Transcript | Charles Mesnil

Arthur Katalayi (Host): Hello, I’m Arthur Katalayi, A2k Advisory partner. We are today with Mr. Charles Mesnil, General Manager of Lugamines, a mining company based in Katanga, Hello Mr. Mesnil.

Charles Mesnil (Guest): Hello Arthur and hello to all your subscribers.

Arthur Katalayi: Thank you for having us, today we are going to talk about your very interesting career which started in finance, and we are going to start with your academic background. You graduated from Saint-Cyr of Paris-Dauphine, you are French and you have been in the DRC for almost 10 years now, is that right?

Charles Mesnil: That’s exact indeed. So, quickly on my CV, I have a fairly standard academic background for anyone who wants to work in finance in Europe. So actually Paris-Dauphine is a good address for market finance, corporate finance and it is in this direction that I turned, and indeed, I also doubled that with a stint in the Military Academy at Saint-Cyr, because I think that at the time, it was very formative and I have never regretted that decision. And then there you go. Following that, I started my career in finance first as a junior in corporate finance at Ernst & Young, then in private equity; I was more precisely in ViewPoint Capital, in the software industry, in Frankfurt.

In the meantime I still had an experience which is not so common as that since I crossed Africa, already at the time in my youth, from north to south, in order to discover all the countries which constitute this beautiful continent. And so like that, it gave me a first experience, a first approach and a certain passion for the continent, quite simply.

I come back very quickly to my time in private equity. Indeed we did some transactions at the time in the software industry and then afterwards I did the classic LBO; for your subscribers who know American finance will know what I’m referring to leverage buy out etc. So that’s the financial arrangements in private equity in order to make debt-based company buyouts.

Arthur Katalayi: After the next question I wanted to ask you was why this immediate shift from Europe and private equity, finance to the mining sector immediately; was it a passion you had before? An industry you wanted to get into? Or it is a combination of several things.

Charles Mesnil: So very modestly, I’m still going to have to tell you that there is a certain pattern in finance, for a bit of history, everyone remembers that about thirty years ago when I started my career since I am 51 today; which does not make us any younger. So back then it was all about service.

Arthur Katalayi: Okay

Charles Mesnil: It was the American model, apart from account services. Things have changed and over the past few years as we often find out ourselves, the whole world economy is paying attention to the primary sector – it concerns agriculture, in parentheses. People who know a little bit, know that in Ukraine 40% of the arable land is owned by Cargill, Monsanto and Dupont; major American players. Bill Gates also entered the primary sector. They are more into agriculture and mining of course is becoming very crucial, it was before and we can see it now. So, indeed, we have a tendency in uncertain times that we are experiencing to go back a little bit to the basics and mining is one of them, and mining in the Congo is probably a very good place; one of the very good spots in the world to start at.

Arthur Katalayi: And the mining sector in the south-east of the DRC is both complex but at the same time offers, as you know, a lot of very interesting opportunities now and in the future. What role does a medium-sized company like Lugamines play in this development? And what is your company’s specific service offering?

Charles Mesnil: So that is indeed a good question. I think it is necessary to articulate the answer in 2 parts. First thing is to state very quickly the advantage of Katanga; the whole of the south-east of the DRC compared to the Grand-East, is that most of the large international mining companies are much more willing to set up shop; in priority in Katanga and we can then develop it towards the whole North-Eastern zone. And it has practically nothing to do with the wealth of resources since Congo, as everyone knows, is a land blessed by the gods which has rich minerals in almost all areas. 

Correct me if I’m wrong, aside from Barrick, which has its Kibali mine, there aren’t many mines from international operators that have operations in the Northeast. If we can come back a little bit very quickly, it’s of course the security situation, the lines of communication, the foreign interference … Everyone knows about it. So Katanga is an area that, on the contrary, can accommodate a certain number of investments that are bankable to international standards. So we at Lugamines, to answer your question, more specifically, we want to be a primary investor, that is to say that we realized that, since I started my activity in Congo 10 years ago, that between the artisanal mining that continues in many areas and the huge mining operations of KCC, Mutanda and others… Finally there are very few operators. 

So we are at a bit of a crossroads where we do exports where we don’t take care of exploration as such, but we identify areas, either with an exploration that was done by others, or ourselves. And then, we are able to plan the entire value chain; that few people do. That is to say that there are people who are only interested in resources, and other people are only interested in taking commissions etc. We are able to plan the entire value chain up to the export plan. And it allows us to sell investment opportunities on terms that are acceptable to foreign investors.

In particular, we were pioneers on embankments. Quite simply the embankments it is when for example Gécamines exploited quarries itself; it proceeded to the constitution of embankments of several hundred million tons which was deemed poor. But in fact, current technology makes it possible to treat the metals that are contained in these fills; so it was a way to promote pretty much all of the metals that were available. Now it’s a bit over since the embankments have been largely exploited and therefore a little more difficult. We, in conclusion of the question, are rather at the crossroads of large investments. That is to say that once we have validated the value chain, then we can make investment proposals so as to develop in collaboration with large international mining operators. What interests us is the long-term vision, not very interested in doing one of the projects as some do … Dan Gertler for example, without trying to judge whether or not this approach is appropriate…

Arthur Katalayi: Also, according to the London firm specializing in mining intelligence, CRU group, the global copper industry must invest more than $100 billion over the next 10 years to fill the annual deficit of 4, 7 million tons of copper. In view of global demand and the energy transition, the demand for cobalt is also just as strong. Afterwards, it must be said that these are the opportunities that will necessarily increase tenfold over the next few years, since demand will quadruple, according to certain estimates. What is needed as a condition for Lugamines and other players in the sector to continue to explore, secure and start other large-scale projects, mining projects in the DRC?

Charles Mesnil: The prerequisite that you made is a perfectly fair presentation, that is to say that there is a transition that is in the process of being put in place. And so, just to follow up on this preliminarily quickly, there is indeed a copper boom and it’s very interesting to see that when certain commodities have collapsed before recovering, and in particular in recent periods… Finally, copper remained at a very good level despite the drop in activity in China in connection with Covid19. It’s held up and it’s very interesting to see. Speaking of copper, it is the main resource. There’s also cobalt that’s used, people probably don’t know that, it’s basically used to stabilize batteries. That is to say to avoid the phenomena that everyone knows about spontaneous combustion, battery explosion etc.

But of course there is lithium; it is I would say the new frontier, as far as mining in the DRC is concerned. Chile has to be the second of the world’s reserves after Australia, it seems to me anyway. Australia is by far the world’s number one producer of lithium. The Manono area in Congo, north of Katanga, is an area that is on the way to becoming the new California from this point of view, so of course we have to build roads and so on. But there are huge potentials. So that’s a preliminary remark. To add a little word, you should never base a business plan on the last observed commodity prices because you have enormous volatility. Earlier you mentioned cobalt, I saw cobalt at $90,000 per ton, it has stabilized more or less at $35,000, but there are operators who have made their business plan based on that, we can mention Schemaf; it seems to me that it is not a big secret. This of course causes small problems in terms of funding, but then it went very well for them, there is no problem, but you have to keep that in mind.

And then if I can make a little anecdote for your subscribers, the interesting thing is that me, as a Westerner, I’m based in Switzerland, as a Westerner operating on the ground in Congo, the hype aspect of some metals I observe it directly on WhatsApp. Because when the demand is high, I have videos of people saying to me: “I have lithium, so come and buy me the lithium…” And right now, when gold passes $2000, once about every week I have videos of people saying to me, “I have 2, 3 kilos of gold, do you want to buy them?

Well, of course, it doesn’t work that way; at least not for us. 

But, it’s fun to see the hype… By the way, as we just talked about gold, right now, of course, it’s a big trend. You asked what the conditions were? The first is physical security. There is also an essential point; it is legal certainty; that is to say that the contracts and concessions signed must be completely secure. Let’s not go back below. And it should be noted that there have been several transitions of presidency in recent decades, whether between President Mobutu, Mzee Kabila and his son, and now His Excellency Mr. Félix Tshisekedi. Contracts have never been canceled suddenly at the time of change of power; it’s something that I spend my time explaining to international investors. Afterwards, of course, there are difficulties that cause a bit of bad publicity.

Of course everyone has heard of the conflict raging between Gécamines and the big Chinese operators at the moment. When the Chinese bought the shares of Gécamines to remain alone in the projects, they were accused of having undervalued the reserves. And so that’s why we come back after several years saying “we’re going to need 1, 2, 3, 7 billion dollars to compensate for that…” And that of course is very bad for everyone.

But I would also like to point out that the contracts that are called into question are not the prerogative of the DRC. You know, President Macron who recently came to Kinshasa, his predecessor I believe, who had signed major submarine contracts in Australia, one day he was told “it’s over”. So it’s not the prerogative of the Congo, but all the same, it’s really crucial this legal certainty in my opinion.

A third aspect is the reputational risk, so here too we have to educate international investors. Tell them “no, it’s not that serious, you have to take…” Everyone believes that guerrillas are everywhere, that child labor is everywhere, that corruption is everywhere, etc. These are all caricatures. Personally, I have never seen children working in cobalt mines in Katanga. But if you ask Western journalists whether he is at the FT or The Economist or elsewhere, for them, if you talk to them about Congolese cobalt, they have the image of children digging. It’s not like that. So that too is a condition in my view. Me, I fight at my level when I make investment proposals; but the reputational risk is there.

A fourth point very quickly is that of course, we have to monitor the infrastructures, the communication channels. That’s the attractiveness of Katanga, there are good roads, but it is necessary to do maintenance on the roads. We must develop the railways, there is one. It is necessary to monitor a little bit all the constraints at the level of tolls, untimely barriers when you go to a mining site. All these are elements that block the business a little bit on a daily basis.These, of course, are efforts on which we can work. We talked about the Manono road, in the rainy season it is two days with a twelve-hour jump from Lubumbashi.

I want to mention one last point, and that the Congolese who know will smile gently, do you know how many services there are working at the border in Kasumbalesa, that are at the level of export and import ? So I did not count. But there is an implausible accumulation of service; so there is the DGDA, customs, there is the Congolese control office OCC, so as far as the quality of the products is concerned coming in and going out, there is the DGM to check who is coming in, who is going out, the truck drivers, etc. There was the quarantine at the level of the Covid for hygiene; there are the services of the sovereign State, the ANR, which is also present. There is the mining division which asks for its contribution for the transport of minerals. DEKAT is yet another state service. So there is an accumulation of state services which each require their own fees, at their own expense I would say…

Arthur Katalayi: Wouldn’t it be ideal to centralize all that or try to centralize as much as possible?

Charles Mesnil: So that is indeed ideal. This is absolutely the obvious solution. But we must also recognize that the Congolese have a certain pragmatism.

That is to say that all these state services are so accustomed to dealing with them that basically it happens on the model of a one-stop shop. But don’t underestimate the fact that if there’s the slightest problem with just one of these services, your truck is stuck. And you can’t change that.

Arthur Katalayi: The mining industry aims to be carbon neutral before 2050. Is this achievable given current trends, and is it a priority?

Charles Mesnil: So, I can say my true opinion on this. Personally, I have big doubts about this story of carbon neutrality even in the Western world. Just a small example, the European parliament as one man had voted for the end of thermal engines on vehicles by 2035, Germany has just reversed course. So, personally, if I see Germany backtracking, I can’t see the Congo rushing into something that seems quite dogmatic to me and then afterwards, for carbon neutrality, we have to observe things as they are today. I don’t want to go too far on this because maybe we can come back to it a bit later.

But I’m not a real energy specialist and to be honest with you, I see that practically only a large part of the energy that is consumed in Katanga, especially in the slightly mining areas that are not connected to the Grid, is all that is on fuel. So if you ask me the obvious condition, it seems to me that it is the development of the Inga dam on the Congo River. The last time I was interested in the question, there were still a number of turbines of the old Inga dam which were broken down, no longer operational. There is the big Inga dam, like at the moment. There, we also have it; it is a sine qua non. And then the rehabilitation of the network itself, that is to say the distribution, the power lines etc.

But one thing must still be said, and that is that once again, in the Congo, people are lucky to have one of the most powerful rivers in the world, which can provide them with electricity that irrigates the whole region and not just the Congo.

Arthur Katalayi: To continue on this energy issue, energy prices have reached record levels in recent months, also a consequence of geopolitics. And it looks like there won’t be a significant drop in the future. And the energy deficit has its limits in the DRC, sometimes the ability to launch new large-scale projects. Do you have any idea on how to fix this? Even if you have already given part of the answer.

Charles Mesnil: So absolutely. Well, once again, we are getting out of my area of expertise a little bit. But let’s say I have an end-user approach to the matter. All I see is that, indeed, the energy that is consumed in Katanga, especially in transport, but also for electricity. It is essentially the fuel, it is the diesel etc. And it is enough to observe the number not only of trucks, tanker trucks which transit, for what is observable… But everywhere the people, all the administrations, the airport of course, all these areas are powered by emergency generators. Because of course some of these services cannot fall into a decanter to say it like that. Because SNEL is out of stock and unfortunately it happens a lot. Now I would still like to make a clarification; I have South African friends who come to Kinshasa or Lubumbashi who tell me: “Now, we in Johannesburg, we have power cuts from 10 to 12 hours a day …” And in Congo, at the moment, we are 4 hours away. So there’s still something quite ironic about that, isn’t there?

Arthur Katalayi: Quickly on offer, we were talking earlier about Qatar and Saudi Arabia, it’s true that in Congo, we still don’t want a monopoly, but a lot of mines are in operation with Chinese ownership, total or partial.

What do you think of the diversification of foreign investors and operators for the Congolese economy? It is something that would do the country good. Or else we must continue on the current path and then simply not diversify into the pool of operators.

Charles Mesnil: So, I think that here we quickly come across geostrategic aspects because the war in Ukraine polarized the world in a fairly obvious way between a Western bloc and an alternative bloc. So, a reverse globalization is led by the BRICS, behind China, behind Russia, and even very big powers such as India. And we finally find ourselves in a configuration where the world is separated.

The position of the Congo, for me, of course, I cannot judge it. And it’s very difficult to say who the Congo should turn to, but of course as an independent country that is looking for its own path. Willingly, the Congo must seek partners with all the countries that have been mentioned. I think India in particular, and it’s a very independent partner which is natural. Saudi Arabia is totally extraordinary, we would never have thought to see this, but Saudi Arabia is breaking away from the American bloc. Saudi Arabia can play its game and cooperate with the Congo.

Of course, I am not talking about China, which is extremely present in the Congo. It’s been for years, it’s like a love story, and there are ups and downs. But I believe that they are there and I think that the thing that appeals to me the most in what you say is to see the absence of the historical European countries that were present in Africa before. I’m talking about Belgium for you Congolese, but France, the United Kingdom and the United States I see very little presence of these countries in mining.

Arthur Katalayi: And what do you think is due to?

Charles Mesnil: So I think there are a lot of reasons. One of the reasons that is obvious was that there was a lack of interest in the mining sector and it was the “daddy” economy, nobody is interested, you know, “we Americans, we are a lot smarter, we’re doing high-tech services, we’ve done artificial intelligence, we’re not going to start looking for manganese, … It’s too low! »

So there is still a trendy aspect that should not be underestimated. And I’ll give you an example, you know that in the United States 20% of the American GDP, is related to legal fees? You have to realize that, i.e. its service, lawyer’s fees, legal expertise, its compensation payments, etc.

So what is the end value in people’s wealth? I tend to say it’s selling wind at the end, but that’s my opinion. And so all that is something that has heavily impacted the whole mentality of generations of students who would have felt dishonored to dive into mining and, that’s why I didn’t see them. Canadians and Australians are a little different because they have mines on their soil and so they are used to that, it’s part of their culture. But for the others, I don’t see any Germans here, I don’t see any French people, I don’t see any Belgian and it’s very interesting to see. And you know what’s more damaging? It’s because here too, you have to talk to the old people and those who are in the field. They tell you “you know? there is great wealth here on the farm, on the farm which is located here, around Kolwezi, the Belgians had they had a farm… I’m sure there was gold and rubies. Well then you ask and then there they tell you “… No but in fact, in Belgium, there is indeed a library where…” but I’ve never been, so I’m not going to go too far…There, the Belgians had made an extremely precise map of the mining resources in the Congo in general and in Katanga in particular, and you can go there, you cannot take photos and you cannot make copies. So that’s it, but all that to say that they have the resources and the knowledge of the field. But there is not a single Belgian mine here, it’s strange.

Arthur Katalayi: We’re going to switch to the last question, the show is called The Right Advice. Throughout your background and your expertise in mining and international finance, what advice(s) would you give to future operators in the sector wishing to seize opportunities in the mining industry over the coming decades?

Charles Mesnil: So I tend to give general advice. Because of course it is not a question here of saying about such an area, be careful, it is sulfide copper, and you will need such a machine …

Arthur Katalayi: Because it’s not an easy industry to access, the Congolese mining industry, that is also something that should be mentioned.

Charles Mesnil: So absolutely. And then of course, you have extremely different investment details depending on your production plan depending on the metal you process, etc. There are a number of people who are very rich around Bukavu or Goma and they don’t have the first machine and yet they export coltan, without any investment, but it happens that if you go and visit the Mutanda mine on the outskirts of Kolwezi, the value of the investments is in the hundreds of millions of dollars. So there really is the whole spectrum. I prefer to focus on somewhat general advice, so I would say learn patience, listening, respect for people and the local culture. 

Otherwise, of course, if one arrives with Western mentality patterns, etc. We lose patience quickly, we get angry for a lot of things. A second advice that I could give, there too, it’s a temptation it’s not to skip the stages. That is to say, you will always have the temptation to cut corners, to tell yourself “I am going in circles and…” Quite simply to pay for a quick stamp on a document. So I strongly advise against it, because you will certainly save time, but you are totally at the mercy of the person who gave you a stamp. If that person changes his position, his successor will come to look at the paper and say, “What is that? “ And then your permits may be cancelled, it’s as simple as that. So you have to do things right, it doesn’t stop you from being nice to people. I even think it’s recommendable. And then things take their course, and it can go well.

I will go between one last tip while it is a little bit related to the previous amount. It is that, of course, we are not going to hide our face, and we are not going to hide behind our little finger, of course there is corruption in Congo. I don’t think I’m learning it. There is corruption everywhere, there is in the Congo. That does not prevent us, we, Western investors, Western operators, me personally, I have a partnership with a Congolese partner and friend who is the majority owner in the company. But above all, you have to remain faithful to the ethics and the business approach that we have in the West. We must not believe that it is because we arrived in the Congo that it is the Far West. So you’ll always have someone saying to you, “Listen, for you, his age, I’ll put a team of five villagers for you who will dig you up to twenty meters…” Fine. And if the hole collapses, that’s 5 dead. Me it’s not something that I do and then you have to be careful. Anything that can impact you as a Westerner…your ESG Scorecard. So, your responsibility, the environment, all that, is analyzed by Western Stock Exchanges, by analysts, by activist funds, by Blackrock today; Blackrock does not invest in your mining operation, if your ESG Scorecard is not good. So it all depends on where you want to go. I say don’t be cowboys. And then, there is still an example, I will not give names, but people find it on the Internet. Quickly, there is nevertheless a great Franco-Swiss leader who went to Abidjan to sell a project that had a major pollution issues which led to many deaths, and incredible damage and he found himself a month in prison. In Abidjan, that story is starting to date a bit. But it is quite well known and that is what awaits people who think that we can do absolutely anything on the pretext that the state has a presence, say, less involved than in the US or in German; What!

That’s it, it’s a little bit of the 3 tips I would have, general advice, which I strongly recommend to listen to here!

Arthur Katalayi: In any case, they are very valuable. Thank you very much Mr. Mesnil for having received us in your offices.

Charles Mesnil: With pleasure. Thank you very much, it was my pleasure.