Litigious shareholders put world’s biggest miner on the ropes

Amid ongoing investigations, shareholders at Glencore are suing the company, after concerns over connections to corrupt mining activities in the Congo caused shares to plummet. Molly Lempriere considers whether this could spell trouble for the mining titan

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It has been a tumultuous year for the world’s largest mining company. Glencore’s conduct in the Democratic Republic of Congo (DRC) has come under investigation following its involvement with Israeli billionaire Dan Gertler, who is accused of widespread corruption, money laundering and other ‘opaque’ dealings in the African country.

Gertler bought his first mine in the DRC in 1997, and soon became friends with President Joseph Kabila, forming a partnership that helped him amass a fortune of $1.2bn through mining ventures. However, in 2017, following an ongoing investigation by the US and the UK, Gertler became subject to US sanctions after being accused of bribing Congolese officials to secure mining deals, something he still denies.

Glencore had been one of Gertler’s biggest partners, with more than a dozen deals between the two parties between 2007 and 2017. Consequently, as the mining mogul came under fire, Glencore’s position became increasingly complicated, as pressure grew for the company to distance itself from Gertler, despite still owing him royalties for previous contracts.

The entanglement and ensuing lawsuit has also drawn scrutiny from the US Department of Justice, following which, the company’s own shareholders appear to have lost faith.

Two lawsuits have now been launched by Glencore shareholders, accusing the mining giant of misleading them. The cases were initially launched in the US, and have now stretched to the UK’s courts, as they seek compensation for the dramatically reduced share prices.

Glencore declined to comment on the move.

Around 25% of Glencore’s operations are in the DRC, making it a hugely important area of its business. The company mines copper and cobalt in the country, with the price of the latter almost tripling in 2017 due to the dramatic rise in battery and electric vehicle adoption.

Trouble in the Congo

The DRC is a major producer of metals and minerals, accounting for 60% of the world’s cobalt production. Glencore currently has a substantial stake in Katanga Mining, which produces cobalt and copper, and wholly owns the Mutanda copper mine. Both are located in the Katanga province in the African Copperbelt region.

Gertler had a role in both mines until February 2017, when he was bought out by Glencore. This move followed previous concerns about the Israeli’s dealings, but the longstanding bond between the company and Gertler meant Glencore had to continue to pay him royalties for previous deals.

“Even though many corruption-monitoring NGOs raised doubts about the transparency of Gertler and his related companies’ mining deals with Congolese Government, Glencore continued its business relations with Gertler and his related companies until 2017,” explains GlobalData analyst Alok Shukla.

“In December 2017, after the US Treasury sanctioned Gertler and his related companies under the charges of money laundering, Glencore stopped paying royalties to the Gertler affiliates,” Shukla continues. “This pulled Glencore in to a legal battle, which ended in an out-of-court settlement. But, this raised questions about Glencore's ethical conduct as it is brazenly bypassing the US sanction by paying the royalties in euros.”

However, on 27 April, a company affiliated with Gertler filed a lawsuit in the DRC to seek $3bn for future unpaid royalties. In June, the dispute was settled out of court, with the two parties agreeing on a much smaller amount.

“Glencore has agreed to settle the legal dispute in the DRC by paying the compensation to Dan Gertler, its former business partner in DRC,” says Shukla. “It will make royalty payments to Mr Gertler in euros so that it did not fall foul of US sanctions, which were placed on the Israeli billionaire last year. Glencore will pay €21m in royalties from the Mutanda copper mine in DRC in 2018 and €16.5m each quarter from the Kamoto Copper Company, starting in 2019.”

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Kamoto copper mine

The DRC is a major producer of metals and minerals, accounting for 60% of the world’s cobalt production

Accusations that shareholders were misled

Although the suit in the DRC is now settled, it brought Glencore under close scrutiny by the US Government. This led to the issuing of a US Department of Justice subpoena in July.

The announcement of the subpoena alone caused Glencore stock prices to fall by 9%, with a loss in value of more than $4bn. This year to date, legal challenges have caused the company’s stock to drop by 18% in total, at the detriment to its shareholders, some of whom are now taking legal action.

Lawsuits were filed on 9 July at the US District Court in Newark, New Jersey and on 11 July at the US District Court in Manhattan. The lawsuits accuse Glencore of concealing the consequences of its conduct in the DRC. The shareholders claim the company misled them on the effects of increased scrutiny into its compliance with money laundering and bribery.

“The legal proceedings were taken against Glencore Plc by the shareholders for the violation of the Securities Exchange Act of 1934 and Rule 10b-5 (which prohibits fraud in purchase or sale of any security),” explains Shukla. “The company has made a false statement to the shareholders and disclosed that the US Department of Justice issued a subpoena to a subsidiary of Glencore to produce records and other documentation regarding compliance with money laundering statutes and the Foreign Corrupt Practices Act.”

The lawsuits seek unspecified damages from Glencore, and the groups of shareholders are intending to pursue the claims to group actions. The company has said that it will cooperate with the Justice Department, and has set up a board committee to oversee proceedings. Both groups of shareholders are being represented by global law firm Quinn Emanuel.

Richard East, managing partner at Quinn Emanuel, said: “Glencore has a well-known appetite for risk and operates in many of the world’s most endemically corrupt countries, of which the DRC is a notable example. Glencore shareholders may be entitled to bring claims in England under the terms of the Financial Services and Markets Act 2000 in order to seek compensation for losses caused by Glencore’s alleged untrue or misleading statements and/or failures to disclose relevant information to the market.”

The DRC is a major producer of metals and minerals, accounting for 60% of the world’s cobalt production

More lawsuits to come? 

It is not unheard of for shareholders to file US lawsuits accusing companies of misleading them and affecting share prices. But the sheer scale of mining giant Glencore could mean that if the shareholders are successful, it could set a precedent for lawsuits against other mining companies.

“Success of the lawsuit could definitely lead to more lawsuits as it adds weight to the claims of fraudulent share transaction and insider trading,” says Shukla. “For example, one such lawsuit is being launched by a Congolese-American businessman and one of the founders of the Mutanda cobalt mine. Charles Brown is in the process of filing a lawsuit demanding $1bn in compensation, claiming his shares were fraudulently sold to Glencore in two transactions, in 2007 and 2012.”

Mining companies, however, operate in dangerous and varied countries around the world where bribery and corruption is often rife, so this kind of accusation is nothing new.

“Mining executives do not need reminding that they operate in a world where not everybody plays by the same rules,” a recent report by EY stated. “And the rules are not enforced with the same degree of effectiveness in all locations. In the past decade, many companies have increased their presence in some of the most lightly regulated regions of the world, from Southeast Asia to the remotest parts of South America and Africa.”

The case is unlikely to greatly affect Glencore into the future, given the scale of the miner, in particular in the DRC. “During the last three years (2015-2018), miners had paid a total of $1.1bn in taxes to the DRC Government, including $101m as state royalties,” says Shukla. “This is likely to increase under the new mining code, backed by more investment and expansion projects. Glencore can mitigate its future risk by opening for partnership projects.”

There are, however, valuable lessons that Glencore and other mining companies can learn from these lawsuits. Glencore intends to make further efforts to improve confidence in the company and enable it to move forward.

“To boost the investor confidence Glencore is planning to repurchase its own shares for up to $1bn by the end of 2018,” says Shukla. “This will be done in a two-stage process. Under the first stage, Citi Group will buy the shares’ worth for $453m on behalf of Glencore. The process of buyback will showcase the management’s confidence in its own underlying business and value of the shares, which will also help in rebuilding investor confidence.”

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Mining executives do not need reminding that they operate in a world where not everybody plays by the same rules

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