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PRINT EDITION
Glencore's risky dealings could backfire
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U.S. Justice Department subpoena could lead to investigation of miner and its relationship with a blacklisted billionaire
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By ERIC REGULY
  
  

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Friday, July 6, 2018 – Page B4

ROME -- Glencore took a balanced approach on its way to becoming the world's biggest commodities trader and one of the top mining houses. It dealt with the sinners as well as the saints.

Sinners are everywhere in the mining industry, of course, and are all but unavoidable if you want to get deals done in regulatory-lite zones, notably Africa, which is blessed with endless resources - cobalt, copper, diamonds, oil - waiting to be tapped.

Glencore took big risks in Africa, one of which appears to have been its association with Dan Gertler, 44, the Israeli billionaire and commodities tycoon who has worked the mining game in Democratic Republic of the Congo for about 20 years, to great success.

But his mining deals were always viewed with suspicion by the International Monetary Fund, the World Bank and various anti-corruption groups such as Global Witness, which called him "a gatekeeper to Congo's riches."

In December, the U.S. government added Mr. Gertler to its blacklist. He and 19 companies linked to him were sanctioned by the Treasury Department for their allegedly "opaque and corrupt mining and oil deals" that supposedly were arranged through Mr. Gertler's friendship with Congolese President Joseph Kabila.

This week, it was Glencore's turn to step into the American legal dragnet. On Tuesday, Glencore revealed that the U.S. Department of Justice had hit the company with a subpoena to produce documents regarding its compliance with the Foreign Corrupt Practices Act and U.S. money-laundering statutes. The subpoena covers documents related to Glencore's businesses in Congo, Nigeria and Venezuela.

That day, Glencore's shares fell by as much as 12 per cent, erasing about US$5-billion of market value from the company (they recovered some of their ground later in the week, after Glencore - surprise! - announced a US$1-billion share-buyback program).

Clearly, investors were spooked by the subpoena, which could lead to a highly damaging investigation. Already, questions are being asked about the longevity, or lack thereof, of Glencore chief executive Ivan Glasenberg should the Justice Department probe turn ugly. Mr. Glasenberg is the famously savvy, impeccably wellconnected and aggressive South African trader who built a global commodities empire whose holdings include Canadian grain handler Viterra and mining company Falconbridge.

Analysts remain largely bullish on Glencore shares. Their theory is that, subpoena aside, Glencore is in fundamentally good financial shape and that the Justice Department is merely asking for documents at this stage; as far as anyone knows, there is no formal criminal investigation. In a Tuesday note, Credit Suisse said "while [the subpoena is] clearly a risk factor, we stress that these types of requests are more common than perhaps the aggressive drop in the share price today suggests."

Possibly, but there is no telling where the probe will go and the subpoena carried an ominous hint of its potential reach. Note the subpoena requests documents related to Nigeria and Venezuela, where Glencore has only oil-trading operations. So the probe covers both halves of the company - mining (in Congo) and trading.

Glencore declined to comment on the case and would not say whether the name "Dan Gertler" appears in the subpoena, but it's safe to assume his relationship with Glencore is of high interest to the Justice Department. Glencore has been making hefty payments to Mr. Gertler even though he is on the U.S. sanctions list. The question, and it's a big one, is whether Glencore thought those payments would pass muster at the Office of Foreign Assets Control (OFAC), the U.S. Treasury department responsible for enforcing economic sanctions, or whether it was being reckless in making those payments.

First, some background.

Glencore is a big name in Congo, which is home to about 60 per cent of the global supply of cobalt, a vital element in the production of rechargeable batteries.

Glencore dipped into Congo in 2007 by picking up a minority stake in a copper company in Katanga, the country's southernmost province, called Mutanda Mining. Glencore also bought a stake in a small, London-listed miner called Nikanor, of which Mr. Gertler was a shareholder. Nikanor would merge in 2008 with Toronto-listed Katanga Mining.

Mr. Gertler was also a shareholder in Katanga, which is now 85-percent owned by Glencore.

In 2016, Glencore took the view that its partnership with Mr. Gertler was overly risky and bought him out of Mutanda and Katanga early the next year. But their relationship didn't end, because, under previous contracts that Mr. Gertler had made with state-owned mining company Gécamines, he was owed a lucrative stream of royalty payments from the cobalt and copper operations that had come under Glencore's control.

Glencore duly paid them, in dollars, but ripped up the cheques when Mr. Gertler landed on the U.S. sanctions list last December.

Enraged, Mr. Gertler sued Glencore for US$3-billion. Glencore eventually settled for fear of losing control of the cobalt mines to Mr. Gertler, who probably would have sold them to the higher bidder - the Chinese. That scenario would have given China control of the global supply of cobalt, a mineral U.S. President Donald Trump has declared "critical" (Chinese firms, and Vancouver's Ivanhoe Mines, are already entrenched in the Congolese cobalt industry).

Glencore resumed making the royalty payments to Mr. Gertler, this time in euros, so it would not run afoul of the U.S. sanctions.

Here's where Glencore may have made a mistake. The company said it had consulted the appropriate U.S. and Swiss government agencies - Glencore is based in Switzerland - about the payments in euros. But whether OFAC specifically gave Glencore the green light is not known. Instead, it may have given indeterminate advice, if any at all, leaving Glencore with a risky decision to make. Did the lack of a specific "No" from OFAC mean the payments to Mr. Gertler were okay?

It is not known whether the Justice Department or OFAC has decided the payments to Mr. Gertler in euros were in breach of the sanctions. The subpoena may relate to different matters entirely.

What is known is that Glencore has a penchant for taking big risks in risky parts of the world. Mr. Glasenberg was forced to resign from the board of Russian aluminum producer Rusal, controlled by oligarch Oleg Deripaska, after it, too, was put on the U.S. sanctions list.

Britain's Serious Fraud Office may be investigating Glencore's relationship with Mr. Gertler (the SFO doesn't comment on possible investigations). The Ontario Securities Commission investigated Katanga's financial reporting controls, which were found to be weak and resulted in three Glencore executives leaving the Katanga board.

Glencore's association with Mr. Gertler has already been damaging. The subpoena takes the company into the great unknown. Investors have every reason to be nervous.


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