Strategy

How First Quantum recouped its seized mine

How the Canadian mining company got its money back.

First Quantum Minerals Ltd.’s Kansanshi mine in Zambia, Southern Africa. (Photo: First Quantum Minerals Ltd.)

In 2007 the government of the Democratic Republic of Congo announced it would autocratically tear up and renegotiate contracts with foreign mining companies. The price Vancouver-based First Quantum Minerals paid for resisting: the forcible seizure and resale of its properties in the country, including two operating mines and another on which construction was nearly complete. The DRC investigated First Quantum for what it called “suspected widescale misconduct.” Its courts, which are not independent, slapped a stinging US$12-billion judgment on the company. The government transferred the properties for nominal sums to close associates of DRC president Joseph Kabila, who promptly flipped them for significant profits; Eurasian Natural Resources Corp. (ENRC), a large London-based company dominated by Kazakh owners, paid just US$175 million for the Kolwezi project, which cost First Quantum nearly $800 million to purchase and construct.

First Quantum immediately sought redress, but its hand seemed weak. ENRC CEO Felix Vuilis had maintained his company owed nothing to the former owners. “Any dispute that First Quantum has is with the relevant DRC authorities,” he declared shortly after the purchase. Equity analysts covering First Quantum typically ascribed little or no value whatsoever to its residual DRC claims, reflecting the general view of the situation. But under an arrangement revealed in early January, ENRC will pay US$1.25 billion to First Quantum in exchange for uncontested ownership and the cessation of all legal hostilities.

How did First Quantum get its money back? Riyaz Dattu, a partner at Osler, Hoskin & Harcourt LLP in Toronto who has served as counsel in dozens of international trade remedies proceedings, says foreign states cannot seize properties thus. “A sovereign state cannot get away with taking unlawful actions under international law,” he says. “Even Venezuela’s Hugo Chavez, when he takes action that results in expropriation, has been paying compensation.” First Quantum demanded arbitration before the International Chamber of Commerce in Paris, as it was entitled to under its investment contract. First Quantum also sued ENRC for US$2 billion in damages. And it secured assistance from the Canadian government, which expressed displeasure during negotiations over debt forgiveness to the DRC.

These tactics had greater impact than was initially apparent. The legal uncertainty complicated ENRC’s efforts to raise money and develop the mines. More damaging still was the scandal that enveloped ENRC as crit ics questioned its DRC purchases: two independent directors resigned and institutional shareholders sold shares in protest. “ENRC was dealing with a pretty signifi cant cloud hanging over their brand, their name, and potentially their relationship with fi nancial regulators in London,” says Philippe de Pontet, Africa director for the Eurasia Group, a political risk consultancy. “The pressure was not going away.” Meanwhile, the DRC’s already awful image was further impaired. (A recent World Bank “Ease of Doing Business” survey ranked the DRC sixth from the bottom of 183 countries.) Crucially, Kabila’s government lost an important source of tax and royalty revenue while the mines remained idle. In retrospect, Viulis’s defi ance was either bargaining bravado, or else the product of bad advice. Says First Quantum president Clive Newall in an e-mail, “The outcome, although not ideal, is the best that could be achieved under the circumstances.”