dispute that First Quantum has is with the relevant Congo authorities,” declared its CEO, Felix Vulis.

It wasn’t that simple. Despite Vulis’s bravado, “I don’t think they would be so naïve as to believe that a company in First Quantum’s situation wouldn’t fight back,” says Philippe de Pontet, an analyst at the Eurasia Group. “In some ways, it was the equivalent of buying hot property—hot as in stolen.” That dubious provenance would complicate any attempt to finance Kolwezi Tailings’ completion. And First Quantum was bent on making matters as complicated as possible.

As a public company, ENRC had to identify its new partner. Tucked away in a regulatory document were the barest details: it acquired its stake in Kolwezi from an entity called the Gertler Family Trust. That pointed to Daniel Gertler, a shadowy Israeli diamond tycoon known to have close ties to the Kabila dynasty. The British press had a field day. ENRC director Richard Sykes, former CEO of pharmaceuticals giant GlaxoSmithKline, was left to explain why the board felt the Congo acquisitions were appropriate. Sykes defended them. He claimed First Quantum had behaved badly, and that ENRC’s due diligence determined its transaction was entirely legal. As for Gertler, “We came up with nothing that suggested we shouldn’t deal with him,” Sykes told The Sunday Times.

Others could think of reasons. Eric Joyce, an British MP, became a valuable ally for First Quantum. In February 2011, he hosted an event in Westminster on the company’s behalf examining “the challenges of investing in Africa.” He told the U.K.’s House of Commons ENRC was “wrecking its reputation and integrity by entering into ropey deals with frankly shady middlemen.” Joyce called on the U.K.’s Serious Fraud Office to check whether ENRC had complied with Britain’s bribery laws. Last November, he published a series of documents identifying 45 different shell companies (some linked to Gertler) that acquired Congo mining properties since the contract revisitation process began. “A few are enriched at the terrible cost of the many,” Joyce said. The parallels with complaints about Laurent Kabila’s wartime dealings were striking.

Major institutional investors publicly campaigned against ENRC’s purchase. Some sold shares in protest. ENRC’s brokers came under pressure to break ties with the company. “ENRC was dealing with a pretty significant cloud hanging over their brand, their name, their relationship potentially with financial regulators in London,” observes de Pontet. “The pressure was not going away.” All this likely contributed to a conflict last year in ENRC’s boardroom, which saw several directors depart, including Sykes.

First Quantum’s multi-faceted campaign also involved the courts. First Quantum sued ENRC in the British Virgin Islands, claiming US$2 billion in damages. Last September, that court denied ENRC’s application to strike the claim. First Quantum was elated. It said ENRC now needed to explain “how it came about that it signed a contract to acquire the Kolwezi permit the very same day First Quantum’s contract was cancelled.”

The Congo government didn’t have it any easier. Each month of deadlock left potential sources of revenue idle. And the rancour wasn’t helping the country’s already dismal image as a place to do business.

Granted, the government could rely on Kinshasa’s cowering judges to slap First Quantum around. But the lawyers who had drawn up the Kolwezi contract anticipated that. It specified that any disputes be resolved not in the Congo, but rather before a tribunal of the International Chamber of Commerce in Paris—an institution over which Kinshasa had no control. Osler partner Riyaz Dattu says such stipulations are common. “We tend to advise our clients to have leverage when they’re dealing with sovereign states,” he says. “I expect First Quantum would have been advised to do the same.” First Quantum used that leverage by applying for ICC arbitration. Among other things, the ICC eventually issued an order prohibiting the Congo from transferring the Kolwezi permit to new owners. “First Quantum seems to have played it correctly,” Dattu observes. “There is a time delay, but there’s a reckoning at the end. Even Venezuela’s Hugo Chavez, when he takes action that results in expropriation, has been paying compensation.”

Lastly, First Quantum worked diplomatic channels. Under international law, the Canadian government is obliged to protect its citizens and corporations from unlawful abuse abroad. Much of First Quantum’s communications with the Canadian government remain shrouded in secrecy; documents obtained under the Access to Information Act were heavily censored. They reveal, however, that First Quantum sent the contract between Highwind and Gécamines to Sigrid Anna Johnson, Canada’s ambassador to the Congo. Federal lobbying records show that Daniel Brock, a lawyer at Fasken Martineau DuMoulin, lobbied the departments of Finance, Foreign Affairs and the Prime Minister’s Office on the company’s behalf. (Brock knew the corridors of power well, having worked eight years in the Finance and Foreign Affairs departments.) In April 2010, Brock met twice with officials, including the international trade minister’s chief of staff, to discuss “Canadian foreign policy regarding debt forgiveness package for Democratic Republic of Congo.”

It’s not hard to guess what Brock wanted. The Congo was crippled by billions of dollars in national debts, which Kabila wanted forgiven. But to accomplish that he needed co-operation from the Paris Club, an informal group of senior government officials from 19 major developed economies. Canada happened to be a member. Some in Ottawa were hesitant to get involved, possibly owing to the optics of interfering in debt relief to one of the world’s poorest countries. “All of you had clearly indicated your desire not to be the lone shareholder raising substantial concerns,” Phillippe Hall, a Department of Finance official, wrote to colleagues across numerous involved departments in an e-mail. Even so, Johnson, the ambassador, personally forwarded documents regarding First Quantum’s dispute to World Bank and IMF officials. “Apparently, these documents have been circulating in some circles for some time without anyone “officially” tabling them in the debt relief process,” she wrote to colleagues in an e-mail. By attending to that oversight, she further increased the pressure on Kabila’s government. Canadian officials successfully delayed, but did not prevent, the debt relief. But Dattu says: “I think the Canadian government’s activity on this was extremely useful.”

It’s unclear which of First Quantum’s tactics worked best. But collectively they achieved the desired effect. In January, ENRC agreed to pay First Quantum US$1.25 billion in return for uncontested title to the DRC mines and a legal ceasefire. Although that sum does not compensate for the full market value of the expropriated mines, the company at least recovered its costs. “This whole business has been rather difficult for us,” First Quantum CEO Clive Newall told Canadian Business in an e-mail, “and the outcome, although not ideal, is the best that could be achieved under the circumstances.”

First Quantum’s legacy in the Congo remains fraught with ambiguity. If one accepts the UN Panel’s untested allegations from 2002, then the manner in which it lost Kolwezi bears resemblance to the manner in which it was acquired. “Nobody much talks about it, but we all know they got their come-uppance,” says Freedman, the one-time UN panel member. But not everyone sees it that way. Andy Davidson, an equity analyst with Numis Securities in London, believes First Quantum was “the victim of a classic shakedown, simply because it refused to play the ‘brown envelope game.’”

The whole story may never be known. Now pursuing projects in Finland and Australia, First Quantum seems eager to put its Congo woes behind. In January, Newall indicated he’d be willing to discuss the company’s Congo experiences following the settlement, but did not respond to later interview requests. Nor did ENRC. Canada’s Finance and Foreign Affairs departments would not make any officials available to discuss their roles. Joyce agreed to be interviewed, but before that happened his political career imploded following his involvement in a bar-room brawl in London. M’Poko expressed reluctance to dredge back into the history. “First Quantum, they are not our enemies anymore. They are our friends,” he says. “The whole thing has been settled amicably, and things are back to normal.”

There seems to be little appetite for another investigation into Congo’s mining transactions. But Congolese officials are certain to continue exploiting the country’s mineral wealth for personal gain. Transparency International, an NGO that ranks the perceived corruption of nations annually, consistently ranks the Congo among the worst. Privately, Jospeh Kabila is apparently distressed about this. According to one U.S. diplomatic cable leaked last year by Wikileaks, M’Poko told an American diplomat that South African companies frequently complained to him about bribe-seeking Congolese ministers. The cable continues: “According to M’Poko, Kabila is frustrated with Congo’s endemic corruption, even from within his own party, and had asked M’Poko whether he should start executing people who were corrupt to send a message.”

But M’Poko says the government is not worried that First Quantum’s woes will discourage foreign investment. “All—and I emphasize all—major mining companies are in Congo,” he says. “Rio Tinto, Anglo American, AngloGold Ashanti . . . everybody’s there. And they’re happy.” He can now add ENRC to the list; Mehmet Dalman, the company’s new chairman, recently told investors the company’s new Congo assets will be key in establishing the company as a significant global copper producer over the next five years.

But you’ve gotta wonder: How long will it keep them?