The Economist Asia - February 10, 2018

60 Business The EconomistFebruary 10th 2018

1

R

OBERT Friedland, the boss of Ivanhoe

Mines, a large Canadian firm that digs

out copper and zinc in Africa, is not one for

pessimism. In his speech to an annual min-

ing industry jamboree, Mining Indaba, in

Cape Town, his promises about the poten-

tial of the business were ascopious as the

ore bodies his firm mines. But amid the hy-

perbole about electric cars, Chinese con-

sumers and the “most disruptive copper

discovery in the world” there was a note of

panic. Money, he warned, is “a coward”,

and may be about to flee.

The cause of fear is a new mining code

that was passed by parliament in the

Democratic Republic of Congo on January

24th. Congo is Africa’sbiggest copper pro-

ducer; its reserves, mostly in the southern

copper belt, are among the world’s richest.

As important, it has emerged recently as

the world’s leading producer of cobalt, a

by-product of copper smelting that is used

in batteries for electric cars. It also pro-

duces gold, zinc, tin and diamonds.

The new law, which has yet to be signed

by Joseph Kabila, the country’s embattled

president, drastically raises royalty rates

paid to the government on most of the

minerals extracted in the country. If signed,

it will, unlike most revisions to mining

codes, go into effect immediately. Such

rates will rise from around 2% to around

3.5% on most metals. But they could go up

to as much as 10% on cobalt, under a clause

allowing the government to designate cer-

tain metals as “strategic”.

Miners are livid. “This is bad for the con-

tinent, as well as for the industry,” says

Mark Bristow, boss of Randgold, a London-

listed firm with a large gold mine in the

north-east of the country. He says higher

royalties and tax hikes could eat up his

firm’s profits and stifle future investment.

Yet Congo has had a new mining law in

the works since 2012. The current code was

introduced in 2002, when large tracts of

the country were still occupied by rebels.

Many analysts think it is too generous to

miners. Congo “has not done as well from

its minerals as it would have liked,” says

Amir Shafaie of the Natural Resource Go-

vernance Initiative, a London-based NGO.

If there is a surprise, it ought to be that the

royalty increases came only now.

Miners seem confident that the law

could yet change, but that may be wishful

thinking. The Congolese government faces

a growing crisisof legitimacy. Mr Kabila’s

second, and supposedly final, term as pres-

ident finished in December 2016 and yet he

remains in office. Protests since then have

led to hundreds of deaths at the hands of

police; new armed rebellions have broken

out both in the east and south-west of the

country. Squeezing miners may be Mr Ka-

bila’s only chance of raising the funds he

desperately needs to stay in power.

Perhaps the real worry should be that

he might fall. Although Congo’s wealth

has been exploited by Westerners since the

Victorian era, mostof the current industry

dates backonly as far as 1997, when Mr Ka-

bila’s father, Laurent Desire, came to pow-

er. Many of the most profitable mineral

rights were bought through Dan Gertler, an

Israeli billionaire who is a close friend of

the president. In December Mr Gertler was

added by America’s Treasury to a sanc-

tions list; it said he had “amassed his for-

tune through hundreds of millions of dol-

lars’ worth of opaque and corrupt mining

and oil deals” in Congo. If Mr Kabila is re-

placed, everything could be up for grabs. 7

Mining

They don’t dig it

CAPE TOWN

Mining firms are dismayed by a new

Congolese mining law

54

19

5

Treasure chest

As % of world production, 2016

As % of exports, 2015

Cobalt

Cobalt

Refined

copper

Refined copper Other

Industrial

diamonds

Sources: USGS; Observatory of Economic Complexity

Congo’s mining output

T

HE ascent ofHNA, an aviation-to-fi-

nancing giant, began on six wings and

a prayer. It started out as Hainan Airlines,

set up on China’s southern palm-fringed

island in 1993 with three planes, in a joint

venture between a Buddhist businessman,

Chen Feng, and the local government of

Hainan. In 2000 the firm became HNA

Group and, from a Buddha-shaped head-

quarters, Mr Chen built his enterprise into

an empire with more than $150bn in assets.

Foreign trophies came next. The firm bor-

rowed heavily to finance deals worth

$50bn since 2015 over six continents, in-

cluding a 25% stake in the Hilton hotel

group and 9.92% of Deutsche Bank.

In recent weeks it has become clear that

its gorging—which had continued apace

even afterHNAwas among those firms sin-

gled out for scrutiny by China’s banking

regulator last June for their risky debt-fu-

elled purchases—is over. In JanuaryHNA

told creditors that it would face a probable

cash shortfall of at least 15bn yuan ($2.4bn)

in the first quarter of this year.

HNAhas assured investors that this is a

routine year-end squeeze. Butmore worry-

ing reports have trickled out, such as of

banks brieflysuspending unused credit

lines to HNAaffiliates after missed pay-

ments. In the past two months, nearly half

ofHNA’s 16 units listed in China have sus-

pended their shares from trading after

steep falls. In four cases, more than 50% of

the shares are pledged to lenders.

The group has an estimated 43bn yuan

in bond repayments due this year and

next. Partly to meet this obligation it is re-

portedly hoping to sell around 100bn yuan

of assets over the next six months, includ-

ing offices in New York and London and re-

sorts in French Polynesia. It will list Swiss-

port, the world’sbiggestairport-servicing

company, which it bought in 2015. But

shedding assets will not necessarily mean

a cash windfall. It snapped up many of its

assets abroad by pledging shares in target

companies as collateral, meaning that

most sale proceeds would go to creditors.

Analysts had foreseen an unravelling

for some time, before even the regulatory

wrist-slapping. A Chinese business expert

callsHNA’s empire-building “a classic case

of overextending”. For five years it has only

been able to service its debts by taking on

new ones. Returns on its investments have

not exceeded 2% in almost a decade, ac-

cording to calculations by Bloomberg, a

data provider. As a result, HNA’s ratio of

debt to earnings before interest, deprecia-

tion and amortisation is around a lofty ten,

estimates Standard & Poor’s, a ratings agen-

cy. Bond investors have grown nervous,

and the firm’s financing costs have soared.

HNAis not alone in facing severe head-

winds. Several peers were also chastised

for their own spree of foreign purchases, as

regulators clamped down on outflows. Da-

lian Wanda, a property developer that is

buildingan entertainment business, was

forced to dispose of most of its tourism and

theme-park assets to rivals in a 63bn-yuan

fire sale, the biggest property deal in Chi-

na’s modern corporate history. This week

it agreed to sell shares worth 7.8bn yuan in

its domestic cinema and film-production

business to Alibaba. That swift divestment

has given it more of a cushion than HNA,

which has so far announced only one big

property sale in Australia, two months

after a promise to shed investments.

Still, few think the firm will be left to

flounder. Political connections are thought

to help explain whyHNAdodged the more

severe restraints placed on its peers: its

founder has not been called in for ques-

tioning, unlike those of both Fosun, an in-

The unwinding of HNA

Flight of fancy

HONG KONG

One of China’s most voracious overseas

investors comes down to earth