The pending royalty hike on metal production in the Democratic Republic of the Congo throws a wrench into Freeport-McMoRan Inc.'s consideration of buyers for its Kisanfu copper-cobalt deposit.
Freeport President and CEO Richard Adkerson highlighted the asset in a Jan. 25 conference call, noting that buyers are keen to acquire what he believes is the world's largest undeveloped cobalt deposit.
"It's permitted and we're looking at opportunities of developing it or entering into partnerships with other operators there in the Congo," Adkerson said. "We have a lot of interested people wanting to buy it outright."
Since Adkerson made the remark, however, the DRC legislature approved a law that will increase royalties on production of key metals such as cobalt and copper. It is said to be waiting on presidential approval.
The new royalty regime, if approved, may tarnish an asset already set in a high-risk country for operators, analysts say. The move "may take the steam out of Richard Adkerson's comments," said John Tumazos, an analyst with John Tumazos Very Independent Research. Likewise, Caspar Rawles, an analyst with Benchmark Minerals, which tracks more esoteric metals such as cobalt, said the pending DRC royalties will dim potential buyers' views of the project. "That's just a massive red flag for a majority of companies," he said.
Freeport declined to comment on the royalty issue and the strategy for Kisanfu.
Kisanfu's kick
Kisanfu is a copper-cobalt deposit where size and grade make for a powerful combination for would-be buyers with the wherewithal to fund and develop it. Freeport appears to have last reported tonnage and grade for the deposit, including cobalt, in a 2015 annual report. Defining the resource as mineralized material, Freeport outlined 49 million tonnes of milling material grading 2.48% copper and 47 million tonnes of leaching material at 3.16% copper. In a footnote, it said the resource included cobalt grading 1.15%, which, by industry standards, is very high. Freeport declined to comment on the status of the resource.
The potential of the undeveloped deposit has attracted interest. In 2016, China Molybdenum Co. Ltd. and Freeport agreed to enter exclusive negotiations with Kisanfu to be sold for US$50 million, along with Freeport's cobalt processing unit for US$100 million. The talks failed in mid-2017.
The attempt to make a deal on Kisanfu occurred when copper and cobalt prices were much lower than today. Their ascent since, and Freeport's relative strength in 2018 versus 2016 with lower debt and stronger cash, suggests Freeport may now demand more than US$50 million for Kisanfu.
"That was at a different time," Tumazos said of talks between China Molybdenum and Freeport. Rawles expects the same. Freeport would probably want a higher price than it considered in 2016, he said

Queuing up?
If a buyer emerges despite the volatile situation in the DRC, analysts point a finger at it coming from China or a partner that Freeport worked with previously. "Obviously, there's been a Chinese mineral grab going on, not just in cobalt, but in other commodities too," Rawles said.
Still, Rawles underscored that the China Molybdenum talks failed, and with uncertainty over royalties, any buyer, Chinese included, may hold back on bids for now. "It's certainly a difficult one to call and probably difficult until the mining royalties are ironed out," he said.
On the question of potential buyers, Tumazos highlighted Freeport's past. China Molybdenum bought Freeport's majority stake in the Tenke Fungurume copper mine in the DRC for US$2.65 billion in late 2016. Freeport has also dealt with Sumitomo Metal Mining Co. Ltd. and Lundin Mining Corp., he noted.
Lundin would consider Kisanfu "in a second, in a heartbeat," he said. But a Lundin spokesperson threw cold water on the thought, saying the company is focused on assets in North and South America and in Central and Eastern Europe.
Sprott U.S. Holdings Inc.'s President and CEO Rick Rule recently said Sprott and mining entrepreneur Ross Beaty were working on a 50/50 joint venture with an initial focus on DRC cobalt assets. Could Kisanfu be in the cards? Rule could not immediately be reached for comment.
Rawles raised Glencore Plc's name but was skeptical. The company has its hands full at Katanga and is probably not in the market for expansion in the DRC, he said. He characterized the list of suitors as slim given the geopolitical risk of the DRC. "You have to question, if it's not the Chinese, who would commit that kind of capital?"
Finally, Tumazos wondered if Freeport really wants to sell Kisanfu, at least quickly. Adkerson "talks about promising projects at an early stage so that potential shareholders know the virtues of the company," he said.
