Freeport settles with DRC gov’t at Tenke

The Democratic Republic of the Congo (DRC) government has finally completed its lengthy review of Freeport-McMoRan Copper & Gold’s (FCX-N) Tenke Fungurume copper-cobalt project and confirmed that the mining company’s contracts are in good standing. But the approval comes at a price for Freeport and further erodes the country’s already fragile reputation as a place to invest.

The DRC’s state-owned mining company, Gcamines, has increased its ownership stake in Tenke Fungurume from 17.5% to 20%, and Freeport must pay additional royalties of US$1.2 million for each 100,000 tonnes of proven and probable copper reserves above 2.5 million tonnes.

In addition, payments totaling US$30 million must be paid in six installments after the company reaches certain production milestones. Other commitments Freeport has agreed to include the conversion of US$50 million in intercompany loans to equity, and a US$5-million payment for surface area fees. Gcamines also gets to increase its role in project management.

Finally Freeport has agreed to raise the annual interest rate on advances from the current rate of London interbank offered rate (LIBOR) plus 2% to LIBOR plus 6%.

Management was unavailable to comment on the contract.

Under the DRC’s existing mining code, Freeport must pay a 30% income tax rate, a 2% royalty on mining and a 1% export fee.

In a research note to clients, UBS Investment Research wrote that it was reducing its discount rate on Tenke’s future cash flows from 20% to 12%.

“We had been applying a 20% discount rate on all DRC projects since the confiscation of First Quantum’s Kolwezi project by the DRC authorities in September 2009, but had been applying 12% to all DRC projects prior to that event,” explained an UBS analyst.

Tenke Fungurume is about 177 km northwest of Lubumbashi in Katanga province.

The operation is designed to produce about 250 million lbs. copper and 18 million lbs. cobalt a year, but is currently being expanded to roughly 290 million pounds of copper per year beginning in 2011.

In New York, Freeport closed at US$94.05 per share, down US$2.38 or 2.5%.

The Arizona-headquartered company has a 52-week trading range of US$56.71-US$100.34.