Total economic rebuild is expected of the Democratic Republic of Congo's (DRC) mining sector. A period of relative stability has followed the end, in 2003, of the country's war, and the opportunity to rebuild the economy has coincided with a global shortfall in copper supply.

DRC was the world's largest copper producer in the 1960s and while the country's reserves are smaller than those found in South American mining countries, the copper is of much higher grade and less capital intensive to extract – a lucrative source for developers willing to take on the significant country risk.

Work on reindustrialising Katanga Province, the south-east region where the country's copper and cobalt deposits are located, has been underway in earnest since Anvil Mining led the way with the Dikulushi mine in 2002. And four major projects in the market now – KOV, Tenke Fungurume, Kolwezi Tailings and Kamoto – could increase copper output by a total 545,000 tonnes per year (p/y) by 2012.

Other projects in the financing works include Anvil's Kinsevere second stage copper development – near to being mandated to Fortis – and Metorex's Ruashi copper cobalt project where Standard Bank is near to close on $155 million of debt.

Despite the vast potential dealflow, securing project finance for all of these projects, in what remains a highly unstable and difficult country to operate in, promises to be a hard process with only a finite amount of banking appetite for DRC risk.

The pace of development is also being slowed by a review of around 60 mining concessions awarded prior to elections last year. The review is aimed at renegotiating any contracts where there is an imbalance of benefit between state and private sponsor. Of those projects with financing near to close, most have CPs that stop drawdown until the close of the concession review.

The review process started in January 2007 when new president Joseph Kabila approved the review of three mining contracts with Phelps Dodge, Nikanor and Katanga Mining that in total accounted for 75% of the copper and cobalt assets of state firm Gecamines.

The government then announced a much wider review in April. The commission appointed to investigate the licenses was supposed to report in October, however, it is now thought unlikely that the review will be concluded for another six months.

The delay has prompted dissatisfaction among developers who claim the uncertainty is forcing them to put back implementation of financing plans. "Next year could be a bit of a challenge, not least because of the mining review," says one banker. "We're not expecting the noise on that to die down until the middle of next year, by which time there may have been some casualties. Right now most things are on hold until this gets resolved."

Developers are also anxious that the review will result in some major concessions being handed to the metals-hungry Chinese: In September China announced a $5 billion investment programme for DRC, including $3 billion for transport infrastructure and $2 billion for mining concessions. A significant chunk of the infrastructure investment will be spent on railway lines to connect Katanga to the Atlantic.

Political risk insurance

The template for African mining deals was laid down last year with the $960 million Lumwana project in Zambia, which raised $583.8 million of debt, and was followed in August by the $3.3 billion Ambatovy nickel mining project in Madagascar, which raised $2.2 billion. In particular, these deals have smoothed the way for structuring multiple-tranche financings, with one law firm representing all the ECAs and multilaterals.

DRC's biggest mining project is Nikanor's $1.8 billion rehabilitation of the KOV mine 10km west of Kolwezi and construction of what will be the world's largest copper and cobalt refinery. Nikanor appointed Citibank and Standard Chartered to jointly structure and arrange the financing at the beginning of October, with the aim of drawing support from a mix of ECAs, multilaterals and commercial banks. The company has $1 billion in cash reserves that it is using to finance construction – already underway and due for completion in 2009 – and is looking to raise $800 million in debt.

The scale of debt that Nikanor is after makes the financing a daunting challenge. But it is also running behind the Tenke Fungurume project (sponsored by Phelps Dodge) in terms of getting the different elements of ECA and multilateral funding in place. With Standard Bank acting as financial advisor, Tenke is looking to raise $600 million of debt, fully covered for political risk, and has already secured $100 million from the African Development Bank. The EIB has also agreed a Eu100 million tranche, subject to confirmation of the project's mining licence by the review, while OPIC, EDC and MIGA are also believed to be ready to come on board once the confirmation is received.

Getting near complete political risk insurance from ECAs and multilaterals will be critical for these projects. However, DRC poses far greater challenges than Zambia and Madagascar. Katanga Province's power and transport infrastructure is being rebuilt almost by scratch, and the political situation in the country remains fragile.

Unlike Nikanor and Tenke, Katanga Mining has already had its financing plans for the $425 million rehabilitation of the Kamoto mine complicated by the mining review. Katanga, which was the subject of much takeover speculation and a hostile bid over the summer, has not been able to draw on a $260 million project facility from Standard Chartered, Investec and Fortis. The deal came with CP's relating to the end of the mining review, and the delays in the review forced Katanga to take out a $150 million one-year loan in October from commodities trader Glencore (which has the option of converting the loan into shares) at a margin of 400bp over Libor to keep the project going. Katanga also signed a 10-year offtake agreement with Glencore, which is also the offtaker for Nikanor's mining output.

The fourth major DRC project is the $300-400 million Kolwezi Tailings Project. This financing had already been at a relatively advanced stage in 2005 with Royal Bank of Scotland acting as advisor, but the original structure was shelved when First Quantum bought the project sponsor Adastra Minerals. First Quantum – which has already tapped the bank market for $400 million earlier this year for its other DRC projects, including the $226.4 Frontier project – has now mandated Standard Bank and Fortis to arrange the financing for Kolwezi.

Apart from these larger projects, there are many smaller ones also under development. An example of a smaller project tapping funds from the debt market is phase II of Metorex's Ruashi project. Standard Bank is arranging $125 million of South African ECA-covered debt paying a margin of 125bp over Libor, together with an additional $30 million of commercial debt. Equity into the project will come from cash flow from phase I and will amount to $70-75 million. Deals of this size are less spectacular but easier to chew by the commercial debt market.

Licence review

The government commission charged with reviewing mining contracts began meeting in June. Its job forms part of DRC's efforts to turn a new leaf in its history after the country held its first free multi-party elections for 46 years last year. Dealings in the Congolese mining sector have historically been opaque, so the review is ostensibly aimed at restoring accountability to the process and renegotiating deals where the welfare of the local population has been neglected.

At the start of October, advocacy NGO Global Witness, which had previously welcomed the review, published a report criticising the process for a lack of transparency and being conducted in too short a timeframe. The NGO also argued that there were insufficient safeguards of the commission's independence – a problem given that many members of the current government, including President Joseph Kabila, formed the previous transitional government that signed away most of the concessions under review.

"The review of mining contracts is a unique opportunity to restore respect for the law, fairness and trust in one of the DRC's most important sectors," said the Global Witness report. "It could mark a turning point for the country as a whole and provide an effective tool with which to rebuild confidence on the part of civil society, economic operators, investors and donors. But if the process is rushed and is perceived as biased, it will be labelled as 'business as usual'. Not only will the commission's efforts then have been wasted, but popular disillusionment with the review could lead to increased tension and instability in mining areas."

The government responded by almost immediately publishing the contracts under review online, one of the three key recommendations made by Global Witness. Another, that the commission has more time to do its work, also looks like being fulfilled, as its findings are unlikely to be published this year.

As well as the delays causing problems for developers, one developer, Camec, had its main licence revoked in September. This caused Camec's share price to slump to 28p from a peak of 76p in July, when it announced a takeover bid for Katanga Mining.

The presence of former England international cricketer Phil Edmonds as chairman of Camec ensured its bid for Katanga got a lot of coverage in the UK media. However, it was the association with Camec of another shareholder, Zimbabwean businessman Billy Rautenbach, that was the company's undoing. Rautenbach, wanted in South Africa on alleged fraud, headed the Congolese state mining company Gecamines in the late 1990s, and it was allegedly through him that Camec secured its current DRC concessions.

Junior prospects

Camec's failed bid for Katanga had the unintended side effect of raising the prospect of greater involvement in DRC by the majors. If this were to materialise, it would potentially be a welcome source of capital for Congolese mining.

Most of the developers involved in DRC are juniors, the larger companies unwilling to take on the risks. First Quantum, with a value of $6.4 billion, is the largest company with direct holdings, while Nikanor is next largest with a value of $2.4 billion. The only major with a stake in DRC's mining sector is Freeport McMoRan, which acquired the Tenke Fungurume project when it bought Phelps Dodge late last year.

Katanga's response to what it saw as an opportunistic bid from Camec was to seek other suitors, with Anglo American emerging as the likeliest buyer. BHP Billiton and Glencore were also mentioned in the press as potential buyers, while the prospect of a merger with Nikanor was also mooted. In the end the $150 million loan from Glencore has put end to M&A speculation for the time being, but some analysts think Katanga will once again be an attractive takeover target next year.

Overall, however, while there is room for consolidation in the market, observers don't foresee a rush of majors eager to invest in DRC projects. "The majors are still very cautious," says one banker. "After they had been involved in the area and were then forced to pull out, Anglo American rushed back into Zambia unsuccessfully. The jury's out as to whether they have the risk appetite in the short term to get involved again."

Without the deep pockets of the majors, developers in DRC will have to push hard in order to obtain the political risk cover that will make their projects bankable, and it is in the interests of all legitimate parties in the DRC that the government's review of licences results in a mining industry that is seen to be clean.