Copper tests Glencore in Congo

The beer flowed at a dimly-lit bar in the Congo copper mining town of Kolwezi, but it did little to lighten the mood.

Kolwezi - The beer flowed at a dimly-lit bar in the Congo copper mining town of Kolwezi, but it did little to lighten the mood.

Since the commodity price slump rippled out to the remote corners of Africa that hold some of the world's most important metals supplies, thousands of mine workers in Kolwezi have been fearing for their future.

Production at the Katanga mine there has been suspended since September as its owner Glencore responds to a more than six-year low in copper prices, and the last ore has been trucked away.

Katanga represents a test of whether the company's copper mining operations can adapt to weak prices. Glencore plans to re-engineer the site so it can resume output at a lower cost in early 2017, and success would help reassure its investors that the firm can ride out a long commodity downturn.

The mine said in September that it planned to cut a fifth of its around 5 000-strong workforce, at most. But more than 1,000 workers have already taken up an offer of compensation to walk away.

“People think that if they don't accept the money now, the company will cut more jobs later and they'll lose the opportunity,” said employee Deogratias Twite, 26, at Chez Laure bar, speaking over a blast of music from the courtyard outside.

Basil Mwangala Mdala, a 45-year-old electrician, said he was offered an $11 000 buy-out, but turned it down. “What am I going to do with $11,000? I have all of my family here. I have responsibilities as a parent ... The misery has begun.”

The sombre assessment jars somewhat with the message to investors from Glencore's headquarters in the wealthy Swiss tax haven of Zug - that its copper mining operations can adapt and thrive.

The mining and trading group was built up through years of rapid expansion, and is now one of the world's biggest metals miners. But fears it may run out of cash sent its shares tumbling earlier this year and forced Chief Executive Ivan Glasenberg to issue new shares and rein in debts and capital spending.

Africa accounts for around a third of Glencore's copper output, and Katanga - located in the south of Democratic Republic of Congo - was one of its biggest-producing mines in the continent before its suspension.

Even as work tails off at the operations in Kolwezi, the town will remain the focus of fevered activity through 2016 as Glencore upgrades the mine.

The upgrade will include a new leaching plant that Glencore says will allow the site to process ore more cheaply. But it has not given any more detailed plans on how it aims to cut costs at the mine - which is owned by Kamoto Copper Company (KCC), a joint venture between Glencore-controlled Katanga Mining and state miner Gecamines.

The creeping mechanisation feared by some workers may play a part, but so may an increase in production that would cut fixed costs per tonne.

Cutting costs

Glencore says it can slash Katanga's production costs to about $1.65 per pound - from more than $2.50, or $5 510 a tonne. The operation has been clearly loss-making at the current copper price, which hit $4 443.50 a tonne on Nov. 23, its lowest in more than six years.

Its more efficient Congo site of Mutanda - where production costs $1.33 a pound, or $2,930 a tonne - has stayed open.

KCC has targeted annual production of 300,000 tonnes since 2011 but its record output has been just 158,000 tonnes, seen last year.

By moving to slash costs while the mine is mothballed, Glencore's idea is to “hope for the best and prepare for the worst”, said Bernstein Research analyst Paul Gait, who believes a lot of the African copper belt will need to shut down.

“There is no way a lot of what occurs in DRC and Zambia is economic at these (price) levels,” he said.

Whether Katanga will be viable when the suspension ends depends partly on global copper prices, with the outlook clouded by weakening Chinese demand and signs that some big Glencore rivals, such as BHP Billiton and Rio Tinto, are still investing in new production.

“Eighteen months is a long time to say with any certainty or conviction that Glencore [is] going to hit the ground running,” sad Rand Merchant Bank's head of country risk, Ronak Gopaldas.

According to an annual accounts filing by KCC to the local government at the end of 2014, the company had debts of more than $5 billion, of which about $2 billion were owed to Glencore.

KCC referred all queries on its debt to Glencore, which declined to comment. Glencore, under pressure from credit rating agencies, has pledged to cut its net debt by a third to $20 billion by the end of 2016.

It still plans to spend about $880 million on the upgrades at KCC to bring performance in line with Mutanda.

According to Katanga Mining, Glencore has indicated that it would “provide or procure” funding for the upgrades. Glencore declined to provide any more details.

Meanwhile the main workers' union at KCC said 1 220 of its workforce of around 5 000 had left after accepting buy-outs, while at least 3 600 out of 4 500 contractors had been laid off.

“You can read the misery on the faces of the people,” said Delphin Monga, provincial secretary of the UCDT union. “Kolwezi is really mines - I don't see anything that can replace it.”

REUTERS