Recently I’ve been telling my readers about an incredible deal that had just been signed between China and the Democratic Republic of the Congo. For those of you who are new… I’ll give you a quick reminder…

Congo is one of the most mineral-rich places on earth. Africa’s biggest country is said to hold just about every mineral know to man – gold, copper, diamonds, uranium…

In April this year the Chinese sealed an agreement with the Congo government that is going to see China invest $9 billion dollars in reviving Congo’s war-ravaged infrastructure and mines.

In return they will get access to the African giant’s vast mineral wealth. About $3 billion of that is going to be invested in reviving the mines. But a massive $6 billion is going to be spent on building desperately needed infrastructure. China is going to build about 2,400 miles of new roads, 2,000 miles of railway, 32 hospitals, 145 health centres and two universities.

There are only about 3000 miles of roads in the whole Congo at the moment. So the impact on the country is going to be huge…

In return, China is going to get access to some 10.62 million tonnes of copper and 620,000 tonnes of cobalt. That could add-up to more than $42 billion in profit for the Chinese in the coming years.

The sheer size of the deal has completely blown away China’s rivals. Western mining companies and governments have been left reeling as China appears to have locked-up some of the most valuable mineral deposits in the world. And they aren’t very happy…

What are the Chinese up to?

Last week, Hong Kong’s respected South China Morning Post newspaper, carried an article on the deal. I’m going to quote it at length here, because I think it’s an excellent window into how the Chinese actually view their move into Africa:

“Poor Congo! It can never get a break from meddling westerners. But what can it expect, since it is doing a multibillion-dollar deal with China.”

“Worse, this deal, estimated to be worth US$9.25 billion, involves valuable natural resources and will entrench China, for years, in the affairs of a key African country as big as Western Europe. And, as with many similar massive investment schemes across the continent, it is pitting China investors against western institutional lending and aid bureaucrats and mining companies.”

True enough. And the simple fact is that most western companies just aren’t going to have the resources to go head-to-head with the Chinese government in the scramble for Africa. One of our current plays has done just the opposite. It’s providing the infrastructure and support-services that are going to be necessary for the multinationals and Chinese state-owned giants to get their loot out of Africa… find out more about this play here…

The article goes on…
“Sure, there is no guarantee China will deliver. But even if they deliver just half of what they promise, it will benefit the country enormously, which hitherto has been more newsworthy in the west for civil wars and exotic diseases like Ebola.”

“China is taking on enormous risks with the deal. The tonnes of resources sound good on paper, but some of Congo’s mines and concessions are underdeveloped and dangerous to operate; others remain to be explored and developed. The technical and operational challenges are great.

“No western government or corporation would commit so much capital resources in a single enterprise because, as one analyst said of western investments in the continent in general, they mistake their own ignorance and prejudice for risk assessment.

“So, here is a potentially good deal for Congo, and the International Monetary Fund is unhappy. Likewise some western mining companies, which signed dozens of contracts with the country during the last civil war. The chickens are coming home to roost for the companies in the latest sorry attempt at exploitation by the west.”

What he means by that is that many of the small mining exploration companies that entered the country during the Civil War in late 1990’s are now seeing their contracts being cancelled. A lot of these contracts were one-sided deals which left the Congo government holding the short end of the stick. With the support of their powerful new Asian friend, these small American and European companies are now being forced out. And here’s the Post’s rhetorical flourish at the end:

“China is offering real economic growth and opportunity to sub-Saharan Africa, something the west has never done. Poor countries need all the help they can get, from whatever sources they choose.”

The ONE company that can beat the Chinese at their own game…

Why am I revisiting the Congo today? Because when I first wrote about China’s investment deal with the country early last month, I mentioned that we were looking at several investment opportunities in that country…

And we have found one. In fact, if I’m right about it, it’s going to offer the sort of profits that make China’s deal with the Congo look small…

You see, earlier this year, a group of shadowy tycoons who operate in Africa struck a deal that gives them access to the Congo’s richest mines…the sort of thing that the Chinese can only dream about. They’ve got all the right connections and they’ve got the cash to pull it off. And our latest recommendation is going to put you right in the thick of it.

Source: Secret Deals, Africa’s Richest Mines

I realized this after receiving a thoughtful note from reader Eddie C., in response to last week’s piece, “China, Congo and the New Race for Africa.”

Sir,

As far as I can see, China is doing a real good job to these under-developed countries such as Congo. She put in her hard-earned capital to open up these countries, whether be they in Africa or Asia. It is a win-win situation. Where is the human rights violation?

The Chinese did not force these countries to buy opium at gun-point by a cohort of Western countries as what had happened to a weak China in the last century… they did not colonize countries like India or Malaya and treat their citizens as second class servants.

Your prediction that China would gain $400 billion out of a $4 billion investment is grossly exaggerated. Even if it is true, the profit will be shared by the people of Congo (as it is a joint-venture). Aren’t the US and the Europeans doing the same thing? Why pick on China?

…Please be fair and truthful.

Eddie C.

Dear Eddie,

I understand where you’re coming from. Let me make clear I wasn’t trying to bash China in regard to what they’re doing in Africa. In fact, I have a strong measure of respect for what they’re doing. What country wouldn’t want to act in its own long-term interests? What country wouldn’t want to leverage the power of wise investments today to supply their own vital resource needs tomorrow?

No, what China is doing in Africa is very smart.

You also point out that Africa will benefit from these investments. I don’t disagree. Odds are that Africa’s level of benefit could be very strong, especially in comparison to the disaster of Western aid — the hundreds of billions that have gone to waste in the past. When rich governments write checks to poor governments, all too often the cash winds up in the pockets of thieves and thugs.

Even charitable gifts can do more harm than good, as some African locals have lamented. When second-hand T-shirts and sweatshirts show up in poor countries by the truckload, they often wind up being sold on the black market. The net result is profit for bandits and a total block on any type of textile industry. (While local clothing makers can compete with cheap imports, they can’t compete with free.)

In contrast to all this, what China is doing is like night and day. Opening mines, building hospitals, paving roads… all these activities require training and infrastructure and jobs, and that’s a great thing. It’s a means by which Congo (and other countries) can benefit, not to mention the shared benefits of resource deals. I don’t want to take that away from China at all.

Valid Concerns

I still think Peter (the Congolese journalist) has reason to be concerned, though, because with China there are still valid human rights questions to ask. There is a lot of good that comes out of a bluntly pragmatic stance, but there is danger, too. In places like Sudan, China has shown its willingness to look the other way when atrocity occurs. Money flow from resource deals can wind up supporting that kind of atrocity.

There are also fair questions to ask about how resources are extracted and local land is used. When it comes to metal mining and oil and gas production, for example, we know there are better and worse ways to do it from an environmental standpoint.

The lowest-cost way to rip a resource from the ground is often the one that leaves that ground denuded by chemicals and all but stripped bare. So there are valid questions in regard to how Congo’s water and soil and sky might look in 20 years’ time.

As far as what the West did in the 19th and 20th centuries, and how to think about that — I can’t argue with you there. The history you point out is indeed a matter of record.

A Hard Question

This all leads to the question stated earlier: How to think about China? For many in the West, this question is still unresolved.

Some, like legendary investor Jim Rogers, embrace China as the next great nation and the rightful heir of the 21st century. Others, quite frankly, view China as an environmental black hole, an ongoing human rights disaster, and a large-scale military conflict waiting to happen.

Which view is correct? As global investors, we here at Taipan lean much more toward the Jim Rogers view. But, as with many things in life, the answer is not black and white. Instead there are many shades of gray.