Democratic Republic of Congo

Overview

The Democratic Republic of Congo (formerly Zaire) covers the greater part of the Congo River basin, an area of almost 1 million square kilometres. The country is landlocked, except for a narrow strip of land on the north bank of the Congo River that provides an outlet to the Atlantic Ocean. The country is bordered by Angola, Burundi, Central African Republic, Republic of Congo, Sudan, Rwanda, Tanzania, Uganda and Zambia.

The population of the DRC is approximately 60 million based on 2005 estimates, with more than 6.5 million people residing in and around the capital city, Kinshasa. As many as 250 ethnic groups have been distinguished and named in the DRC. Although 700 local languages and dialects are spoken, the linguistic variety is bridged both by the use of French and the intermediary languages Kikongo, Tshiluba, Swahili and Lingala.

Politics and Government

Following several years of conflict in the DRC, a peace agreement was signed in South Africa in December 2002. The then government of the DRC, internal opposition parties, civil society, and rebel groups backed by neighbouring countries agreed to a power-sharing arrangement whereby ministerial portfolios were divided among the participants in the peace process. The power-sharing agreement was enshrined in a transitional government that will remain in place until elections are held, expected within twelve months. These elections will be the first democratic vote held in the DRC since independence from Belgium in 1960. However, areas of conflict remain in parts of the northeast of the country. Beginning in June 2003, intervention forces authorized by the United Nations Security Council to stabilize the situation in the region have been positioned in the northeast portion of the DRC. The international community has backed the current peace efforts and appears to be mobilizing assistance to support reconstruction.

The DRC is a highly centralized republic with extensive executive, legislative, and military powers vested in the President and four vice-presidents. The President acts as the head of state and government, which is located in the capital city of Kinshasa. Members of the cabinet, a 35-member executive, and the transitional parliament, which is divided into two chambers – a national assembly consisting of 500 members and a senate consisting of 120 senators – are based in Kinshasa and are appointed by the President. A transitional constitution was adopted on April 4, 2003. The judiciary is nominally independent; the President has the power to dismiss and appoint judges.

Current President Joseph Kabila has made significant progress in liberalizing domestic political activity, establishing a transitional government, and undertaking economic reforms in cooperation with the World Bank and International Monetary Fund.

Economy

The economy of the DRC has historically been dominated by its resource sector. The DRC possesses a vast potential of natural resources and mineral wealth. However, the mining sector is underdeveloped relative to its potential. The Copperbelt region of the country, in the southern Province of Katanga, is renowned as one of the richest mineral regions of the world and until the mid 1980s enabled the country to be one of the largest producers of copper with annual production exceeding 500,000 tonnes. Adverse political events beginning in the early 1990s and more recent military activity have led to a dramatic reduction in national output. However, diamonds, copper and cobalt remain the principal foreign exchange earning exports for the country, accounting for over $1.4 billion per year based on estimates for 2002. In 2004, the GDP was an estimated $42.7 billion.

Following an absence of approximately ten years, the International Monetary Fund and the World Bank have recently actively re-engaged the DRC and are assisting with the development of coherent legislative and economic reforms, aimed at a reconstruction of the country. In the past year, the government of the DRC has approved a new investment code and a new mining code and has designed a new commercial court. The goal of these initiatives is to attract investment by promising fair and transparent treatment to private business. These initiatives have significantly improved the investment climate for the mining industry and are encouraging renewed international investment. The World Bank is also supporting efforts to restructure the DRC's large parastatal sector, including Gécamines, which is the state-owned mining company, and to rehabilitate the DRC's neglected infrastructure, including the Inga Dam hydroelectric system.

Exchange Controls

The exchange control regulations currently in effect in the DRC subject any transfer in excess of $10,000 to a licence, which is granted by the applicable commercial bank and authorize commercial banks, subject to the payment of relevant tax, to freely transfer dividends, capital gains and interest and capital on foreign loans out of the country. Upon closing of investments, investors may freely remit capital without any restriction, subject to the adherence to applicable legislation within the country, such as the orderly wind-up of companies within the DRC. Residents of the DRC are authorized to hold foreign currency accounts with designated local commercial banks.

Mineral Licence Regime

On July 11, 2002 the transitional government in the DRC passed into law a New Mining Code that was developed by the DRC Ministry of Mines and Hydrocarbons with the assistance of the World Bank. The New Mining Code came into force in January 2003 and the mining regulations thereunder came into force on March 26, 2003. Their provisions, as summarized below, have a direct impact on the Company's property in the DRC. The principal intention of the New Mining Code is to create a stable investment environment for companies investing in the DRC, providing them with security of title and certainty of process.

In the DRC, all deposits of mineral substances are owned by the state. The President of the DRC is given the power to declare, classify and declassify areas of the DRC as prohibited for mining activities and also has the power to promulgate regulations under the New Mining Code. No person may explore for minerals or carry on mining operations except under the authority of an exploration certificate or exploitation permit granted under the New Mining Code. The permit holder is obliged to undertake regulatory duties within specified time limits. These regulatory arrangements are generally similar to those that may be found in other countries with a significant mining sector, and include technical, environmental and other requirements.

Under the New Mining Code, mining rights are regulated by exploration, exploitation, small scale exploitation and tailing exploitation permits.

Exploitation permits for tailings under the New Mining Code have initial terms of five years with five year renewal terms. An exploitation permit may not exceed 400 square kilometres. An entity and its affiliates may not hold more than 50 exploration permits, and the total surface area granted may not exceed 20,000 square kilometres.

The New Mining Code provides that only DRC entities can have exploitation rights. Before a new exploitation permit is granted, a DRC company must be incorporated, and an undertaking given to transfer 5% of the share capital of the company to the DRC government. Exploitation permits are valid for 30 years, renewable for 15-year periods until the end of the mine's life. The New Mining Code states that an applicant for an exploitation permit must transfer to the DRC government 5% of the shares of the company applying for the permit. Although it is unclear whether existing permit holders are subject to this requirement, the Company believes that the undertaking to transfer 5% of the shares of Kasonta-Lupoto Mines s.p.r.l. to the DRC Government is not applicable to the indirect transfer of the Kalumines Copper-Cobalt Project from ARM to TEAL as the permit that is the subject of the project was already in existence.

Any foreign nationals, including any legal entity governed by laws other than the DRC, are required to elect domicile with an authorized mining or quarry agent located in the DRC and must act through this intermediary. The mining or quarry agent will act on behalf of and in the name of the foreign national or foreign legal entity with the mining authorities, mostly for the purposes of communication.

Environmental obligations under the New Mining Code require the preparation of an environmental impact study and an environmental management plan for a development project, both of which must be updated if a renewal of a mining licence is sought. As well, the New Mining Code provides for a biennial environmental audit. If a company does not pass this audit, it may lose its permit. Upon closure of the mine, shafts must be filled, covered or enclosed, and a certificate obtained confirming compliance with environmental obligations under the terms of the environmental impact study and environmental management plan.

Tax Regime

The New Mining Code provides for a single fiscal and custom regime applicable to all industrial mining operations along with the persons implicated on small scale mining operations.

The general system of taxation in the DRC is based on the principle of territoriality, meaning that tax is levied on income that is derived from the DRC. The general corporate tax rate is 40%, while the corporate tax rate for mining companies is 30%. A 20% withholding tax applies to income from movable properties, which is reduced to 10% for income generated from mining, but is equal to 22% on rental payments. The holder of an exploitation permit is also subject to tax on turnover from services rendered and sales realized in the DRC, although sales to a processing industry located in the DRC are exempt from tax on turnover. While the general turnover tax rate on sales is 10% and 18% for services rendered, the holder of the mining permit is liable to tax on turnover at a preferential rate of 5% when paying services and a rate of 3% when acquiring goods related to mining activities. The holder of the exploitation permit is also liable for the 10% tax on the remuneration of expatriates.

The introduction of a standard set of tax rates to be applied to mineral projects in the DRC replaced the previous system of individual project agreements. The holder of a mining exploitation (or exploration) licence in the DRC is subject to a tax on the surface area of the mining concession at the rate payable in Congolese francs equivalent to $4 per square kilometre for the first year ($2 for exploration licences), $6 per square kilometre for the second year ($3 for exploration licences), $7 per square kilometre for the third year ($3.50 for exploration licences) and $8 per square kilometre for each subsequent year ($4 for exploration licences). In addition to the surface area tax, holders of mining permits are liable to an annual area rights tax based on the size of the mining perimeter ranging from $194.40 to $424.68 per square kilometre for exploitation permits.

The New Mining Code imposes a royalty tax payable on the sale of minerals, at the rate of 0.5% for iron ore ferrous metals, 2% for non-ferrous metals and 2.5% for precious metals.

Miga Insurance

The DRC is a party to an agreement with the World Bank's Multilateral Investment Guarantee Agency.