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Glencore, Ivanhoe remain safe investments despite growing political risk in DRC

Glencore PLC and Ivanhoe Mines Ltd. are still safe investments despite growing political risk for miners operating in the Democratic Republic of the Congo, according to a new report by Sanford C. Bernstein.

In a May 15 note, the team said three factors — the new mining code, Gecamines SA's legal proceedings regarding the recapitalization of Kamoto Copper Co. SARL, and the dispute between Katanga Mining Ltd. and Dan Gertler — had been fueling political risks in the country.

However, a diversified portfolio with exposure to copper and cobalt holdings in the DRC and other countries should hedge against the risk, Bernstein said.

"With the DRC representing a very significant component of the future production schedules of both metals, any physical disruption within the country would surely have a significant impact on the pricing environment of both copper and cobalt, with consequent impact on the equity values of non-DRC-exposed producers of those commodities," the analysts wrote in a May 15 note. "Fundamentally, we believe that none of the three (political risk) issues should represent any existential threat to the fundamental investment opportunity available in either Glencore or Ivanhoe."

If the country risk in the DRC is realized, it will affect Ivanhoe and other copper miners in the DRC and Zambia, which would create a supply shortage of about 1.7 million tonnes of copper in the market, ultimately pushing the copper price up, Bernstein said.

The firm's target price for Glencore stands at £5.00 per share, while Ivanhoe is in the books with a target price of C$15.00 per share.

Allaying fears that the changes in the DRC's mining code are precursor of expropriation of assets by the government, Bernstein said the most suitable buyers for those assets — Chinese companies including China Molybdenum Co. Ltd. and Zijin Mining Group Co. Ltd. — are part of a consortium that is already in negotiations over the new mining code.

For the same reason, Glencore's decision to enter into a cobalt supply deal with Chinese battery recycler GEM Co. Ltd. instead of Volkswagen AG was a better choice, according to Bernstein, as it aligned the company's interests with the Chinese state "and in so doing brought an added layer of security that Germany surely would not have offered."

On the issue of state-owned Gecamines' legal claim against Kamoto, the analysts said it is likely "a shot across the bows" from the DRC to Glencore and Katanga regarding the mining code.

"It would not surprise us if this is a warning that, if the DRC is to cooperate with the country's mining incumbents on the new mining code, it expects those incumbents to comply with the full spirit of the law, rather than just the letter of the law."

Commenting on the issue regarding Israeli billionaire Dan Gertler and the freezing orders issued to Kamoto and Mutanda, Bernstein said Glencore and Katanga are likely to have little choice in terms of their dealings with people included on the U.S. Specially Designated Nationals list.

Meanwhile, the Central African country has reported a new Ebola outbreak, which reached an urban center, raising international concern and sparking an emergency meeting of the World Health Organization.

The previous outbreak in 2014 affected quite a few mining assets in the African region, including in the DRC, Sierra Leone, Guinea, Liberia, Senegal, Mali and Nigeria.