East Congo violence may spook mining investors

KINSHASA/DAKAR Thu Nov 6, 2008 11:52am EST

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KINSHASA/DAKAR (Reuters) - Mining investors who have rushed into Democratic Republic of Congo may turn more cautious in backing projects after the fresh outbreak of violence there, industry experts said on Thursday.

Spurred on by soaring metals prices, resources firms flocked to the central African country -- home to some of the planet's richest deposits of copper and cobalt -- after democratic elections in 2006 intended to draw a line under years of conflict and kleptocratic government.

Metals prices have since tumbled, and as fresh rebel attacks hit the east of the country, that optimism now seems premature.

"Seen from abroad, it's 'Hey, here it goes again in Congo,'" said Michel Losembe, vice president at the Congolese Chamber of Commerce.

"People will see it as an alarm. They will say, 'maybe we have been too bullish on Congo and on its long-term stability.'"

Advances last week by Tutsi rebels toward Goma, a major city in the east of the country, have forced at least 200,000 people from their homes and further destabilized already volatile North Kivu province. North and South Kivu provinces are home to most of Congo's tin deposits.

But the lion's share of foreign investment is concentrated in the southeast copper mining heartland of Katanga.

Goma is around 1,000 km (600 miles) from Lubumbashi, the main city in Katanga, but the worry for firms dependent on international markets for capital is that investors hear 'Congo' and think 'trouble'.

"The big impact is on sentiment because it is one country, and if the government becomes destabilized, which might happen, there will be additional country risk," said Tim Williams, global mining and metals director at Ernst & Young in London.

"The perception in Australia or Toronto could well be, 'DRC is a basket case, you can't work there' because you see pictures of riots on the streets, but in the copperbelt it's fine," he said. "It's all about perception."

"LIFE GOES ON"

First Quantum Minerals which has copper and cobalt projects in Congo, said the most recent outbreak of fighting had not had any impact on its operations, based in the copperbelt.

"As far as investor sentiment goes, any news like that tends to be received negatively, it doesn't help, though generally people have learned that life goes on," said First Quantum president Clive Newall.

For mining firms who have seen valuations slashed as metals prices have fallen, the last thing they need is their business to be viewed as even more dangerous by markets which have become extremely risk-averse as a deep global recession looms.

"Project finance is not available for anyone at the moment," Ernst & Young's Williams said.

"What has hit mining companies really hard is the fall in share prices, which makes it very difficult to get finance."

Shares in Congo-focused miners such as First Quantum, Katanga Mining and CAMEC have been battered this year, along with industry heavyweights Rio Tinto and BHP Billiton, as prices of copper and other metals have plummeted from their long-term highs of earlier this year.

Expectations on the ground in Congo are that some projects may begin to move more slowly as firms reassess their projections of the world's appetite for metal.

"Unfortunately, it (the fighting) comes at the wrong time with the credit crunch," said Losembe.

"Economically, the first reaction will be to slow down, but it comes at a time when things would have slowed down anyway."

Earlier this week, Congo's central bank chief said falling metals demand would push economic growth below 10 percent next year, and force cutbacks in mining projects.

Deputy Mines Minister Victor Kasongo said firms would not be allowed to cancel promised investment on the basis that the market has turned against them.

"Nobody can close down a factory just because the prices dropped," Kasongo said.

(Reporting by Joe Bavier in Kinshasa and Daniel Magnowski in Dakar; Editing by Pascal Fletcher)

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