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Mining Giant Hit Hard In $3 Billion Royalties Scandal

Mining

Stocks of Glencore lost 3 percent in trading today after reports that a company affiliated with sanctioned Israeli businessman Dan Gertler have issued a $3-billion asset freeze order that demands billions in unpaid royalties for mining operations in the Democratic Republic of Congo (DRC).

The company, Ventora Development, served freezing orders against Mutanka Mining for $695 million in unpaid royalties, and against Kamoto Copper Company for $2.28 billion in unpaid royalties. Both operations are Glencore subsidiaries.

The news brought Glencore (LON:GLEN) stock down 2.6 percent in Monday trading.

(Click to enlarge)

Ventora claims that Glencore’s subsidiaries have refused to make royalty payments to the company because Gertler is a specially designated national (SDN) on the U.S. sanctions list and paying any royalties to him or any company controlled by him would be a violation of U.S. law. Gertler was added to the US SDN list last year.

In a statement, Glencore said it “denies that Mutanda and KCC are in breach of any of their obligations under their respective agreements with Ventora and AHIL [Africa Horizons Investments Limited] and also entirely rejects Ventora's calculation of the value of the future royalties allegedly owed to Ventora”.

Glencore said it planned to appeal the freeze order as early as this week, the Financial Times reported, citing unnamed sources.

In the run-up to this, the DRC state mining company, Gecamines, launched legal proceedings to dissolve its joint venture with Glencore, citing high levels of debt.

At stake is an expected 320,000 tonnes of copper and 36,000 tonnes of cobalt expected to be produced from these mines in 2018.

The asset freeze order, which no one outside of the issuer, the commercial court and Glencore have seen, reportedly authorize the Commercial Court of Kolwezi to freeze certain bank accounts, tangible moving assets, intangible moving assets and mining titles in the amount of around $3 billion, Glencore revealed in a statement.

The asset freeze order also prompted Canadian RBC Capital Markets to downgrade Glencore stock, shifting its rating to ‘outperform’ from ‘top pick’, noting that this situation “complicates the DRC picture for Glencore”.

RBC also cut its price target for Glencore, but overall RBC said it there was already a substantial amount of DRC risk in the price. Related: This Merger Could Create A New Telecom Giant

If the asset freeze is expected to lead to a half in production for Glencore’s two mines, taking 60,000 tonnes of copper out of the market and possibly sparking a deficit this year, RBC said.

So the argument is that even if Glencore is forced to give up its DRC assets, the resultant jump in copper prices could offset half of the hit they take in this loss, and RBC believes that Glencore could return to a premium rating even if it loses DRC.

Not everyone agrees, though.

UK-based Proactive Investors cited Liberum Capital Markets as reiterating a ‘sell’ recommendation for Glencore, noting that the DRC government is “clearly being far more aggressive than in previous years with the mining companies and the assets”.

JPMorgan analyst Dominic O’Kane told the Financial Times that the impact on operations for Glencore was “unclear at present”; However, “our key takeaway is a further increase to DRC jurisdictional risk for Glencore, which is likely to be negative for its share price.”

By Charles Benavidez for Safehaven.com

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