Document of

The World Bank

FOR OFFICIAL USE ONLY

04 4j. SS 2 2

Report Ne. 5842-ZR

STAFF APPRAISAL REPORT

ZAIRE

GECAMINES REHABILITATION PROJECT

March 27, 1986

Industry Department

This document has a restricted distribution and may be used by recipients only in the perfonnance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ZAIRE

GECAMINES REHABILITATION PROJECT

FISCAL YEAR

January 1 - December 31

CURRENCY EQUIVALENTS

Currency Unit = Zaire (Z)Z i = US$0.02US$1.00 = Z 55 (February 1986)

WEIGHTS AND MEASURES

Metric System British/US System1 meter 3.281 feet (ft)1 kilometer 0.622 miles (mi)1 kilogram (kg) 2.205 poundsI metric tor.ne (t) 1.1 short ton (st)

PRINCIPAL ABBREVIATIONS AND ACRONYMS

CCCE - Caisse Centrale de Cooperation EconomiqueCPE - Countries with Centrally Planned EconomiesEEC - European Economic CommunityEIB - European Investment BankGECAMINES - La Generale des Carrieres et des MinesGECAMINES/Holding - Holding CompanyGECAMINES/Exploitation - Metals Production (The Company)GECAMINES/Commerciale - Metals MarketingGECAMINES/Developpement - Other ActivitiesGOZ - Government of ZaireLAFB - Libyan Arab Foreign BankMIBA - Societe Miniare de BakwangaSGM - Societe Generale des MineraisSMK - Societe Miniere de KisengeSMTF - Societe Miniare de Tenke-FungurumeSNCZ - Societe Nationale des Chemins de Fer ZairoisSODIMIZA - Societe de Developpement Industriel et Minier

du ZaireSOMINKI - Societe Miniere et Industrielle du KivuSOI ATRAD - Socjit6 Nationale de TradingSOZACOM - Societe Zairoise de Commercialisation

des NineraisSYSMIN - EEC's Minerals System Facility of ACP Mineral

ProducersUMHK - Union Miniere du Haut KatangaUNTZA - Union Nationale des Travailleurs Zairois

FOR OmCAL USE ONLY

ZAIRE-GECAMINES REHABILITATION PROJECTSTAFF APPRAISAL REPORT

Table of Contents

Page No.

I. INTRODUCTION .......................... 1

II. THE ZAIRIAN MINING SECTOR ................................ 1

A. Role of the Mining Sector in the Economy .................0 1B. Mineral Resources and Reserves........................... 3C. Structure of the Sector..................... ........ .6... 4

III. THE METALS MARKETS., .................... 8

A. The Copper Market .................... 81. International Supply and Demand.... ............... 82. Copper Prices..,,,,,,,,,,,,,,,,, ... .,,,,.., 10

B. The Cobalt Market ........................................ 111. International Supply and Demand,..,,,,,,,,,s..,.., 112. Cobalt Prices............ 12

IV. THE GECAMINES GROUP. .......................... , , ,,, , ,,13

A. Gecamines/Exploitation.........,,.........,,,,,,, 141. Organization and Management...,,,,, ..... ,.,,.... 142. Mining and Processing Facilities ............. ,... 153. Manpower and r-aining................................ 174. Past Performance.... ............................. .. 195. Production Costs ................... 216. Past Financial Results............................... 25

B. Gecamines/Commerciale. ... ................................ 291. Background and Organization...... ................. 292, Activities and Sales . ........ 303. Sales Strategy............. 314. Transportation Routes. .... ........................e, 32

C. Societe Nationale de Trading ............................. 34D. Rehabilitation Program. o gr.,, ..... 35

This report has been prepared by Messrs. P. Lietard, S. von Klaudy, andMesdames M. Kutcher and M. Garrity of the Industry Department, Mr. C.Tran-Luu of the Eastern and Southern Africa Projects Department, and Mr.R. Rodger (Consultant). Preparation of the text and word processing wasdone by Ms. Nga Nguyen.

This document has a rered distribution and may be used by recipients only in the performance|of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorintion.

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Page No.

Ve THE ....................................... ... 37

A. Gecamines' Long-Term Strategy......... ... eeeec......... 37B. Objectives of the Rehabilitation Project..... ,,, cecse..e 39C. Project Description.....e..ses....e...eseeee.c.. 40

1. Mining and Plant Replacement and RehabilitationComponent sm 40

2 , Training Component..e .. ... 413. Pre-investment and Technical Studies 000 g0 cc..sses60090,,. 42

D. Project Implementation and Schedulee,,,o..e,,,, ,e,,.,,,... 42E. Safety and Environmental Aspects , , ., 43

VI. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT 44

A. Capital Costs. , e c. , .. c.. , ,, 44B. Financing Planc.......... ..c..s. . 46C. Procurement .. . . .e.. ...... 47D. Allocation and Disbursement of IBRD*.,,.,,,,.,.,eeo .... 48

VII. FINANCIAL ANALYSIS . .............e... . . .... e , 49

A. Revenues....... 49Be Operating Costs.. ... ee 50C. Financial Projections ......... cc...... c. 51Do Breakeven Analysis .......e .e.ssc.. c .... .. c 53E. Sensitivity Analysiseo ... .eecc..e.c ,,, .....c ,.,e.. 53Fe Financial Covenants .. .. scs........c... .s 54G. Auditing and Reporting Requirements ,, 55H. Financial Rate of Return and Sensitivity Tests................ 55I. Major Risks .. es.... ss..... ce.ec.............cmsc...........s 56

VIII. ECONOMIC ANALYSIS 57

A. Economic Rate of Return .....eecc,. 58B. Foreign Exchange Benefits ................ ........... c, m s 58C. Other Benefits .... e......scscms 58

IX. AGREEMENTS REACHED AND RECOMMENDATIONSS...... ... s.eo..oos 59

TABLES

Zaire - Mineral Production, 19 758 4; ...... ... .... m, 2

Gecamines - Geological Ore Reserveso..c .eo...c.c.o..scsec.cs.sem..... 4LME Copper Prices, l3 8 Sc.ec.. ... . .s , 10Gecamines - Local and Expatriate Work Force, 1974784gcseem4e..cc"c 17Gecamines - Ore Stockpiles, 1974-84. .......- 8. cc.55.. 4 .gm... e 20Gecamines - Cost Structure, 1979-84. .........00eece. e.g..... ........,.. 23Gecamines - Tax Payments, 1 4m4... 25Gecamines - Shares in Metal Revenues, 1978-1984 ......................... . 26Gecamines - Summary of Financial Performance 1978-1984c.ss.scc.eeem 27

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TABLES (Continued)

Zaire - Mineral Exports via Various Routes, 1978-84............... 33Comparison of Gecamines' Copper Export Routes, 1984............... 33Synopsis of Key Policy Elements in Gecamines Rehabilitation Program 36Summary of Capital Cost Estimates................................. 45Financing Pa ................................. 46Allocation and Disbursement of IBRD Loan.......................... 48International Inflation, 1986-95 ... o..... 49Gecamines - Metals Sales, 1985-90................................. 50Price Assumptions, 1985-95. .......... ..... *.*..................... 50Gecamines - Summary of Financial Performance, 1985-91............. 52Gecamines - Breakeven Prices for Copper, 1986-90.................4 53Gecamines - Sensitivity Case Key Indicators....................... 54Switching Values of Critical Variables............................ 56

ANNEXES

2-1 Non-Copper Mining Activities3-1 The Zinc Market4-1 Gecamines/Exploitation Organization Chart4-2 Gecamines General Process Flow Sheet4-3 Gecamines/Exploitation Manpower and Training4-4 Gecamines Accident Statistics, 1975-844-5 Gecamines Production Statistics, 1974-844-6 Gecamines Audited Income Statements4-7 Gecamines Audited Balance Sheets4-8 Gecamir.s Copper and Cobalt Sales, 1981-844-9 SOZACOM Audited Income Statements4-10 SOZACOM Audited Balance Sheets5-1 Implementation Schedule6-1 Project Cost Estimates6-2 Analysis of IBED Financing6-3 Disbursement Schedule for Bank Loan7-1 Assumptions for Financial Projections7-2 Gecamines/Exploitation Projected Income Statement7-3 Gecamines/Exploitation Projected Funds Flow7-4 Gecamines/Exploitation Projected Balance Sheet7-5 Cash Flows for Financial Rate of Return8-1 Cash Flows for Economic Rate of Return8-2 Foreign Exchange Effect

MAPS

IBRD 19111 (Zaire-Gecamines Rehabilitation Project)IBRD 19112 (Zaire-Transport Connections)

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DOCUMENTS AVAILABLE IN T'HE PROJECT FILE

A. GECAMINES INVESTMENT PROGRAM

1. Audit Technique Programme Quinquennal d'Investissement (1984-1988)Nines/Roche; June 1985.

2. Programme Quinquennal d'Investissements (1984-1988); Gecamines;Dept. de la Planification et Gestion des Programmes; May 1984.

3. Description Geneerale des Budgets d'Investissements (1983-1988);Gecamines April 1985.

4. Budget Quinquennal d'Investissement (1984-1988). Dossier deSynthase; Gecamines, June 1984.

5. Programme Quinquennal (1984-1988); Financement des Investissements;Gecamines; mars 1985.

6. Budget Quinquennal d'Investissement (1984-1988); Hypothese 1-750;Gecamines; juin 1984.

7. Etude de Pre-Faisabilite du Raffinage du Cuivre Blister des Usinesde Lubumbashi; Dept. Planification et Gestion des Programmes;Gecamines; janvier 1985.

8. Programme Quinquennal d'Investissement (1984-1988); La necessited'investir 748 million dollars pour que l'entreprise poursuzivre sesactivites normales. Gecamines; 26 octobre 1984.

B. GECAMINES INSTALLATIONS

1. Mine de Kipushi; Inauguration Complexe Concassage - Extract-onPuits V, 1150. Gecamines; August 1983.

2. Gecamines; Description des Installations de la Gecamines; November11, 1982; Ref.: 32.563/PRD.

3. Description des Installations de la Gecamines; Mai 1983; Dept.Planification et Gestion des Programmes; No. 780/PGP.

C. GECAMINES FINANCIAL INFORMATION

1. Nouveau Regime Fiscal - a M. le President-Delegue General de laGecamines; Lubumbashi; 5 novembre 1983.

2. Note a DFI/DIR; Memorandum Sur L'Evolution des Frais Generaux etdes Cofuts Operatoires (Periode 1974-1983); Lubumbashi; le 11juillet 1984.

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D. MARKETING (SOZACOM, GECAMINES/COMMERICALE)

1. Protocole d'Accord, Kinsasha, le 15 novembre 1984.

2. Convention de Commercialisation des Produits Miniers de laGecamines; La Generale des CarriAres et des Mines; Lubumbashi, le 6aofit 1982.

3. Sozacom - Rapport Annuel, 1982; Societe Zairoise deCommercialisation des Minerais (3).

4. Etats Financiers au 31-12-84; Gecamines Commerciale.

5. Societe Zairoise de Commercialisation des Minerais - SOZACOM;Enterprise Publique-Kinsasha; Etats Financiers au 30 juin 1984;Price Waterhouse.

E. MANPOWER DEVELOPMENT

1. Gecamines - Exploitation; Centre de Formation des Cadres et Agentsde Maitrise; Planning des Sessions de Formation; 1985.

2. Gecamines - Exploitation; Formation a la Securite du Travaill Pourla Maitrise.

3. Rapport Annuel - 1984; La GCnirale des Carriares et des MinesExploitation, Centre de Formation des Cadres et Agents de Maitrise;Kolwezi; le 21-03-85.

I. INTRODUCTION

1.01 The Government of the Republic of Zaire and Gecamines (La GEnerale desCarriares et des Mines) have requested Bank Group financing of US$110 millionequivalent to finance part of the foreign exchange cost of a US$703 millionmedium-term program to rehabilitate Gecamines' facilities and to rationalize itsoperations. This rehabilitation program is crucial to maintain Gecamines'competitiveness on the world market and to ensure its future financialviability. It is also vital for a stable development of the Zairian economy,since the mining industry accounts for over 20% of Zaire's GDP and around 65% ofits foreign exchange earnings, and is Zaire's major modern sector employer. Assuch, the Government is dependent on metals revenues to finance its investmentprograms, to develop other sectors of the economy and to diversify the country'seconomic base. The proposed loan would be the third financing extended by theBank Group to Gecamines.1 /

1.02 The proposed Project addresses the technical, management and humanresource problems which, in conjunction with recent depressed copper and cobaltprices, have undermined the technical efficiency and the financial position ofthe Company. The Project is comprised of three components: (i) a replacementand rehabilitation program for equipment and spares to rehabilitate Gecamines'existing mine and plant facilities; (ii) a training program to upgrade skills ofthe local technical and supervisory personnel; and (iii) technical studiesincluding those for preparation of investments after the Project period.

1.03 The Project was identified and prepared during imnlementation of theGecamines technical assistance project starting in 1984. It was appraised inMay 1985 by a mission consisting of Messrs. P. Lietard and S. von Klaudy of theIndustry Department and Messrs. R. Rodger, M. Allard, P. Boudreault, and L.Imbeau (consultants,. The training component was appraised in July 1985 by Mr.C. Tran-Luu, of the Eastern and Southern Africa Projects Department. Contactwas also maintained during the appraisal process with representatives of thepotential cofinanciers.

II. THE ZAIRIMA MINING SECTOR

A. Role of the Mining Sector in the Economy

2.01 Mining is a key sector of Zaire's economy. Between 1981 and 1984,mining activities accounted for about 20% of the country's GDP, and contributedan average US$1.2 billion per year, or 65% of merchandise export earnings withcrude oil and agricultural exports accounting for most of the remainder.Moreover, the sector plays an important role in generating government budgetrevenues with an average share of over 25% in the past de.ade, of whichGecamines accounted for 20%. The sector also contributes substantially toindustrial employment, energy and _.ransportation demand and provides numeroussocial services and training. Zaire is the world's leading producer of

1/ In 1975 the Bank approved a loan of US$100 million for theGecamines Expansion Project (Loan 1090-ZR, of March 8, 1975 amendedNovember 16, 1979) and in 1983 approved a credit of US$7 million forthe Gecamines Technical Assistance Project (Credit 1336-ZR, of October26, 1983).

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industrial diamonds and cobalt; the fifth largest producer of copper; and asignificant producer of tin, zinc, and gem diamonds. However, Zaire's miningactivities and potential extend far beyond these principal products, and otherminerals currently mined include gold, tungsten, manganese, silver, cadmium,columbium-tantalum, and lignite.

2.02 Zaire's mineral production has shown substantial fluctuations over thepast decade as shown in the following table.

Zaire - Mineral Productin, 1975-84

Cqpwx Cdblt Zinr Cahbm Silver Cold Cassiterite Ore Dianonds(tomes) (tones) (mln carts)

1975 496 13.6 65.6 0.3 71.3 3.2 6.4 308.5 12.81976 444 10.7 60.6 0.3 60.7 2.8 5.3 182.2 11.81977 48D 10.2 51.0 0.2 85.0 2.5 5.1 41.0 11.21978 424 13.1 43.5 0.2 89.1 2.4 4.4 - 11.21979 399 14.0 43.7 0.2 91.9 2.3 3.5 - 8.8198D 459 14.5 43.8 0.2 78.8 1.3 3.2 6.6 10.21981 505 11.2 57.6 0.2 83.3 2.0 3.3 17.6 6.81982 503 5.6 64.4 0.3 54.5 2.0 3.2 - 6.11983 509 5.3 62.5 0.3 31.9 5.2 2.5 - 12.21984 501 9.1 66.1 0.3 48.0 3.3 3.2 - 18.5

The state-owned group, Gecamines, produces more than 90% of the copper, all ofZaire's cobalt, zinc, and cadmium production as well as small quantities ofgold, and silver. The remainder of the copper production comes from one othercompany which is producing about 35,000 tonnes per year.

2.03 The important fluctuations of copper production reflect variousfactors which in the past have affected Gecamines' performance, most importantlythe 1978 invasion of Shaba province which resulted in major disturbance ofoperations of its main copper production center at Kolwezi. Gecamines'performance over time is reviewed in more detail in Chapter IV. The fluctuationof cobalt production reflects largely the ups and downs of the internationalcobalt market, including the impact of Zaire's own marketing policy since itcontributes about half of world production. Production of zinc has remainedstable while that of silver decreased largely as a result of the decliningsilver content of ores mined by Gecamines. Gold and diamond production has beensubject to wide fluctuations due to the Government's unclear policies towardssmall scale mining and marketing, and to supply and logistical difficulties ofthe two main producing companies. Since ]983, however, following a completeliberalization of trade and introduction of a floating exchange rate, recordedgold and diamond production has surged to considerably higher levels. Thedecline in cassiterite production has been due to a lack of investment whilemanganese ore production was stopped after the closure of the Benguela railway,the only economic export route.

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2.04 The mining sector, and particularly Gecamines, has been the majorfactor in Zaire's recovery following the period of civil unrest and economicdecline between independence (1960) and 1965. The sector was also at the originof the economic boom in the late 1960s and early 1970s, when copper and cobaltprices soared and generated substantial foreign exchange revenues which in turnhelped other sectors, particularly agriculture, to improve their performance andcontribute their share to economic recovery. During the period 1968-73 themining sector grew by 7.5% per annum (p.a.) compared to a GDP growth of 7.1%p.a. The sudden and drastic decline of the copper and cobalt markets in 1975,the ill-conceived Zairianization and nationalization of many transport,agricultural, manufacturing, and trade enterprises, and the closure of theBenguela railway caused a rapid deterioration of Zaire's economic situationleading into an economic crisis from which the country has so far not been ableto recover completely. During the period 1973-79 the mining sector declined by2.7% p.a. and total GDP decline was 1.4% p.a. However, the temporaryimprovement of copper and cobalt markets during 1979-81 and Gecamines' effortsto recover from the consequences of the 1978 Shaba invasion have resulted inrestoration of previous copper productior. levels and improved exportperformance, and have thus contributed to a slight economic turnaround since1979, reinforced by a variety of economic policy measures introduced in 1983 bythe Government that aimed at liberalization and at the promotion ofentrepreneurial initiatives. Between 1979 and 1984 the average growth rates ofboth the mining sector and GDP have again been positive, at 4.2% p.a. and 1.2%p.a., respectively.

B. Mineral Resources and Reserves

2.05 Zaire has an area of 2,345,000 km2 (IBRD Map 19112) and is wellendowed with mineral resources. The copperbelts of Zaire and Zambia contain 12%of the world's copper resources2 /, or 131 million tonnes of copper out of the1,100 million tonnes of copper in land-based deposits, with Zaire holding 73million tonnes, or 7% of the world's total. In addition, Lhese copperbeltdeposits contain the largest known resources of cobalt: of an estimated 9.9million tonnes of cobalt in land-based deposits, Zaire has some 3.1 milliontonnes, or 31% of the world's total.

2.06 In the Shaba province of south-eastern Zaire, the copper-cobaltdeposits form one of the richest metallogenic areas in the world and have highcopper (4.7%) and cobalt (0.41%) contents. Unlike the porphyry copper depositsof North and South America and of the Pacific, which generally average about 1%or less copper, they are stratiform deposits in sedimentary rocks which havebeen considerably folded and faulted. There are generally two ore strata 5 to20 meters thick, separated by 13 to 22 meters of waste. The ore occurs assulfide minerals, whi-h have been altered by weathering in portions of thedeposits close to surface. The weathering varies considerably in depth from onedeposit to another (80 to 450 meters) and results in oxide, carbonate, silicateand phosphate minerals. This combination of oxide and sulfide ores, togetherwith a transition zone of mixed ores in between, results in the need for complextreatment processes.

2/ Geological resources are defined as mineral occurrences which haveacquired or may acquire economic value in the future.

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2.07 Total geological ore reserves3/ in the Gecamines concession alone areestimated at 571 million tonnes containing an average of 4.7% copper and 0.4%cobalt, equivalent to over 40 years of production at present production levels,as shown in the table below.

Gecamines - Geological Ore Reserves a/(million tonnes)

Oxide % Cu Mixed % Cu Sulfide % Cu Total X Cu % Co

Western Group 116.4 5.4 173.4 4.6 182.7 4.7 472.5 4.8 0.4Central Group 19.2 4.1 14.5 3.8 10.5 4.0 44.2 4.0 0.3S.-.thern Group b/ 31.3 4.7 5.5 4.5 17.4 4.5 54.2 4.6 0.4

166.9 5.1 193.4 4.5 210.6 4.6 570.9 4.7 0.4

a/ 13.8 million tonnes of high grade cobalt ores not included.b/ Includes 9.7 million tonnes of sulfide ore containing 4.7% Cu and 7.2% Zn.

Source: Gecamires.

Over the past 10 years, discoveries of new ore reserves at Gecamines have addedmore copper than was mined during the same period, and indications are that vasttonnages of ore resources exist within and around the Gecamines concession: forexample, ore reserves at SODIMIZA (para. 2.15) are estimated at 20 milliontonnes of 4% copper, and exploration is currently underway to expand thesereserves.

2.08 While copper and cobalt are Zaire's major mineral resources, there isa diversity of other known mineral deposits. Tin metal resources are estimatedat 600,000 tonnes, or 6% of the world's total. Manganese, gold and diamondresources are substantial, and there are significant undeveloped resources ofiron ore, bauxite, phosphate, and uranium. Zaire also has resources ofindustrial materials, including limestone which is quarried for production ofcement and lime. Lastly, petroleum is produced offshore in small quantities.

C. Structure of the Sector

2.09 The technical supervisory agency of the mining sector is the Ministryof Mines and Energy. However, because of the significance of mining in theeconomy and of the predominance of Gecamines in the sector, this ministry isonly one of numerous government institutions that maintain direct or indirectinterest and influence over the sector. Among these, the President's Office hadduring a certain period direct supervisory responsibility for Gecamines; theMinistry of Finance subsequently assumed that role to oversee design andimplementation of fiscal regulations applicable to the sector; the Central Bankcontrols most external financial transactions of the largely export-orientedmining sector; the Ministry of Portfolio holds all government property,including shares in mining companies; and the Ministry of Foreign Trade overseesmineral exports as well as the important imports for operations andinvestments. The Ministry of Planning also plays an important role in thedesign of sectoral investment plans and mobilization of financing.

3/ Reserves are mineral occurrences which are economically andtechnically exploitable.

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2.10 The history of mining in Zaire is largely that of copper.4! Miningin the Zairian copperbelt was initiated in 1911 after completion of the raillink with South Africa in 1910. Production of copper grew from 7,400 tonnes in1913 to a peak of 498,600 tonnes in 1974, after creation of a second smallcopper company in 1969. Zaire's total production increased to a new peak of509,000 tons in 1983. Cobalt production started in 1924 and reached a peak of17,500 tonnes in 1974. Union MiniAre du Haut-Katanga (UMHK), a Belgian companyand Gecamines' predecessor. was founded in 1906 by the Comite Special du Katangaand the Tanganyika Concession Ltd. After initially working gold deposits, theCompany started mining copper near Lubumbashi in 1911. Gradually, productionand social facilities expanded to three mining centers around Lubumbashi(Southern group), Likasi (Central group), and Kolwezi (Western group). By 1960,the Company had a workforce of 20,000 and was producing annually 300,000 tonnesof copper, 9,000 tonnes of cobalt, 100,000 tonnes of zinc concentrates, andsmall quantities of cadmium, germanium, radium, gold and silver.

2.11 The Congolese Government nationalized UMHK's assets in 1967 andtransferred them to a new state-owned company La Generale Congolaise des Mines(GECOMINES), which subsequently ir 1971 was renamed La Generale des Carrieres etdes Mines (Gecamines). A technical cooperation agreement dated January 1967 andamended in February 1969 between the Government, Gecamines, and Societe G&enraledes Minerais (SGM), an affiliate of UMHK, regulated the compensation questionand provided for continuing technical assistance by SGM and marketing ofGecamines' mineral products. The nationalization was thus of little practicalconsequence for Gecamines' operations since continuity of management andmarketing remained assured. In April 1974, a further step was taken to increaseZaire's independence in mineral activities through conclusion of a revisedagreement between the Government, Gecamines, and SGM, which provided for (i) afinal compensation payment of about US$100 million to SGM by March 1975; (ii)increased copper refining in Zaire; and (iii) marketing of Gecamines' productionby a new Zairian marketing company, the Societe Zairoise de Commercialisationdes Minerais (SOZACOM).

2.12 Gecamines production expanded further to reach a present productioncapacity of about 470,000 tonnes per year (tpy) of copper; 15,000 tpy of cobaltand 70,000 tpy of zinc. Apart from cadmium of which about 300 tpy are producedin Shaba, the remainder of the output (mostly precious metals) has, so far, beenrefined primarily under tolling arrangements in Belgium. Gecamines' workforcehas grown to about 36,000 and is the principal economic base of most of Shaba.The number of employees and their families living directly on its salaries areestimated at about 250,000 but indirect employment and income creation due toits mining activities is substantially higher. The Company also plays a majorrole in maintenance of transportation, communications ard social infrastructureand provision of social services.

2.13 Gecamines operated under the direct supervision of the President'sOffice until 1981, at which time this responsibility was transferred to theMinistry of Finance. SOZACOM, however, has operated under supervision of theMinistry of Foreign Trade and its relation with Gecamines has been strainedresulting in frequent frictions because of Gecamines' inability to control the

4/ Zaire's non-copper mining activities are presented in Annex 2-1.

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marketing of its production, SOZACOM's high marketing fees, and financialirregularities. In mid-1982, a new Marketing Agreement between Gecamines andSOZACOM gave full ownership of mining products to Gecamines up to the finalsale, with SOZAUOM as its sole sales agent, and gave Gecamines increasedinfluence in defining the strategy for the marketing of its production. Despitethese rearrangements, however, neither the financial nor the commercialrelationships were completely clarified and disagreements continued. In July1984, the Government decided to abolish SOZACOM and reestablish Gecamines'complete marketing authority. Intensive discussions were held thereafter on themerits of various alternative organizational setups to harmonize production andb:las. These discussions centered in the creation of a marketing subsidiary toGecamines, or the integration of the former SOZACOM as a department ofGecamines.

2.14 In November 1984, the Government decided to reorganize the Gecaminesgroup as follows: a new entity, Gecamines/Holding, was constituted to overseeall Gecamines activities, thus replacing the Ministries of Finance and ofForeign Trade as direct supervisor of the group. Gecamines/Holding in turn issupervised by a committee consisting of the ministers of Mines and Energy, ofFinance and Budget, and of Portfolio, and the governor of the _entral Bank.Gecamines/Holding has three independent subsidiaries: Gecamines/Exploitation,in charge of all metal production activities of the former Gecamines;Gecamines/Commerciale, in charge of all the marketing activities for copper,cobalt, zinc, and other minerals and staffed mainly with former SOZACOMemployees; and Gecamines/Developpement, in charge of all non-mining activitiesof the former Gecamines, mostly agricultural activities in Shaba, formerlyorganized under a Gecamines subsidiary, the Agro-Industrielle du Shaba (AGRIS).7airian executives were appointed at the top of each of the four companies,underlining, as in other sectors, the political will to replace expatriates byZairian nationals. The new organization became effective in January 1985.Details on Gecamines/Exploitation and on Gecamines/Commerciale are presented inChapter IV.

2.15 Societe de D^veloppement Industriel et Minier du Zaire (SODIMIZA) isZaire's second copper producer with an annual production capacity of about35,000 tonnes. It was created in 1969, started production from one mine in1972, and opened a second mine in 1977. Until 1983, SODIMIZA was 85Z-owned byJapanese interests and under Japanese management with copper concentrates beingshipped to Japan. In 1983, the Japanese shares were sold to the Government.SODIMIZA concentrates have since late 1984 been processed at facilities ofZambia Consolidated Copper Mines Ltd (ZCCM), a short distance across theZambia-Zaire border. SODIMIZA is currently managed by a Canadian teamcontracted by the Government. It appears to be well run and does not encountermajor problems of equipment and materials availability, or foreign exchange.

D. Prospects of the Sector

2.16 The mineral sector is dominated by Gecamines, and this dominance canbe expected to continue in the future because the Company's known geological orereserves are sufficient for at least 40 years at the current rate of

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production. Nonetheless, the potential of the rest of the sector is very good,although largely unrealized: for example, tin reserves are estimated at 6% ofthe world total, and yet production in recent years has amounted to only 1% ofannual world mine production. Much of the country is relatively unexploredgeologically, and basic geological mapping and exploration for new deposits arebelow levels needed to tap the sector's potential effectively.

2.17 Since the mid-1970s, shortages of foreign exchange, skilled labor andfuel, increasing transport bottlenecks and unstable economic conditions have ledto a decline in productivity as well as to a growing decapitalization of allmining companies. The performance of the sector has been affected not only byunpredictable events beyond the control of Zaire (metals price fluctuations,transport route closings, Shaba invasions), but also by government policies inthe areas of taxation, financial and personnel management and the role offoreign capital. Although production results do not in all areas reflect thesector's increasing difficulties, the factors mentioned have prevented itsregular development and have initiated a progressive decline which eventuallyhas resulted or will result in production decreases.

2.18 In spite of the common factors affecting sector development in thepast, there have nevertheless been substantial differences in the economic,financial and management environment between Gecamines and the other miningcompanies. One difference has been the ability of Gecamines to get relativelygood access to foreign exchange in order to maintain its productive capacity.Although not continuously sufficient, foreign exchange was never quite as scarceas for the other minirg companies and for other commercial and state enterprisesin the country in geaLeral. Also, Gecamines' personnel policy has beenrelatively less prone to direct government interventions such as tightrestrictions on the number of expatriates employed. Finally, Gecamines hasbenefitted in southeastern Shaba from a relatively urbanized area of Zaire withgood climate and acceptable infrastructure and communications, which havesubstantially facilitated recruitment of qualified personnel.

2.19 The other mining companies have also been much more seriously affectedby the general degradation of the transport and communications infrastructurewhich set in during the rebellion years 1960-1965 and was reinforced by theZairianization measures of the early 1970s. This deterioration coupled withmore severe foreign exchange shortage and lower political and commercial cloutof the smaller companies resulted in more pronounced scarcities of materials,parts and consumables and thus more frequent interruptions of operations. Inaddition, the smaller companies suffered during the past 10 years of economicdecline from a policy attaching priority to Gecamines considering its importancefor the country's foreign exchange and budget revenue generation.

2.20 Recent signs, however, of a cautious economic recovery, supported bygovernment measures to reestablish business confidence and to promoteinvestments, provide hope for a revitalization of the non-Gecamines sector, andfor an increased inflow of commercial funds and concessional foreign aid, tosupport various rehabilitation programs. While the Government's foremostpriority would still be to secure Gecamines' financial needs for priority

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investments, which the proposed Project is designed to support, rehabilitationof the other mining companies should become a key element of the Government'sfuture development objectives of diversification of the mining sector. In orderto initiate such a recovery program effectively, various issues will need to beaddressed, including the viability of the different subsectors, the financingneeds for investments and operations, the personnel and management policies, theownership options and the possible role of foreign investors, the need forimproved infrastructure and communications, and the required marketingarrangements for the mineral production. Since the Government's long-termobjective is to reduce Zaire's dependence on copper and cobalt, a crucial issuetoday is how to arrest the decline of the non-copper sector and maximize thesector's contribution to economic recovery and growth. In order to assist theGovernment in assessing the sector's prospects and rehabilitation needs, theBank organized a sector mission in January 1986 which reviewed constraints aswell as options for the sector's development.

III. THE METALS MARKETS

3.01 The international copper, cobalt and zinc markets are the majordeterminant of Gecamines' financial health and its contribution to the Zairianeconomy. The uncertainty of these markets is consequently a major source offinancial risk for Gecamines and for the proposed project. This chaptersummarizes the key world market factors, including current and projected prices,for copper, cobalt and zinc, which together account for 90% of Gecamines'revenues, and presents an assessment of Gecamines' market position. Details ofthe zinc market are presented in Annex 3-1. A presentation of the copper andzinc markets was made in -Price Prospects for Major Primary Commodities-prepared by the Economic Analysis and Projections Department (Report No. 814/85,dated September 1984). A more recent study is -The Changing Structure of theWorld Copper Industry and its Future Prospects" Draft, World Bank, November1985.

A. The Copper Market

1. International Supply and Demand

3.02 The supply of copper comes from two sources - primary (mine)production (85%) and secondary (scrap) production (15%), and was 7.2 milliontonnes in 1984. Copper mine production is concentrated in the developingcountries whereas secondary production occurs almost entirely in theindustrialized countries. Although refining capacity in LDCs has beenexpanding, about two-thirds of world copper production is presently refined inindustrialized countries. In 1984, LDCs accounted for 68% of world copper mineproduction outside countries with centrally planned economies (CPEs), and 80% oftheir production was exported to industrialized countries. Zaire is the thirdlargest LDC copper producer with 7% of world production in 1984, all of itexported. Chile contributes about 16% and Zatubia 7%, with Peru, thePhilippines, Papua New Guinea, Mexico and Sou .;. Africa accounting for most ofthe remaining LDC production. CPEs are largely self-sufficient in copperrepresenting about 18% of world mine production and exporting less than 50,000

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tpy to market economy countries. During the 1970s, the developing countries'share of primary production increased and a structural shift occurred in mineproduction away from the industrialized countries, where production actuallydeclined. Production dropped most sharply in the USA from 1.6 million tonnes in1970 to 1.1 million tonnes in 1984. By comparison, mine production in Chileincreased from 0.7 million tonnes in 1970 to 1.3 million tonnes in 1984, themost dramatic increase among developing countries. However, productionincreased by different amounts also in other LDCs with the exception of Zambiawhere it started declining in 1974 for various reasons including depletion ofdeposits. The major factor behind these substantial shifts has been thediscovery and exploitation of new copper deposits with higher ore grades,favorable production and marketing conditions, or by-products which resulted invast differences in production cost up to a factor of 3, and entailedconsiderable changes in competitive advantages over time.

3.03 Unlike supply, copper demand is geographically concentrated in theindustrialized countuies which accounted for 83% of world refined copperconsumption in 1984. US consumption represented about 27Z of the total,equivalent to about 2.0 million tonnes. Copper is easy to use in manufacturingcompared to many other metals requiring higher precision technology. Copper hasimportant electrical and thermal conductivity and corrosion-resistancecharacteristics. The electrical sector accounts for about 502 of copperconsumption, and other important sectors are machinery (20%), construction (14%)and transportation (10%). World copper consumption grew strongly at 4.2% p.a.from 1960-70, but the consumption growth rate fell off to 2.4% p.a. during1970-80, and declined by about 2% p.a. during 1980-83; it rebounded dramaticallyby more than 10% in 1984 not only in countries with ztrong economies but also indepressed countries of the developing world, particularly Latin America. Thisoverall decline is related, in part, to lower economic growth rates inindustrialized countries, and also to a decline in the intensity of use inspecific applications, reduction in unit weight of finished goods (e.g., smallerautomobiles) ard loss of markets to substitutes (e.g., aluminum and plastics).In future, some further reduction in intensity of use is to be expected incertain automotive and information technology applications and additional lossesmay occur to aluminum for automobile radiators and plastics in buildingconstruction. Such losses may be partly counterbalanced by gains in new marketssuch as solar energy applications and electric vehicles.

3.04 Because of the changing demand patterns described above, thestructural changes on the side of the producers, long lead times in opening ofmines and slow production responses to changing market conditions, the coppermarket is subject to sharp fluctuations in the supply-demand balance and hasbeen characterized by four-to-five year cycles of growth and decline for thepast several decades. During the 1970s, copper booms occurred in 1973-74 and1979-80. Outside of these years, however, the copper market has been verydepressed. It collapsed in 1975 following the oil crisis and since then hasexperienced excessive inventories and oversupply due to the reluctance of manyproducers to cut back production in line with poor demand recovery. Today, theindustry is faced with substantial excess production capacity and nearly 1.0million tonn-s of mine capacity are operating on a reduced schedule or have been

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temporarily closed or placed on a care and maintenance basis due to lack ofdemand. Even so, total commercial stocks of refined copper at end 1984 wereestimated at over 1.2 million tonnes down from a peak of 1.7 million tonnes atthe end of 1983, but high compared with normal levels of 0.8-1.0 million tonnes.

3.05 Long-term demand prospects for copper in the mid to late 1980s and inthe 1990s will be determined not only by the world economic outlook but also byother factors, such as substitution with competitive materials, changes inintensity of use of copper, the availability of copper scrap and the developmentof new applications for copper. Substitution trends from competing materialsare expected to have a major influence on future copper demand. Worldconsumption of refined copper is projected to grow at 0.7-1.9% per annum duringthe period 1985-95 to reach 8.0-9.2 million tonnes in 1995.

3.06 Present primary and secondary production capacity is estimated atabout 9.3 million tpy indicating that the only requirement for additionalcapacity is to replace mine closings. According to industry estimates, a largenumber of small projects are presently under construction or have a highprobability of being implemented over the next decade. Such projectscould provide up to an additional 1.5 million tpy capacity with a break evencost in the range of 55-65 cents/lb. Nearly half of these projects (about 0.8million tpy capacity) would be implemented to replace mines that are expected toclose in the next 10 years due to depleted ore reserves, and the balance wouldbe net incremental production. While progress will be influe.iced by futureprices and market conditions, much of this capacity is expected to enterproduction based partly on the expectation of lower production costs thanexisting high-cost producers. It is expected, therefore, that withoutsubstantial further mine closings and a major cutback in industry investmentpatterns, there will be continued over-capacity at least until the 1990s.

2. Copper Prices

3.07 The bulk of international copper trade, including Gecamines'exports, t kes place at London Metal Exchange (LAiE) prices. LME copperprices ha. historically shown large fluctuations, but with the exceptionof upswings in 1973-74 and 1979-80 copper prices have been depressed formost of the past decade, as shown in the table below.

IME Copper Prices, 1973-85(US$/lb-cLarrent terms)

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

UfE Price 0.81 0.93 0.56 0.64 0.59 0.62 0.90 0.99 0.79 0.67 0.72 0.62 0.64

3.08 In 1984, copper prices averaged 62.5 cents/lb, their lowest inreal terms at any time in the post-war period. By comparison, industrysources estimate that average industry production cash costs in 1984 wereabout 58-63 cents/lb (including by-product credits and interest, but excludingdepreciation), and that about 30% of the copper industry in the world (excludingCPEs) was not able to cover direct cash costs.

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3.09 After a strong consumption upswing in 1984, stocks in LME warehousesdeclined from a peak level of 436,000 tonnes in December 1983 to 115,600 tonnesin July 1985. Nevertheless, during 1984 the copper price remained at a low 62.5cents/lb, to some extent because of the strength of the dollar. Since themarket is likely to continue being oversupplied through the end of this decade,the price of copper is not expected to break out of its present historical lowrange for a long time. In the face of the depressed market conditionsexperienced after 1980, average copper production costs in US dollar terms havedecreased substantially in most countries. Average direct cash costs declinedby about 15 cents/lb between 1980 and 1984. This was a result of (i) drasticcost cutting measures; (ii) phasing out of high-cost mines; and (iii) variouscurrency devaluations by major copper-producing developing countries which hadlet their currencies appreciate up to 1981 and are now under debt-servicingpressures. Since, in several of these countries, including Zaire, thesepressures are not expected to ease soon, they are likely to continue to followexchange rate policies that will result in maintaining or increasing thecompetitiveness of their export sectors, including copper. As a result ofactions taken by Gecamines' management and the Government, the Company'scompetitiveness has increased in the past few years: its production costs wereestimated clsse to the industry average in 1982, but now range in the lowerthird of all producers. In North America, where international costcompetitiveness has been further eroded by the strength of the dollar, thehigh-cost mines are likely to remain closed and many of them may be abandonedcompletely.

3.10 There is little consensus regarding the timing or strength of futureprice increases until 1990, when the oversupply problem could start tomitigate. The LME price is expected to fluctuate around an average of 65cents/lb (in 1985 dollars) and such fluctuations may be quite large. By 1995,the industry is expected to have adjusted to the slow-growing consumption trend,with the bulk of the high-cost capacity closed and new additions to productioncapacity being efficient and competitive at lower cost levels. Because of anexpected net reduction of capacity coupled with moderate demand growth theoversupply situation should turn around and the average price can be expected torise moderately, reaching 74 cents/lb (in 1985 dollars) by 1995. The financialprojections presented in Chapter VII of this report have been prepared on thebasis of these price forecasts.

B. The Cobalt Market

1. International Supply and Demand

3.11 Cobalt is obtained as a by-product from primary mine production ofcopper, nickel, and other ores, although a small (6%) but increasing quantity isobtained from secondary (scrap) production. Zaire and Zambia account for twothirds of the primary production, and five other countries (Australia, Canada,Finland, New Caledonia and the Philippines) for most of the balance ofproduction. Zaire holds 60% of the economically and technically exploitablereserves of cobalt, and has historically supplied half the world mineproduction, which was 22,000 tonnes in 1984. By comparison, total productioncapacity is currently estimated at about 35,000 tpy.

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3.12 In contrast to supply, cobalt demand is concentrated in theindustrialized countries with the USA, Western Europe and Japan accounting for94Z of consumption in 1984. Cobalt's properties of heat and wenr resistance andmagnetism make it a strategic metal used in high technology areas. Super alloysused in aerospace applications accounted for close to 40Z of consumption, wvilepermanent magnets accounted for 12%, cutting tools 15% and chemicals 35%.Cobalt is most prone to substitution in magnets, where consumption declinedsignificantly in the late 1970s when prices rose dramatically. In its otheruses, cobalt is practically not substitutable which makes long-term demandinelastic to price movements but highly reactive to perceived or real supplyshortages which can lead to exaggerated stockpiling and temporary price surges.

3.13 Due to these factors the cobalt market has in the past been subject tosharp fluctuations in supply-demand balance, with demand highly responsive toshort term business cycle conditions. On the supply side, cobalt production ismore dependent on copper and nickel production than on market conditions.Nonetheless, Zaire, as the dominant producer, has historically maintained abalance by adjustments in production and inventories. In recent years, Zairehas sharply reduced metal production by stockpiling cobalt in hydrate form.However, the growing number of producers in recent years has weakened Zaire'sinfluence to a certain extent. Moreover, high price periods provide incentivesfor treatment of scraps and residues and other forms of recycling which competewith established mine production.

3.14 From the trough of 15,000 tonnes in 1981, demand has increased at 8%p.a. to 19,000 tonnes in 1984. This growth rate is lower than historical rates,and long-term demand growth is expected to increase at an average annual rate of3 to 4% to reach about 22,000 tonnes in 1990 and about 27,000 tonnes in 1995.Given a production capacity of some 35,000 tpy, an oversupply situation islikely to exist for the rest of the decade. Depending, however, on theperceived price and supply situation, short-term demand may fluctuateconsiderably because of stockpile movements. As an indication, commercialstocks at the beginning of 1984 amounted to about 15,700 tonnes, or about 82% ofthat year's demand, but decreased to about 12,800 tomnes by the end of 1984, or68% of demand. Stockpile figures, however, are uncertain because of incompletereporting and unclear dividing lines between metal and ore stockpiles. Inaddition, stock movements may have been influenced by a higher supply certainty,speculations on price movements, or increase in consumption which could not besatisfied by increased mine and smelter production.

2. Cobalt Prices

3.15 Historically, the producer price for cobalt has been set by UMHK, andsubsequently SOZACOM, and this price has been utilized by most other producers.A free market price, covering less than 10% of world production, from smallerproducers and secondary metal, is established by merchants and is quoted inmetals publications. With the apparent supply shortages in 1978-79 andsurpluses in 1980-81, the free market price became dominant. However, in thepast year, Zaire and Zambia have re-established the predominance of the producerprice and the free market price has remained slightly below the producer price,

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where it has been historically. Cobalt production costs are difficult toestimate since cobalt is generally considered a by-product without specificmining costs, although some of the processing costs can be allocated to themetal. To the extent that estimates can be mgde, costs (up to final delivery)are considered to be lower for Zaire and Zambia, than for other producers.

3.16 The frequent supply/demand imbalances notwithstanding, cobalt pricesremained quite stable up until the late 1970s. The producer price (in nominalterms) increased steadily from US$1.50/lb in 1960 to US$4.44/lb in 1976. Duringthis period, cobalt prices increased by 1.4% p.a. in real terms, which werecomparable to real increases in prices for nickel and other metal substitutes.With the Shaba invasions in 1977 and 1978, a perceived shortage led to panicbuying, driving the free market price up to US$45/lb at the end of 1978 fromUS$6/lb at the beginning of the year and the producer price to US$25/lb from$6.40/lb during the same period. With the economic slowdown in 1980-81, andexcess supply, the free market prices fell as low as US$4/lb in 1983, and theproducer price system was abandoned temporarily. In 1984, Zaire and Zambiare-established the producer price at US$6.50/lb increasing it to US$11.70/lbduring 1985. Due to continued oversupply on the international markets, theproducers are unlikely to be able to sustain the current price level. Anadditional dampening effect on cobalt prices would be exerted by implementationof the recent proposal of the US Government to decrease its strategic stockpilesby about 11,000 tonnes over a five-year period which would result in anadditional 10% oversupply of the market. A price assumption of US$7 to US$8 in1985 terms is used in the preparation of the financial projections of ChapterVII.

IV. THE GECAMINES GROUP

4.01 The companies of the Gecamines group emerged from the recentreorganization of the Gecamines-SOZACOM group as the successor to the previousGecamines with exclusive responsibilities for metals mining and processing andwith a substantial role in the definition of metal marketing strategies (para.2.14). The recent reorganization has created a uu!que institutional linkbetween Zaire's copper industry and the political and economic decision-makingcenters since a full-time coordinating body (the Holding), reporting to a singlesupervisory Committee comprising the ministers of Mines and Energy, of Financeand Budget, of Portfolio, and the governor of the Central Bank, has now beenestablished. The Holding is concentrating on external representation of theGecamines group, on contacts with the authorities, and on coordination amDng thesubsidiaries of the group, without getting involved in day-to-day management orpresenting a sizeable financial and bureaucratic burden. The Holding operatesunder a Board chaired by the President of the Holding, and includes the chiefexecutives of the three subsidiaries and four representatives of theGovernment. The new structure has also permitted improved integration of theproduction and marketing functions of the Gecamines group over that of the past

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decade, since the production and uarketing subsidiaries no longer operateseparately under different Boards of Directors and under the supervision ofdifferent Ministries.

4.02 In order for the Gecamines group to continue playing its key role inZaire's economy in the short and medium term, it is important that a stableorganizational set-up be maintained to create the clear and rational businessenvironment that is vital to the group's future performance. In the past,Gecamines has been affected by repeated reorganizations and frequentreplacements of top level executives, and given the disturbing influence ofthese changes, and the suitability of the new holding structure, it appearsessential that it be left in place, unless significant changes in the economicenvironment justify adjustments or modifications, and that the frequent turnoverof top executives be avoided. The Government has agreed to consult with theBank prior to any decision affecting the organization of the Gecamines group.

A. Gecamines/Exploitatior

1. Organization and Management

4.03 Gecamines/Exploitation5/ reports to the Holding. Its Board ofDirectors consists of 7 members all appointed by the Government.6/ The Boardmeets twice a year, defines the Company's general policy and provides overallguidance and supervision to the Company's operations. The Chairman of the Boardis the Company's chief executive (President Delegue General) and is appointed byPresidential Ordinance; the Financial Director and Deputy Director General(Operations) are also Board members. The remaining members includerepresentatives of the President's Office, Shaba province, and parastatalinstitutions relating to Gecamines.

4.04 The organizational structure is characterized by functionalcentralization and geographical separation of tlcee production groups atLubumbashi, Likasi, and Kolvezi. The organizatiun of the Company (Annex 4-1)consists essentially of 3 main departments responsible for all productionactivities in the 3 production groups; for finance; and for other activitiessuch as planning and research, supplies, social programs and personnel and forthe Brussels office. A marketing division, reporting directly to the DirectorGeneral, is in charge of defining and supervising all commercial activities.

4.05 As organized under the 1974 Bank-financed expansion project of 1974(Amended in 1979)7/, Gecamines has used the services of Currie, Coopers andLybrand, of Canada to review the adequacy of its organizational structure,

5/ Unless noted otherwise later in this report, Gecamines will be used inshort for Gecamines/Exploitation.

6/ As of March 1986, the Boards of the Gecamines companies had not yetbeen appointed.

7/ Appraisal Report No. 576a-CK, dated December 26, 1974.

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recommend appropriate changes and establish a framework for improved personnelpractices. The consulting firm indicated in its report of November 1981 agrowing lack of control and information flow within the Company, disparitybetween authority and responsibility of various organizational units, aninadequate delineation between staff and line functions and an unnecessarilyhigh degree of functional centralization. Furthermore, it emphasized thatnon-productive activities were using up valuable financial and human resources.To overcome these organizational weaknesses, the consulting firm proposed amajor reorganization scheme, which was accepted by Gecamines' Board in December1981 and is now well under implementation: it includes a completedecentralization on a cost center basis and the installation of a comprehensivecontrol system for top management and for the cost centers. The 1983IDA-financed technical assistance project (Credit No. 1336-ZR) 8 ! is presentlyassisting this reorganization effort, particularly in the Finance Department,and generally to strengthen Gecamines' management in the production, financial,marketing and legal fields.

4.06 Gecamines' top management has been affected in the past by frequentgovernment interventions and repeated changes of chief executives. Gecamineshas known 4 Directors General in less than 3 years. It is important that thisrapid turnover of top executives be avoided in the future so that the Companybenefits from the management stability required for effective conduct of itsproduction, commercial and financial business. The Company also suffers fromincreasing number of vacancies in management positions occupied mostly byexpatriates who retired, particularly in the Production and FinanceDepartments. These positions must be solidly established on a long-term basis,which implies both the immediate recruitment and intensive training of Zairiannationals suitably qualified to fill the vacated positions.

4.07 A major weakness in Gecamines' management structure has been theabsence of an appropriate long-term planning group to help conceive and designthe Company's corporate strategy. While the present planning group, inheritedfrom the UMHK organization, is handling detailed project planning, the importantarea of corporate planning has not been sufficiently promoted sincenationalization and consequently Gecamines has remained dependent in itsstrategic decisions on external expertise. Also as a result of the history ofthe Company, both expatriate and Zairian staff at Gecamines have to a largeextent been mostly technically oriented, focusing on production and investmenttargets, with less concern for analysis of commercial and financial options andhence without the sufficient flexibility to react quickly to changing conditionsin the Company's financial and commercial environment. In order to initiatelong-term strategic planning, Gecamines has agreed to establish a unit bySeptember 30, 1986 reporting to the Director General, and for which terms ofreference were submitted for Bank review.

2. Mining and Processing Facilities

4.08 Gecamines' production complex is an intricate matrix of operationsspread over 300 km in the Zairian copperbelt, and grouped in three separategeographic areas in Kolwezi (West), Likasi (Center) and Lubumbashi (South) (MapIBRD 19111). A simplified operations diagram is presented in Annex 4-2.

8/ President's Report No. P-3474-ZR, dated March 3, 1983.

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Details of Gecamines' facilities are available in the Project File. Gecamineshas currently a concentrating capacity of 530,000 tpy of copper and a smeltingand leaching capacity of 470,000 tpy; the mining capacity, however, has inrecent years been only about 450,000 tpy because of a lag in overburden removalresulting from weak management in the open pit mines and low equipmentavailability. Also, Gecamines' copper refining capacity is limited to 250,000tpy, and a good part of Gecamines' copper production is refined overseas. Inaddition, Gecamines has production capacities for 15,000 tpy of cobalt and70,000 tpy of zinc.

4.09 Mining Operations. The Western Group represented 77Z of the Company'stotal ore production of about 16 million tonnes in 1984 and is spread over 8open pit mines and one underground mine. Ore reserves in five of the open pitmines will be depleted over the next 3 years, and will be replaced by oreproduction from 3 large open pits namely Dikuluwe, Mashamba and a new large openpit mine (KOV). The ore bodies of the Kamoto underground mine flatten out atdepth, and the mine exploitation is in a transition phase from sub-level cavingand mechanized cut ard fill to a room and pillar mining method. The CentralGroup represents 14% of the Company's ore production. The Kambove undergroundmine will be closed in 1987 and replaced by the Kamfundwa open pit mine wheremine preparation is well advanced. The Kakanda open pit was exhausted lastyear, and ore is now being mined from a series of small pits spread over 30 km.The rest of the ore (9%) produced comes from the Kipushi underground mine in theSouthern Group, which yields a zinc-copper ore from a massive sulfide deposit.With depth, the copper-rich ores are expected to be depleted over the next 10years but reserves of high grade zinc ore are substantial. The average oregrade in 1984 amounted to about 4.1% copper (with the Western group producingabove the average at 4.4% copper) and 0.3% cobalt.

4.10 Processing Facilities. Processing the oxide, sulfide, and mixedcopper-cobalt ores requires complex ore dressing and metallurgical operations.The ores are first concentrated in different concentrators located close to themines in each center: 4 in the Western Group handling 13.7 million tonnes ofore in 1984, two in the Central Group handling 2.2 million tonnes of ore and onein the Southern Group producing copper concentrates and zinc concentrates from1.6 million tonnes of ore. Total ore feed to the concentrators has in the past5 years exceeded ore production from the mines, resulting in reduction of orestockpiles (paras. 4.20 and 4.22). The Company's total concentrate productionin 1984 totalled 1.8 million tonnes containing 29% copper and about 2% cobalt,and 0.13 million tonnes containing 57% zinc.

4.11 Most of the sulfide concentrates are fed to the Lubumbashi smelter, apyrometallurgical plant built in 1911 and modified repeatedly thereafter andwhose technology and equipment reflect essentially the 1930s. The concentratesare sintered, smelted and finally converted, to yield blister copper ingots.Oxide concentrates, together with small amounts of sulfide and dolomiticconcentrates, are treated in the hydrometallurgical plants at Shituru (Likasi)and at Luilu (Kolwezi). After leaching by sulfuric acid, the solutions aresubjected to electrolysis to yield electrowon copper and cobalt cathodes. Partof the copper cathodes (about half of the Company's production) are fire-refined

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at Shituru. Another refinery was constructed under the Gecamines' expansionproject to produce about 100,000 tpy of high grade cathodes, but is now only 80Zcomplete. The zinc concentrates from Kipushi are roasted at Shituru to yield azinc oxide calcine, as well as sulfur dioxide gas for the production of sulfuricacid. The zinc calcine is then treated in the zinc hydrometallurgical plantnear Kolwezi to produce zinc metal ingots, with cadmium as a by-product.

4.12 While the concentrators are generally adapted to the ore production ineach production group, both with regard to capacity and ore types, themetallurgical plants are not: as a result concentrates from the Western groupare shipped to the Center and South for metallurgical treatment and zincconcentrates from the South are processed in the Center and West. The Westerngroup accounts for nearly 80Z of the Company's ore output but only for 36% ofmetal production.

4.13 With its present facilities, Gecamines has little choice but to try tomaintain the present oxide/sulfide/mixed balance of ores that corresponds to thecharacteristics of its processing facilities. This is an important element oflong-term mine planning, since the deposits generally contain oxide ores closeto the surface, and sulfide and mixed ores at greater depths and since the openpits of the Western group are becoming increasingly deeper. The open pits andthe Kamoto underground mine in the West could continue to produce the presentore mix for at least 10 years but with the Center mines running out of oxideswithin 10 years, a substitute oxide ore source would have to come intoproduction by 1995, if supply of oxide concentrates is not to become abottleneck necessitating a redesign of the metallurgical plants. The mostobvious oxide source which could be developed over that horizon is the Tenkedeposit. The overall composition of Gecamines' ores and in particular of thoseof the Western open pits at greater depths will also determine the justificationof the construction of a flash smelter at Kolvezi which could not only decreasethe costs of concentrate transports, but also provide much needed flexibilityfor the Company to adapt to higher quantities of sulfide ores. While Gecaminesproduces currently about 70% of its sulfuric acid needs, existing zinc roastingfacilities are obsolete, and a flash smelter at Kolwezi could contribute theremainder and thus eliminate in the future the need to import sulfur for acidproduction.

3. Manpower and Training

4.14 Gecamines is the largest employer in Shaba province, with a total workforce of 36,100, as presented below.

Gcaxines - Local and Bcprqiate Work Force, 1974-84

1974 1976 1978 1979 1980 1981 1982 1983 1984

Supervisory Staff- Zairan 1,240 1790 1,924 2,099 2,260 2,293 2,275 2,314 2,322- Exqetriate 1,520 1232 663 773 999 1,052 960 849 719

Workers 31,597 32,149 31,660 32,946 35,149 34,910 34,410 33,823 33,05834,357 35,171 34,247 36,818 38,408 38,260 37,645 36,986 36,099

Source: CGwamnes Anxml Reports.

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The absorption of a number of companies into Gecamines in 1974, includingMETALKAT (operating the zinc hydrometallurgical plant) and Minoterie of Kakontwe(operating farms and a flour mill), substantially increased Gecamines' workforcethat year. From 1974 to 1981, the increase continued, primarily in servicefunctions. The implementation of the new organizational structure resultingfrom the recent organizational study (para. 4.05) and more effective personnelcontrol, has reversed this trend and the size of the work force has beenreduced, primarily by attrition, by about 2,000 since 1980.

4.15 The Zairian workers are members of the Zairian Labor Union (UNTZA)which negotiates a labor agreement every two years, covering wages and otherbenefits. Wages have not kept pace with inflation over the past 10 years,primarily because of Government-imposed wage freezes. The result was occasionalshort illegal strikes. The Company provides generous fringe benefits, such asfree housing, schooling, and medical care as well as subsidized food, and totalpersonnel costs amount to about two to three times the wage bill proper for theCompany's workers. Absenteeism, which had traditionally been low, at about 3%in the early 1970s, increased to over 10% at present, as the generous fringebenefits keep workers on the payroll but low wages-have reduced the incentive toreport to work and have led to increased moonlighting, and theft of diesel fueland other saleable goods. Lcw salaries have also increased the difficulties inrecruiting Zairians to certain skilled positions, such as mechanical orelectrical engineers and technicians who have alternative employmentopportunities in construction or other industries. Gecamines has agreed toprepare by December 31, 1986 a plan to implement its stated policy of graduallyincreasing wages over the next several years (including incentive scheme) and ofreducing fringe benefits (in particular subsidized food), in order to counteractthe negative effects of low wages and generally reduce absenteeism.

4.16 The percentage of Zairian supervisory staff has increased from 28% in1970 to 76% in 1984, and is expected to reach 85% in 1988. Although one of theobjectives of the nationalization was to increase the number of Zairiannationals in higher positions, the policy of replacement of expatriates is stilldetermined mostly by considerations of continuity and efficiency of operations.Gecamines' promotion of Zairian nationals has generally met the objectives setby the Zairianization program of the early 1970s, and was overall betterconceived and implemented, than in other large industrial businesses. However,accelerated replacement of expatriates at Gecamines followed the 1978 Shabainvasion: whereas before 1978, the gradual staff changes had little impact onoperations, the events of that year and the quick replacement of expatriatesresulted in increasing problems given the lack of training and experience of theZairians who took the vacated positions. This led to poor maintenance practice,substantial delays in overburden removal from the Kolwezi open pit operationsand decrease in ore stockpiles. The number of expatriates increased again until1981 to compensate for the insufficient number of qualified local staff and hassince then decreased regularly as Zairian nationals acquired the skills andexperience to replace them.

4.17 Meanwhile many Zairians have been actively promoted and have reachedhigh positions in the Company including the current Director General. Shortagesin qualified local staff, however, persist and training requirements for the

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future are substantial. While these requirements apply to all areas, they aremore obvious for the middle level technical staff and for the financial staff.Training of Zairians at all levels will therefore become particularly importantin the next few years as more expatriates at different levels retire andZairians are expected to take their positions. Organizing a concerted effort toidentify and train successors for expatriates is therefore an urgent prioritytogether with preparation and implementation of the manpower and careerdevelopment plan. In designing such a plan, the Company should reduce itsover-reliance on engineering as a background for its senior staff, towards amore broadly varied group of disciplines required to operate the Company.Manpower and training policies are further detailed in Annex 4-3.

4.18 Gecamines plans to increase the number of Zairian supervisory stafffrom 2,300 in 1984 to 3,600 in 1992. During the same period, the number ofexpatriate staff is expected to decline to about half its present level of 700.If these goals are to be achieved effectively, existing staff constraints haveto be taken into accGunt and appropriate training needs defined so that theplanned transition can be achieved without impairment of the Company'sefficiency. For this purpose Gecamines has agreed to prepare not later thanDecember 31, 1986 a comprehensive manpower development program for itssupervisory staff that would take account of the stated policy of acceleratedZairianization. The program should include a detailed plan of retrenchment ofexpatriates and at the same time establish a clear recruitment and promotionpolicy for its local staff, together with an appropriate merit system.Gecamines would also be requested to prepare a comprehensive training programwhich is a prerequisite for the success of the proposed Company personnelpolicy, and should be oriented to improving the skills of Gecamines personnel inthe following three main areas: (i) management: to develop managementprograms, and adap. the existing center for staff training; (ii) technical andvocational: to improve technical skills of Zairians to replace expatriates attechnical level and to face the requirements of changing production methods anddifferent equipment; and (iii) plant training centers: to standardizecurricula, and upgrade training methods and teachers.

4.19 Accident prevention has traditionally been an important part ofGecamines' personnel policy. Direct responsibility for accident prevention lieswith the Safety Department, which provides training in accident prevention forworkers and supervisors: technical services for monitoring of plant andequipment; and inspection services to investigate accidents and their causes.Gecamines' performance has in general been satisfactory and has shown asignificant improvement over the past decade. The change in mining methods atthe Kipushi mine from labor intensive top-slicing to mechanized mining accountsfor much of the improvement in underground mines during the period 1975-78.Accident statistics over the past decade are summarized in Annex 4-4.

4. Past Performance

4.20 Production statistics for the mines, concentrators and metallurgicalplants are presented in Annex 4-5. The capacity of Gecamines' metallurgicalplants is a nominal 470,000 tpy of copper. The plants have produced close to

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this level over the past 4 years. Production in 1984 was 223,500 tonnes ofcopper wirebars (99.95% copper (Cu)), 156,500 tonnes of blister copper (98.5%Cu), 84,700 of electrovon cathode copper (99.5% Cu). In addition, the plantsproduced 9,100 tonnes of cobalt metal in the form of fire-refined granules,cathode, and refined metal; 66,100 tonnes of zinc ingots, and minor quantitiesof cadmium. Small quantities of precious metals were also recovered fromblister copper refined in Europe. Gecamines' mining activities have over thepast decade been affected more than its processing installations by shortages ofspare parts, supplies, inadequate maintenance, insufficient replacementinvestments, and poor mine planning, and by shortcomings in management due toinsufficient training. As a result, mine output has hardly been sufficient toreach the capacity output of 470,000 tpy and mine production had to besupplemented by stockpiled ore in order to maintain metal production. Moreover,copper ore grade decreased from 4.9% in 1978 to 4.1% in 1984, necessitatingincreasing ore production for the same amount of metal contained. Decreasingaverage ore grade was principally due to mining of lower grade ores at Kipushiand Kambove but also to inadequate mining practices in the open-pits at Kolvezi.

4.21 The open-pits at Kolwezi (Siege Kolwezi Mines-SK1) have encounteredmore severe problems than all other operations of Gecamines over the pastdecade. Given their complexity they were more seriously affected by lack ofqualified personnel, shortages of spare parts and supplies in the wake ofinsufficient foreign exchange availability after 1975, and delays in equipmentand spares delivery after the closure of the Benguela railway. The problemswere aggravated in 1978 after the Shaba invasion, when many expatriates left, ofwhom only a part were rehired. The weak link between short-term planning atKolwezi and long-term planning at Lubumbashi has presented a further obstacleto effective mining operations at SKM. Finally, eroding discipline andmotivation because of low wage levels and inadequate incentive systems havecontributed to SKN's mounting technical difficulties.

4.22 The combination of the adverse factors described above resulted incontinued problems of utilization of the truck fleet, which in 1984 spent about40% of the time in workshops and only 60% on site. Since, however, the truckfleet is not fully utilized even when available, the overall utilization ratewas less than 50%. This had a detrimental impact on excavation which since 1975has lagged behind Gecamines' targets of overburden removal and ore production.As a result, Gecamines' total copper mine production fell behind its totalannual output and the Company had to use its intermediate (buffer) stock ofmined ore in order to maintain copper production at the target levels as in thefollowing table.

Gecamines - Ore Stockpiles, 1974-84

1974 1976 1978 1980 1982 1984

Copper Ore ('000 tonnes) 15,399 12,694 11,780 11,774 10,731 8,760Grade (ZCu) 4.8 4.4 4.7 4.1 4.1 3.9Copper Content ('000 tonnes) 743 553 553 487 439 340

Source: Gecamines.

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Gecamines estimates the accumulated shortfall in total overburden removal at SKMat about 10 million m3. With the mining plan calling for excavation volumesincreasing up to 40 million m3 by 1989, even under assumptions of increasing oregrades (due to opening of the KOV mine and mining in greater depth) and improvedconcentrator recoveries a solution to SKM's problems remains the highestpriority for Gecamines in order to maintain the Western group's contribution tooverall copper production at about 80%. Gecamines has agreed to present byDecember 31, 1986 a plan to reorganize its mine planning (short, medium and longterm) at all mining divisions, and particularly at the Kolvezi open-pits.

4.23 The other open-pits and the underground mines have been substantiallyless affected by the various problems outlined above. Nevertheless, agingequipment, insufficient spare part supplies, lack of training and poorer ores inparts of some deposits also hampered overall production of the Company.

4.24 The problems Gecamines faced in mining were compounded by low and onthe average decreasing copper recovery rates in the concentrators, particularlyat Kolvezi and Kamoto in the Western group. In order to reduce ore feednecessary for these concentrators, a study was carried out by LakefieldResearch of Canada in 1982-83 on improving recovery rates at the concentratorsof the Western group. Modifications requiring minimal investment implementedafter that study have already increased copper recovery at the Kolweziconcentrator from 71% in 1982 to 76% in 1984 and by smaller percentages at theKamoto concentrator. Further increases in recovery would contributesubstantially to relieving SKM's constraint and to cost reductions in mining ingeneral, since production of one tonne of copper requires some 30 tonnes of oreand 90 m3 of ex,avated volume in open-pit mines. Every increase of 1% inconcentrator recovery rate thus reduces the required volume of excavation byabout 0.7 million i

3, or 2.5% of the current volume. Given the problems inopen-pit mining and the possibilities for reduction of ore feed, theconcentrators are also a high priority area for Gecamines.

4.25 The decline in metal recoveries in the metallurgical plants hasparalleled the experience in the concentrators. At Luilu, copper recovery hasaveraged 89% over the past three years, a marked improvement from 83% during1977-80 but still far from the 93U level in 1972-74. Similarly, copperrecoveries at Shituru were 89% in 1984 after a low 86% in 1976 and a subsequentimprovement to 94% in 1979. The decline at the Lubumbashi smelter has beenvirtually uninterrupted from 95% in 1972 to 90% in 1982, but recovery improvedto 92% in 1984. Additional investment would serve to eliminate bottlenecks, toreplace old, obsolete equipment and to reinforce weak sections of these plants.While moderate improvements in copper recoveries could be expected, the mostsignificant benefit would be to assure the metal production.

5. Production Costs

4.26 Production cost figures prepared by Gecamines have to be consideredwith caution as Gecamines does not yet have an accurate and comprehensive costcontrol system and information on cost developments is based solely onapproximate data. Moreover, the zaire currency has been overvalued most of the

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time until 1983. Under these conditions, cost control and calculation is verydifficult and comparisons over time and with other companies become skewed.However, certain recent developments have already improved the situation.First, the monetary reform of 1983 virtually liberalized the exchange rateregime and as a result Gecamines' income statements and cost figures in 1984provide a considerably more realistic picture of Gecamines' cost performance.Second, since 1984, IDA-supported technical assistance to Gecamines' FinanceDepartment (Credit No. 1336-ZR) has been put in place and includes a completereorganization of its Accounting Division and the introduction of revisedaccounting systems, including appropriate cost accounting as well as design andimplementation of effective cost control systems. A fully comprehensive costdata base should be completed by 1986 and, by the end of that year, the revisedsystems should essentially be in place. A training program for local accountingstaff is also planned but is expected to take longer in implementation than thedesign of systems because of the low level of primary and secondary education.Third, the highly variable and arbitrary tax regime applied to the Companyuntil 1982 resulted in tax charges in very substantial amounts and largevariations, even if this was also coupled with a variety of arbitrary rebates(mostly in the form of tax reimbursements).

4.27 Based on Gecamines' accounting information and on average officialexchange rates, the Company's cost structure and unit costs per pound of copperhave been calculated over the last six years. Costs have been allocated tocopper on the basis of its share in metal revenues since a breakdown of costsinto those for copper and for other metals is artificial for certain productionsteps (up to the metallurgical treatment) and is not well monitored for circuitsthereafter where the distinction could be made. The results are summarized inthe following table.

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Geadnes - Cost Scture, 1979-84(Z M11.o)

19841979 1980 1981 1982 1983 1984 x

Wages and Salaries -i7 W 8W 17T 13,M 4,3 -- JI1Otber Services 191 425 764 935 1,518 4,934 15MaterLals and Conunables 494 1,258 1,806 2,031 4,151 11,165 35Transport 189 402 772 880 2,312 50D44 16DerecLation andl Prvisio. 186 448 313 990 2,304 4,438 14Indirect Taxes Ies Rebiats 852 448 211 73 221 509 2Other Chaiges 50 - - - 34 598 2Met interest 125 210 436 367 476 635 2

Subtotal 2,464 3,758 5,186 6,353 12,939 31,648 100

Minus: Costs of Works 311 312 293 2D5 520 2,888emated by CGC, anddeferred aurges

Total Productim Cost 2,153 3,446 4,893 6,148 12,419 28,760

Excaze Rate (Z/ES$) 1.7 2.8 4.4 5.8 12.9 36.1Total Production Cost (US$ Million) 1,267 1,231 1,112 1,060 963.8 796.7Unit Cost (US cents/Lb-prorata) 62 84 63 79 72 55Unit Cah Cost (US aents/lblrvorata)a/ 55 73 60 68 62 47

4 Total production costs less depreciation but inclndig debt repayxmt.

Sources: Gecamiries Amnnl Reports until 1983; Gecamxns finranial statemts for 1984.

4.28 Until 1982 costs were poorly controlled and Gecamines's productioncosts were adversely affected, when expressed in US dollar terms, by thecontinuous overvaluation of the zaire currency. It is true also that lack ofproper cost control in the operations and at head office resulted in increasingunit production cost, even with the benefit of increasing production between1979 and 1982. Cost cutting measures introduced by Gecamines' management in1982 reduced costs significantly by 1983, particularly at head office. Also,the IDA-financed technical assistance to the Finance Department has permittedimproved knowledge of cost levels and trends by operations; the cost accountingintroduced, following a consultant study, to measure cost for the Kamotounderground mine has been implemented and is being introduced to all Companyoperations to permit immediate actions to reduce costs by managers andsupervisors at all levels. These measures, as well as the zaire currencyrealignment, engendered a considerable reduction in unit costs (both totalproduction and cash costs) between 1982 and 1984.

4.29 Gecamines' total copper production cost for 1984 amounted to about 55cents/lb, including depreciation, finance charges and marketing costs up to-delivery in Europe. About 80% of this is production cost up to the finalproduct at the metallurgical plants, and 20% is marketing cost of which about

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two thirds transport and one third commissions and refining charges in Europe.Cash operating costs excluding depreciation and provisions but including debtrepayment, amount to 47 cents/lb. The total foreign exchange component of about451 of production costs makes Gecamines vulnerable to shortages in foreignexchange allocations by the Government, as happened in the periods 1975-76 and1980-81.

4.30 The most important cost item is materials and consumables,representing over a third of the Company's costs and over half of its foreignexchange costs. Further discussion of this cost item is presented in paras.4.55-4.58 in the context of the creation of SONATRAD. However, Gecamines' costbreakdown does not reflect the importance of total personnel costs which areestimated to amount to about double the wage bill when various fringe benefitssuch as health care, housing, education and subsidized food are included. Theseitems appear in Gecamines' accounts as services. A more realistic costallocation would show total personnel costs, at about 302 of total costs. Theshare of wages and salaries has fluctuated little over time ranging between 15%and 18% during the period 1979-84 with total personnel cost estimated to befairly constant at around 30Z. With the exception of 1979 (i.e., after theShaba invasion), the share of materials and consumables ranged between 32' and35% and that of transport ranged between 8% and 18%. The share of depreciationcharges has increased from 81 in 1979 to 17% in 1984 after the 1982 assetrevaluation and its impact on depreciation (para. 4.36).

4.31 The cost item which changed most drastically is that of taxesreflecting the erratic and often arbitrary fiscal burden imposed in the past onthe Company. To improve on the situation, the Government agreed at theAmendment of Loan 1090-ZR in November 1979 to carry out a study on a taxreform. As a result of the study's recommendations, Gecamines' tax regime waschanged in September 1983. The new tax regime involves, in addition to thecorporate profits tax of 50%, two ezport levies: a basic royalty at aproportionate ad-valorem rate of 7% on the total of Gecamines' exportedproduction deductible from the c- porate tax, and a progressive export duty onsales of copper based on a threshold price, fixed so as to permit a reasonableprofitability for the Company without overtaxing it in periods of low prices;the surtax is deductible from the taxable base. The new system has worked welland has stabilized Gecamines' tax payments, and ensured regular tax income forthe Government. The Government has agreed to consult with the Bank beforemaking any changes to the tax regime governing Gecamines' finances. Inaddition, Gecamines' costs include other substantial indirect tax payments,principally import duties. The Company's total tax payments broken down bymajor category are shown in the following table.

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Geacmines - Tax Payments, 979-84(Z Ni111on)

1979 1980 1981 1982 1983 1984

TIlirect Turns ixcluied in otber Cost Items 179 362 513 428 1,385 1,849of Wichd (Import Dbties) (104) (246) (354) (255) (1,113) (1,150)

IndLirect Taxes Shan as Cost Iten 852 1,550 718 299 221 505of Which (Export Levies) (800) (1,481) (608) (33) - -

Cozporate Ineoe Tax aJ 289 1 443 1 444 2 838Total T3M TI T7S 75 w

Tax ReB1uenumrts and Subsides - 1,102 508 228 - -Net Taxes Pald (Z miloio)T 1,321 811 1,167 500 2,049 5,192

Net Taxes Paid (E$ milion) 777 290 265 86 159 144

a/ Iwci ing Export Tax fram 1983.

Snource: Geomdne Armal Reports.

4.32 Variable (direct) costs represent about 45% of Gecamines total costs.Ore production from mining operations account for about half of such directproduction costs and as Gecamines' mines become progressively deeper, miningcosts per unit of ore have a tendency to increase, and hence mine planning andmining methods have to be adjusted to help contain operating costs. Oreconcentration accounts for 22Z of direct production costs and the metallurgicaltreatment for the remaining 28%. While plant costs are less significant thanmining costs, plant performance can have a significant impact since improvedrecoveries can be achieved at little additional cost, but with substantialimpact on mining unit costs. Fixed (indirect) production costs have increased,both as percentage of total cost (from about 33% in 1974 to about 55% in 1983)and in real terms, and became the obvious target for the cost reductionsGecamines started in 1982. A breakdown of costs by geographical productioncenter is not available but would be essential for the future in order to directeffectively the Company's cost control measures to the areas of high priority.Given the importance of cost cutting measures and the reorganization of theaccounting system currently under way Gecamines has agreed that it would submitfor the Bank's review by December 31, 1986 a program for cost control and costreduction by production center.

6. Past Financial Results

4.33 Audited financial statements for Gecamines during the period 1978-84are presented in Annexes 4-6 and 4-7 and are summarized on the following page.Gecamines' accounts are audited annually by an international audit firm (Coopers& Lybrand), and auditing arrangements and procedures are satisfactory.

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4.34 Gecamines' metal revenues have been subject to large fluctuations overthe past few years following the ups and downs of copper and cobalt prices.Favorable cobalt and copper prices resulted in revenues from metal sales aroundUS$1.4 billion p.a. between 1979 and 1981 while sharp decreases in copper andcobalt prices caused a drop in metal revenues which declined to below US$1billion p.a. in 1983 and 1984. Copper is now the predominant productrepresenting 70% of total revenues, although cobalt has in the past during thecobalt boom period played a greater role in Gecamines' revenues, as presented inthe following table.

Gecamines - Shares in Metal Revenues, 1978-84 (in %)

1978 1979 1980 1981 1982 1983 1984Copper 43 40 64 58 77 77 68Cobalt 54 54 32 36 14 13 26Others 3 6 4 6 9 10 6

These shares are unlikely to change substantially in the medium term given therelatively stable outlook for the copper and cobalt markets. Over a longerperiod, however, the contribution of other metals is expected to decline becausedecrease in production of precious metals.

4.35 Between 1978 and 1981 Gecamines' financial situation was characterizedby high metal prices, increasing copper production and high cobalt production,as well as relatively low levels of depreciation due to inadequate assetsvaluation, showing good levels of net income and internal cash generation.In 1981, with copper prices starting to decline and the cobalt market collapsing(in quantity and price), even with a stable copper production Gecamines'revenues decreased by about one third. At the same time, costs were allowed toincrease and the overvalued zaire currency continued to exert its distortingeffects on Gecamines' accounts. These combined factors resulted in a sharp dropin the Company's profitability. After the 1982 assets revaluation and itsimpact on depreciation, Gecamines showed substantial net losses of about US$316million in 1982 and US$111 million in 1983. The combined effect of cost cuttlngmeasures, recovery of the cobalt market, and stabilization of the tax regime in1983 improved the Company's financial result substantially in 1984, showing anet income of about US$42 million and an intern.l cash generation of US$210million.

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Gacmx.s - &xnury of FlzwElal 1erf d, 1978-14ln Z Million)

Year ere December 31, 1978 1979 1980 1981 1982 1983 1984_ __ __ __ -- -(inlitai) - -------------

Pr&aictio (000 tim)Copper 391.3 369.8 425.7 468.2 466.4 465.8 464.0Cobalt 13.1 14.0 14.5 11.1 5.6 5.4 9.1Zinc 43.5 43.7 43.8 57.6 64.4 62.5 66.1

Tln StatewitCQpper Re_ea n.a 959 2,473 3,612 4,592 7,791 22,021Cobalt Revem_s nea. 1,313 1,206 2,231 864 1,312 8,385Oter Metal Re'ue n.a. 165 159 441 550 953 2,169Oter Reve na. 147 275 350 237 S90 1,483

Toal Revenues 977 2,584 4,113 6,636 6,243 10,646 34,058

COsts Before D1preiaticn and Mao 569 914 2,38D 3,790 6,222 5,898 21,259Depreciation 59 137 231 137 1,355 4,128 6,089Total Tames Paid 204 1,321 811 1,167 500 2,049 5,192Net Incom After Taxes 145 212 691 1,542 (1,i) (1,429) 1,508

- m -~~~~~xw~ w~ w

cashFlo StatementInteri a Cah Generatim 204 349 922 1,679 (479) 2,699 7,597Capiral Expexlitures 95 229 493 368 117 935 2,140

AssetsCwt Assets 851 2,970 6,178 8,901 6,429 17,069 25,479Net Fi,ed Assets 480 *.0 1,318 1,550 10,886 37,314 43,706Other Assets 2 16 30 31 11 679 899

Total Assets 1,333 3,926 7,526 104 17,326 55,06 70,085

labilities and Equityrrent LiabdlIties 352 2,033 2,499 4,193 3,263 9,044 9,744

l.org-term Debt ard liabilities 205 361 751 1,113 1,064 4,581 5,886Deferrnd Reyenues - - 1,890 1,167 31 99 66Provisiors 97 160 196 249 564 2,030 4,122Net Capital 679 1,372 2,190 3.760 12.404 39,308 50,267

Total Liabilities & Equity 1,333 3,926 7,525 10,482 17,326 55,062 70,(85

RatiosbrRhae Rate (Z/UIS$) 0.9 1.7 2.8 4.4 5.8 12.9 36.1C.rrent Ratio 2.4 3.5 2.5 2.1 2.0 1.9 2.6Quick Ratio 1.6 1.1 1.8 1.6 0.7 1.1 1.4LT Debt/Equlty Ratio 23:77 21:79 26:74 23:77 8:92 10:90 10:90

Notes: (a) Startir In 1982, revm e acouxg wa cduhgad, in oc with tlh _ MarketigAgret.

(b) Startivg In 1982, metals in tarmdt are aouted as ientories (as 8es reiivdbles bes re), inaccordanre with the _ S am Mazkekit Agreemr.

(c) Starting In 1982, special prefinanclng arrant8s wee grlually elialratal.(d) In 1982, G es revalue its grss asts and depreation albffAmop_

Source: Gecmines Amimal Reports until 1983; Finandcal Statetats 1984.

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4.36 In the past, allowances for depreciation provisions were limited bythe method of assets valuation on a historic cost basis (although a limitedrevaluation of assets was carried out in March 1976), and Gecamines was unableto set aside sufficient funds for the replacement of its fixed assets. Thisnecessarily led not only to high levels of profit tax obligations but over thelong run threatened the capital structure of the Company. Effective 1982,Gecamines' assets were revalued on the basis of full replacement value.

4.37 Gecamines' balance sheet has in general been sound in the past.The main feature has been the low long-term debt to equity ratio whichdespite inadequate assets valuation remained under 30:70 until 1981. Theasset revaluation of 1982 resulted in a corresponding adjustment of theCompany's equity and a reduction of the debt to equity ratio to less than10:90 in 1982, even with the new debts contracted that year. The Company'sequity, including reserves, representing more than 70% of total liabilities andequity, reflects a sound capitalization. The current ratio has beensatisfactory, ranging between 1.9 and 3.5 although with a declining trend since1980, mostly on account of a reduced accounts receivable as marketing and cashmanagement improved. The quick ratio has been fluctuating between 0.7 (1982)and 1.8 (1980) and was 1.4 in 1984, which is above 1.3, as stipulated by theLoan Agreement for the expansion project. However, improved cash managementmeasures mentioned earlier are expected to maintain it at a satisfactory levelthereafter.

4.38 Although the income statements have until 1981 shown high profits,Gecamines has throughout encountered grave liquidity problems. The majorreasons behind these have been the inefficiencies in marketing and salesreceipts management to a large extent caused by difficulties of coordinationbetween Gecamines and SOZACOM and weaknesses of the latter in cash management.At the time of appraisal of the expansion project in 1974, the typical lagbetween copper shipments F.O.B. African ports and sales receipts was 3 monthsfor copper and 9 months for cobalt. Since then these lags increased to 9 monthsfor copper and 30 months for cobalt and resulted in a near trebling of accountsreceivable in real terms 1980. While some of the delays, particularly in thecase of cobalt, were due to market conditions, they were attributable to a largeextent to: (i) SOZACOM's inefficient handling and follow-up of sales; (ii) slowinter-bank cash transactions; and (iii) non-Company demands on the foreignexchange due Gecamines. These liquidity problems coupled with decreasingprofitability reduced Gecamines' ability to reinvest at adequate levels between1981 and 1983 and aggravated the existing operational problems. Following themarketing agreement between Gecamines and SOZACOM in 1982, Gecamines' liquiditysituation improved substantially even if its cash flow was not sufficient topermit adequate levels of re-investments. Moreover, in the context of theIDA-financed technical assistance project, a major effort has been initiated toimprove the Company's cash management and substantial savings are expected to beachieved, from better management of sales receipts as well as from a reductionof short-term credit in particular for prefinancing of metal sales. On theother hand, the performance of Gecamines/Commerciale (para. 2.14) and its impact

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on marketing delays and short term financing needs cannot be fully assessed yet,but streamlining of the relationships between Gecamines/Exploitation andGecamines/Commerciale is already taking place under the supervision of theHolding Company.

4.39 In addition to marketing and payment delays, inefficient liquiditymanagement, and high prefinancing charges, insufficient foreign exchangeavailability created particular liquidity problems for Gecamines in the past.The Government agreed in 1977 to establish an allocation system under which theCompany would receive 45% of its net sales in foreign exchange. In practice,however, the actual allocations remained lower until 1981, ranging between 38%and 41X. Since 1982, they have been kept at the agreed level of 45% partlybecause the implementation of the Gecamines/SOZACOM marketing agreement gaveGecAmines fuller control over its accounts. Assurances were given duringnegotiations that Gecamines would continue to be allowed to retain from theGovernment 45% of its receipts from metal sales net of marketing expenditures.

4.40 Gecanines has in the past been subject to repeated interventions by theGovernment resulting in uncompensated sales and barter operations without promptand adequate reimbursement and payments made or services rendered upon theGovernment's request became a substantial burden. The prominent item is debtsdue by the Governmeut to Gecamines from uncompensated sales which haveaccumulated to an amount of US$125 million until 1984 and now amount to aboutUS$57 million. In 1983, the Government agreed on repayment of these debts alonga definite schedule. The schedule has not been strictly respected, butquarterly commercial audits imposed by the Bank in June 1984 to keep track offinancial irregularities in the commercial operations have shown that no furtheruncompensated sales took place after June 1984. In order to prevent futureirregularities of similar nature, the Government has agreed that the financialrelations with the Government would be governed exclusively by the existing taxregulations and the dividend policy agreed upon between the Company andGovernment, and that no sales without proper and prompt compensation would takeplace. This would continue to be monitored through regular external commercialaudits.

B. Gecamines/Commerciale

1. Background and Organization

4.41 Gecamines/Commerciale was established in November 1984 to take overthe activities and part of the staff of SOZACOM, which had been the solemarketing agency for Zaire's mineral production since 1974. Gecamines/Commerciale reports to the Holding, and acts as an agent for sales ofGecamines/Exploitation's products. This arrangement is the continuation of theMarketing Agreement signed between Gecamines and SOZACOM in August 1982.Gecamines/Commerciale is based in Kinshasa with 510 employees, and also operatesan office in Brussels. Its policy is to locate as much cf its activities aspossible in Kinshasa. However, the Brussels office will continue in a key role,because of its proximity to the major European markets with easy contact tometal buyers and sellers.

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4.42 The history of SOZACOM and its troubled relationship to Gecamines waspresented in detail in the President's report for the Gecamines technicalassistance project (Report No. P-3474-ZR). This history was characterized byhigh commissions, slow payments to Gecamines or incomplete transfers of salesreceipts, and a poorly designed cobalt marketing and pricing policy whichresulted in the collapse of the cobalt market in 1980. The critical change inthat relationship came about with the signature of the Marketing Agreement in1982 which gave Gecamines/Exploitation ownership of its mineral production untilfinal sales, full control over its sales receipts, and a say in the design ofthe group's commercial strategy. SOZACOM's sales accounts were in effecttransferred to Gecamines, a Gecamines representation was established inSOZACOM's offices, both companies have started to define a marketing strategy incommon, and Gecamines participated in new contract negotiations since 1983.Gecamines/Exploitation has also established satisfactory control mechanisms thatmonitor the strict respect of the Agreement, and since the abolition of SOZACOMin July 1984, external commercial audits report quarterly on the functioning ofthe controls as well as on irregularities. Since the Marketing Agreement isessential for maintenance of Gecamines' financial autonomy and for its effectivefinancial management, as well as for design of a rational marketing policy,Gecamines/Exploitation has agreed that the 1982 Marketing Agreement betweenGecamines and SOZA0OM would continue to govern the relationship betweenGecamines/Exploitation and Gecamines/ Commerciale, and would not be amendedwithout prior Bank approval. Assurances were also obtained that Gecamines/Exploitation will maintain its controls and that half-yearly external commercialaudits would continue to apprise Gecamines/Exploitation, and the Bank, ofirregularities in the implementation of the Marketing Agreement.

2. Activities and Sales

4.43 Gecamines/Commerciale is responsible for sales of all ofGecamines/Exploitation's export production (the mining company sells smallquantities of copper and zinc to local customers). Gecamines/Commerciale dealsdirectly with buyers and signs contracts as Gecamines/Exploitation's agent. Itassumes responsibility for metal shipments at the port of export, and as suchdeals with ocean freight, insurance, sales documentation, and handling toreceipt by foreign customers - usually on arrival at the receiving port.Gecamines/Commerciale's income derives from fees of slightly above 1% of salesreceipts for copper, 3% for cobalt, 1% for zinc and cadmium and 0.5% for goldand silver. In addition, Gecamines pays 0.4% for copper sales and 3.0% forcobalt sales to other agents. These commissions are substantially lower thanthose charged by SOZACOM; they are still higher than charges by other marketingccmpanies. Since the transition from the SOZAC0M conditions is taking sometime, the target fees mentioned above are expected to be acihieved by 1988, whichis reasonable. Gecamines/Commerciale has agreed to market its products inaccordance with regular commercial practice and on the basis of arm's lengtharrangements, ensuring that at no time, Gecamines/Exploitation will receive lessthan full ex-works commercial price (subject to normal trade discounts) for itsproducts.

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4.44 Gecamines' copper sales have been heavily concentrated in Europe, butalso extend to several North American, Asian, and CPE countries, as shown inAnnex 4-8. The concentration of sales in Europe (about 85%) represents apotential weakness because of lack of diversification and absence in otherexpanding markets. Copper cathodes and blister copper require additionalprocessing, whsich traditionally has been done at SGM's Metallurgie Hoboken plantin Belgium. After 1982, there has been a cautious start of diversification toother refining companies, and of a total of 240,000 tonnes refined in Europe in1985, about 50,000 tonnes were refined outside Belgium.

4.45 Gecamines produces more than 200,000 tpy of refined copper in the formof wirebars and with the phasing out of production of that particular shape inother countries, Gecamines has become a major wirebar producer in the world.Traditionally, wirebars have been the standard copper product and the basis forprice quotations at the LME, but high grade cathodes have increasingly replacedwirebars in LME contracts. Although an official decision has not been taken yetto replace wirebars completely by high grade cathodes at the LME, this productwill increasingly be limited to a relatively small market with small customersand short to medium term contracts. While the market for wirebars is notexpandable, Gecamines could for a period of time maintain a safe and dominantposition if it pursues an active customer-oriented marketing policy.

4.46 Cobalt sales are more broadly diversified among European, NorthAmerican, and CPE countries, as shown in Annex 3-8. The USA is the sinqle mostimportant buyer of Zairian cobalt, accounting for over 95% of sales in NorthAmerica. Japan is also an important purchaser, despite the fact that it is aseller in world markets of metal refined from concentrates and matte purchasedfrom Australasian countries. Audited financial statements for Gecamines/Commerciale during the period 1980-84, are presented in Annexes 4-9 and 4-10.

4.47 Production and sales of zinc and cadmium are relatively small, but thegrade specifications are high and no difficulty is encountered in marketing ofthese metals. Nearly half of Gecamines' zinc production is sold to the USA andabout one quarter to Asia. Gold and silver are recovered as a by-product in therefining of blister copper that takes place in Belgium.

3. Sales Strategy

4.48 The marketing of copper does not present major difficulties. Normallyannual sales contracts are signed in October/November of each year and indicatemaximum/minimum purchase volumes. Price is based on the prevailing LMESettlement Price at the time of delivery subject to certain premiums andcharges. Major buyers place orders generally on a monthly basis and provide amid-year estimate of total purchases for the year. The sales contracts arenegotiated by Gecamines/Commerciale with the participation of Gecamines/Exploitation's Marketing Department, in accordance with policies established byGecamines/Exploitation, and are signed jointly by Gecamines/Comerciale andGecamines/Exploitation. In spite of declining demand for wirebars, Gecamines/Exploitation has maintained its sales of this shape by reaching longer term (3years) understandings with certain consumers of wirebars in Europe. It has alsodiversified the refining of blister copper and electrowon copper cathodes, and

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has initiated direct sales of small quantities of electrowon cathodes to brassmills and other consumers of copper for alloying where mechanical strength andelectrical conductivity are more important than high grade. Gecam.nes/Exploitation has also initiated sales of high grade cathodes, presentlytoll-refined in Belgium in view of their eventual production at theelectrorefinery at Luilu. Gecamines/Commerciale has agreed to present by June30, 1987, a plan defining its strategy for marketing wirebars in the mediumterm, and of progressive replacement of wirebars.

4.49 Unlike copper, cobalt marketing involves critical judgments both interms of setting selling prices and in terms of finding market outlets. Zairesells mostly refined cobalt in the form of cathode chips. A high-quality,vacuum-refined cobalt, suitable for super-alloy applications is also marketed.In addition, Zaire sells lower quality cobalt cathodes from Shituru toMetallurgie Hoboken in Belgium for refining into high quality refined metal andfor production of special products such as cobalt salts. Since the cobaltmarket is in a condition of severe oversupply, many producers, including Zaire,are holding large inventories of cobalt. Gecamines/Commerciale has agreed topresent by June 30, 1987, a plan defining its strategy for marketing cobalt inthe medium term.

4.50 Zaire has historically followed a policy of selling cobalt at aproducer price set by SOZACOM. But in recent years the market price has been ata large discount to the producer price causing both Zambia and Zaire to losetheir competitiveness. The sharp drop in market share during 1980-82 waslargely due to losing customers to marginal suppliers from Japan and Canada whowere selling cobalt at very low prices on the market. With Gecamines' financesext-emely sensitive to cobalt prices, and to the extent that these are generallyconcrollable, it is important that Gecamines' cobalt pricing policy take accountof the risks that go with unreasonable producer prices and of the need tomaintain the client confidence which took several years to reestablish after theexcesses of 1980. It must be recognized that any increase in market share canonly come at the expense of either Zambia or the marginal producers and, whilegenierally pointing in the right direction, Gecamines' strategy is not yetcomprehensive in terms of dealing with the overall mix of pricing, sales terms,inventory policy, and quality considerations and may well be less effective inincreasing market share than the Company presently anticipates.

4. Transportation Routes

4.51 Three main routes are available for the export of Zaire's mineralproducts: (i) the Voie Nationale, a multimodal chain of transport comprised ofthe railway line from Shaba to the Ilebo port on the Kasai river, bargetransport from Ilebo to Kinshasa on the Zaire river, rail transport fromKinshasa to Matadi, Zaire's main seaport; (ii) the Southern route which connectsShaba to the Southern african ports of London and Durban through the railways ofZaire (SNCZ), Zambia, Zimbabwe, Botswana and South Africa; and (iii) the Easternroute via SNCZ, water transportation on Lake Tanganyika and the Tanzanianrailways to the port of Dar es Salaam. Traffic has been allocated as follows:

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Zaire - Mineral Exports Via Various Routes, 1918-84('000 tonnes)

Voie Eastern Southern RouteYear Nationale Route (Metal) (Concentrate) Air Total

1978 230.5 34.2 167.5 83.0 0.9 516.11979 186.2 16.3 198.1 95.0 10.3 505.91980 200.8 38.0 232.6 97.6 10.0 579.11981 276.6 34.8 229.4 99.8 1.6 642.21982 252.3 43.1 230.4 80.0 0.5 606.31983 257.5 64.7 238.6 83.2 - 644.01984 242.6 59.1 236.2 65.3 - 603.2

Sources: Gecamines Annual Reports; Zaire Dept. of Mines Annual Reports.

4.52 The above routes are also used for the imports of equipment, spareparts, consumables and reagents for the mineral industry, as well as generalgoods for the mining communities. Until its closure in 1975 the Benguelarailways to the port of Lobito in Angola was the main foreign route for Zaireand accounted for 50% of total mineral exports. The road from Dar es Salaam isalso important to Gecamines because it is the only route with sufficientclearance to permit transport of large mining equipment used in open-pits.

4.53 The Voie Nationale has experienced difficulties because of the ageand poor condition of railway, port and river transport equipment; deteriorationof the road bed and track on the railway portion, and low water levels on theKasai river. The shortage of operational railcars has become an increasinglyserious problem on SNCZ affecting all users of the railways, includingGecamines. As a result total transit time on the Voie Nationale is about 25%longer than on the Southern route. Despite these shortcomings, Zaire's policyis to export through the Voie Nationale on a priority basis, 1e'zause it is thecheapest available route in terms of foreign exchange and is free from possibleclosure due to political and security conditions in foreign countries. Thispolicy is supported by Zaire's major donors. Some key figures on Gecaminesexport routes are summarized below.

Ozierison of Geadnes Cper Exort Raoes, 1984

Vote Nationale Eastern oites Southern RatesVolume (xraes per muuth) 20,000 5,000 19,730Distance (km) 2,650 2,715 3,623Average transit tine to port (days) 51 46 30Average transit time in port (days) 19 62 27Average total transit time (days) 70 108 57Transport Cost (US$/tonne) 162 150 $149

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4.54 Improving the performance of the Voie Nationale has been one of theGovernment's main goals in the transport sector over the recent past. Thisrequires that Infrastructure and equipment be rehabilltated and the institutionsresponsible for the Voie Nationale be strengthened. Much work is currentlygoing on along these lines under 3 Bank assisted projects, the ONATRAModernization, Ports Rehabilitation and Second SNCZ projects 9 /, for a totalcost of US$247 million equivalent, of which US$171 million in? foreign exchangefinanced by various donors (IDA, AfDB, KfW, CCCE and Belgium). Substantialimprovements in the Voie Nationale's performance should follow theimplementation of these projects, which will last until early 1987 to late1988. Au additional project with Regie des Voies Fluviales, the public agencyresponsible for maintenance of Zaire's river network is expected to start in1986. Transport infrastructure and equipment on the Voie Nationale hasdeteriorated to such an extent since 1960, however, that continued support fromexternal donors will be required co ensure satisfactory performance in the longterm.

C. Societe Nationale de Trading

4.55 An important element in the success of Gecamines' cost reductioneffort is the Company's ability to improve its procurement process, with a viewto obtaining the best possible conditions, minimizing delays, and optimizingcash management. Materials and consumables costs amount to over US$300 millionequivalent annually, or 35% of Gecamines' production cost. When equipment forinvestment is added, Gecamines spends about US$250 million in foreign exchangeannually, or 55Z of its total foreign exchange expenditures, for consumables,equipment and spares. This expense category is thus an obvious target forintroduction of increased efficiency and reduced costs, through the introductionof new procurement procedures and purchasing methods. At present virtually allprocurement is done through restricted consultation of supplers, with no orineffective ex-post audit; Gecamines' procurement staff is weak in ability toprepare the technical specifications, in their knowledge of their suppliers, andin their negotiating skills.

4.56 The Government, aware of procurement problems in all its publicenterprises, addressed them through the creation in March 1985 of a centralprocurement agency, the Societe Nationale de Trading (SONATRAD), to serve alllarge public enterprises, including Gecamines. SONATRAD's mandate is to permitsubstantial improvements in procurement through improved negotiation techniques;grouping orders from several public enterprises; standardization of commonequipment; elimination of certain purchasing intermediaries, diversification ofthe sources of supply, and promotion of competitive local producers.

4.57 Extensive discussions have taken place since March 1985 bt.een theGovernment, Gecamines, SONATRAD and the Bank to develop SONAIRAD into aninstitution that can effectively play its role of improving Gecamines'procurement practices, and to have the respective roles and responsibilities ofGecamines and SONATRAD clearly spelled out in an acceptable bilateral contract.

9/ Credits 1180-ZR, of March 10, 1983; 1335-ZR, of April 28, 1983; and1475-ZR, of August 7, 1984, respectively.

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A draft Purchasing Agreement was agreed as a restt of these discussions, whichelaborates SONATRAD's role in the following areas: (i) to serve as ' Gecamines'purchasing agent for a limited number of large contracts (above US$1 million for1986) and for contracts of equipment common to several public enterprises andwhere substantial savings can be expected from grouping of orders; (ii) tocontrol and audit Gecamines' purchasing practices, with particular emphasis oncommercial intermediaries, standardization, and monopoly situations; and (iii)to advise Gecamines on purchasing procedures, knowledge of equipment market, andgenerally upgrade Gecamines' purchasing skills. The Government has agreed toa review of the threshold every six months and for assurances that it could notbe changed without prior Bank's approval.

4.58 The Purchasing Agreement between Gecamines and SONATRAD which wasapproved by the Zairian Government is a satisfactory document which adequatelyaddresses the weaknesses of the present system. The Government has agreed thatthe Purchasing Agreement would not be amended without prior Bank approval. TheGovernment also agreed that Gecamines will monitor SONATRAD performance as itspurchasing agent and that quarterly external audits would apprise Gecamines, andthe Bank, of the quality of implementation of the Purchasing Agreement.

D. Rehabilitation Program

4.59 As discussed throughout this chapter, the Gecamines Group has faceddifficult commercial, technical, financial and manpower conditions, that havedamaged considerably its ability to produce copper economically but have alsoprovided the shock necessary to start a serious series of actions to improve onits technical efficiency, its financial performance and its labor productivity.Several such actions were started in 1982 and are well under implementation,others are under preparation and are part of Gecamines' proposed rehabilitationprogram.

4.60 The necessity for a substantial rehabilitation program arose from theincreasing vulnerability of Gecamf s to operating difficulties. In the past 10years, the Company has been able to maintain fairly high production and saleslevels in spite of numerous obstacles, to a large extent because importantintermediate stockpiles had accumulated which provided the Company with unusualflexibility and the ability to withstand much buffeting without majorconsequences. This flexibility is fast disappearing. On present trends, itwill not be possible to draw much longer on such stockpiles when mining orconcentrate production is lagging. In 1974, Gecamines had 19 months ofproduction in banked ore: this has dropped to 9 months in 1984 and the oregrade has decreased from 4.8 to 3.9%. Similarly, the concentrate cushionprovided by the startup of the DIMA concentrator in 1980 has now been used up.The operating flexibility of Gecamines may thus have completely disappeared by1987 or 1988 and serious production mishaps will then affect sales almostimmediately. Any significant additional delays in either the Kolwezi strippingprogram or the implementation of the critical components of the RehabilitationProgram would have a deep and permanent impact on the Company.

SThOPSIS OF ImI POLICY nANIM in CgCAuIinS IWRABILITATIOU FIOtZAN

I HdZAC8HCFT F_NSWNKL. AND nnIZATImI IhFtOUIAction Taken up to December 1985 Action Planned Completioa Date

(a) Stability of preaent otganization The Cecamines Group reorganized to a Consultation with Bank before Continuous

Holding with three subsidiaries in change in orgaaniattonalNovember 1984 structure

(b) Recruitment of top managers ar.; training of Recruitment effort underway Preparation of emerRency September 1986

potential candidates recruitment and training program

(c) Creation of Strategic Planning Department None Preparation of terme of reference January 1986

Recruitment and organizatioo of June 1986

Department

(d) Manpower development en1d training Prograzs exist but need improvement Design of comprehensive manpowet December 1986

development and training program

(e) Change of balance between wages/salaries None Preparation of action plan to December 1986

and fringe benefits inerease waxes/salaries andreduce fringe benefits to establishmore effective incentive systes

2. uuuarlcus AD miuTNAuMC

(a) Western Group

Transfer of medium_ and long-term mine planning from None Preparation of a decentralization Decesber 1986

Lubusbashi to Kolwezi achedule

Improvesent of equipment maintenance and Technical assistance hired in 1984 but Introduction of new truck dispatch June 19835

management results not yet satisfactory and couunication system;

continuation of equipmentmaintenance training

Studies of inveatmects for new mining equipment Only approximative schedules prepared Carrying out of studies with high

(truck electrification, in-pit crushing) in 1984 and studies not completed priority:- preparation of study Implementa- January 1986

tion schedule;- preparation of investment

achedule June 1986

Optimizatiocn of open pit mining operations None Studies on mining optdiization in December 19S6selected areas to be initiated

Acquis tion of sufficient mining equipment anid Started In 1984 as part of investment Revision of initial plan in June 1986

spare parts program accordance with result of studieson new mining equipment

3. F3OCCUI33T AeD MU1CHSING STSIU

(a) Definition of procurement responaibilitiea SONATRAD, created in Hatch 1985, does Contractual reeponp.bilitiea of December 1986

not have claar responsibiltties SONATRAD and Cacaminea iaprocurement to he defined inagreement acceptable to allparties

Nonitoring of SONATRAD'a effec- Continuousttveaess through regular audits

TW 1PSIS 0o m POLIC! UKJTS in CECANINIS CARUSILITATIOU F OCUA

(3. frocurema_t and Purchasing System Continued)

(b) Improvesent of requisitioning/ordering system None Study of present procedure and December 1986reenomendation on improvements

4. FINANIL sIsu U

(C) Accounting system Technical assistance htred In 1985 Complete reorganization to Improve December 1986relability of accounting data

(b) Coat control Introduced 1982/83 with consultants' Broadening of system over whole December 1986assistance Company and linking to revised

accounting system

Cc) Training of accounting staff Technical assistance hired in 1985 Training seminars end on-the-job Continuoustraining for accounting stafflinked to revised accountingsystem

(d) Financial forecasting Financial forecasting system designed Further reftnement of system and Continuoususe as management tool and forpreparation 5-year financialforecast

(a) Tax regime New tax regime introduced in 1983 Stability of tax regime Continuous

(f) foreign exchange allocation 45X allocation effective sitce 1982 Stability of foreign exchangeallocation. Continuous

(g) Dividend policy None Desiga of dividend policy to be December 1986introduced a

Se 031 COST MCYIS -

Social Serviees Som social services transferred to Clarification of Cecamines' role In December 1986subsidiaries and costs for sose other social services through comprehen-services being reimbursed by Government sive review of their extent and

costs

Go. COUSCIAL n WT

(C) Definition of comercial responsibilities Gecamines/SOZACON MKrketing Agreement of MKrketing Agreement to continue ContinuousAugust 1988 gives Cecamines/Explottation povern relations between compantesbetter control over coxmercial strategy of the Holding

(b) financial Autonomy KMrketing Agreement gives Cecamines/ Maintenance of Cecamlnes' financial ContinuousExploitation full control over sales autonomy including Controller's andreceipts Treasurer's functions; limitation

of payments to affiliate companiesto clearly defined levels; monitoringthrough regular audits of financtaltransactions

(c) Coevercial practices Barter and uncoapensated sales stopped Strict adherence to normal Continuousin June 1984 corsercial practoces monitored

through regular commercial audits

(d) Wirebars markets Options under revtew Preparation of Action Plan for June 1987marketing of wirehars and itsprogressive replacement

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4.61 At the same time, with the essential constraints in Gecamines'operations being the low operating availability of mining equipment in theWestern open-pit mines and low metal recovery rates in its concentrators, alarge part of Gecamines' investment effort has to be devoted to addressing thosetwo main constraints, and to concentrating on sufficient reinvestments at theopen-pits, improvement of spare parts and fuel supplies, decentralization ofmine planning, as well as implementation of investments to increase recoveryrates in concentrators.

4.62 As part of the preparation of its rehabilitation program, Gecaminesprepared in 1984 a five-year investment program, which covered its investmentrequirements during the period 1984-88, and which directs investments to (i)projects increasing metals recovery in the concentrators and in themetallurgical plants and (ii) replacement of worn and obsolete equipment toimprove performance and reduce cost, mainly in the mines. This program isreviewed in Chapter V. To ensure optimum use of the investments proposed,policy actions are required in a number of areas. These actions have beendiscussed in the preceding paragraphs and their key elements are summarizedin the preceding two pages.

V. THE PROJECT

A. Gecamines' Long-Term Strategy

5.01 In view of the changing market and price trends, Zaire must developthe marketing, production and investment strategies that make optimal use of itslarge copper reserves and its good ore grades. In an increasingly competitivemarket, Gecamines has little choice but to improve its cost competitiveness andaim at remaining within the lower third of world mining operations in terms ofcopper production cost, including transportation and financial charges. Inpractice, this means (i) improving the management of each sub-component of itsoperations, (ii) increasing the efficiency of its existing facilities, (iii)improving its overall cost effectiveness, and (iv) diversifying its product mixinto higher grade products. Appropriate cost consciousness should in the longerterm give Gecamines the financial means to adapt its level of production tomarket opportunities, and restructure its facilities to take account of theclosing of old mines and opening of new ones.

5.02 Gecamines' present strategy is oriented towards maintaining itspresent production levels of about 470,000 tpy of copper, 10-12,000 tpy ofcobalt and 70,000 tpy of zinc, while improving its cost competitiveness throughfurther integration of mining and processing within each of the threegeographical production groups (West, Center, South) with the objectives of moreefficient use of the Company's total physical assets, improvements inproductivity and quality, and reduction of inter-group transport costs. Theprincipal components of the long-term plan are the following:

(i) completion of the electro-refinery and construction of a flash smelterat Luilu (West), to permit more than two thirds of mine production inthe West to be processed up to electrowon or high-grade cathodes;

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(ii) opening of new mines (Tenke) in the Center and replacement of currentconcentration capacity at Likasi (Center) by new concentrationcapacity commensurate with the requirements of these mines, tomaintain Gecamines' balance of oxide/sulfide/mixed ores because of thehigh oxide content of ore from the new mines;

(iii) decreased processing of concentrates from the West at the Lubumbashismelter (South) and use of part of its capacity for processing ofconcentrates from SODIMIZA; and

(iv) installation of a zinc roasting plant, a sulfuric acid plant, and azinc metallurgical plant at Kipushi (South), which is expected toproduce zinc exclusively in about ten years, to supplement presentinstallations in the Center and West.

5.03 Although the long-term plan would add about 100,000 tpy of copper toGecamines' metallurgical capacity, actual net copper metal production byGecamines is expected to increase by only 20,000 tpy of copper since processingof Gecamines concentrates would be reduced at Lubumbashi by an amount close tothe capacity of the new flash smelter, while Lubumbashi would principally treatSODIMIZA's ore production. Another feature of the long-term plan would beexpected self-sufficiency of Gecamines in sulfuric acid production because ofthe expected production from new acid plants Unked to the new zinc processingfacilities and to tne flash smelter.

5.04 The Tenke deposit has been retroceded to Gecamines, and perhapseventually the Fungurume deposit. These new opportunities raise severalquestions about the Company's longer term choices: first, whether as proposedearlier by Gecamines and as implied in the present plan, Tenke should only bedeveloped to replace costlier deposits presently in production, within theexisting capacity limit of 470,000 tpy of copper, or whether a productionpotential of at least 100,000 tpy of copper should be added to such capacity;and second, whether Gecamines should sell concentrates or increase its ownmetallurgical plant capacity in order to market the additional blister orelectrorefined cathodes. Finally, the prospects of expanding Zaire's copperproduction raise a number of issues about the role of Government in thedevelopment of Zaire's copper industry. On the one hand, expanding existingGecamines' mines would offer prospects of quicker and larger returns thanopening new private mines (Gecamines' cash generation would allow it to sustaina substantial investment program); on the other hand, Zaire's large copperreserves and high ore grades would give the Government an excellent bargainingposition in negotiating at the appropriate time with international miningcompanies so as to allow the private sector to become a motor of expansion anddevelopment in the sector. In the short term, and in view of the poor pastperformance of foreign investment in copper in Zaire, Gecamines constitutes anirreplacable source of investment for the copper sector. In the long term,however, Gecamines should seriously consider the option of associating privateforeign partners which would bring not only financial resources but also theirtechnical, managerial and marketing know-how, to its mineral diversification orother new projects.

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5.05 Substantial work has been done already by Gecamines to define itsstrategic options, particularly to prepare scenarios for the next 10 years, butmany longer term alternatives have yet to be imagined and analyzed. While inthe end it is the Government's responsibility to define an overall long-termstrategy for the development of Zaire's copper sector, Gecamines will also buildup within its organization a corporate planning capacity to keep track ofdevelopments in the world metals market, to identify marketing opportunities forZaire, to organize coordination between the various functions of the enterprise(notably commercial, production and finance), and to guide Gecamines' managementin deciding on medium- and long-term investment and production options within alonger term context (para. 4.07). The Government and Gecamines have agreed todiscuss with the Bank its expansion investment plans and the structure of thepartnership (including foreign private investors) envisaged for its newinvestments.

B. Objectives of the Rehabilitation Project

5.06 Gecamines' rehabilitation program which has been extended to 1990because of the low level of execution in the 1984-85 period (the object of theproposed Rehabilitation Project) is an important link to its long-term strategy;its main features and conditions of success were presented in Chapter IV. Themain objectives of the Project are to improve Gecamines' efficiency throughoutthe whole chain of production and commercialization of its metals products, toraise the Company's productivity at the mines and in the surface plants andhence, while maintaining production capacity at its present level of about470,000 tpy during the 1986-90 period, assure the continued f JW of theprincipal source of foreign exchange earnings to Zaire. The Project also aimsto increase Gecamines' profitability and ability to transfer resources to theTreasury, consolidate its position in the world copper market, and to integrateits operations with other economic activities in Shaba. As such, it would be amain ingredient into Zaire's economic recovery program. Specifically, theProject would aim at:

(i) maintaining metals production at the Company's nominal capacity toachieve optimal use of existing installations;

(ii) increasing metal recoveries at concentrators and metallurgical plantsto reduce quantities of ore to be produced at the mines;

(iii) reducing operating costs at the level of concentrators andmetallurgical plants, and containing mining costs;

(iv) diversifying the Company's product mix through production of highgrade cathodes;

(v) improving the Company's management and efficiency of operation; and

(vi) preparing Gecaminest long-term strategy through various exploration,research and study works.

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5.07 Gecamines' 5-year Investment Program covering the physical invegtmentof the rehabilitation program was first discussed with the Bank in February1984, and after several amendments, was formally presented to the Bank inOctober 1984. It consisted essentially of overdue investments which Gecamineshad not carried out in recent years or investments which would be part of anormal program of replacement to preserve good operating conditions of itsproduction facilities. A Bank mission visited Zaire in May 1985 to conduct,with the help of outside consultants, a full technical audit of Gecamlones'Investment Program in order to (i) verify that Gecamines 100-odd sub-projectswere consistent with the overall objective of maintenance of production,improvement of productivity and reduction of cost and with its medium- andlong-term investment plans; and (ii) review and assess the technical andeconomic justification of each sub-project. The auditing team visited allGecamines' production units to assess the production performance and physicalstate of the facilities, as well as the units' ability to implement theirproposed investments. Also, particular attention was given to intra-unitrelations, and to the consistency of their proposed investments and hence to theoptimization of Gecamines' total physical assets. The proposed Project takesaccount of all reviews that took place and changes that have been introduced tofurther optimize Gecamines' investment over the coming years.

C. Project Description

5.08 The Project would cover high priority investments during the period1986-90 for replacement of old equipment and rehabilitation of components ofplant facilities, required to improve Gecamines' performance. The Project wouldalso include reinforcement of the Company's training department to upgrademanagement and supervisory personnel; and technical assistance and studies toimprove weak performance in certain areas (supply organization, truck dispatch,short-term mine planning) or to carry out measures necessary for preparation ofinvestments after 1990. The Project consists of three major components: (i)investments in existing mining and plant facilities for equipment replacementand rehabilitation, aiming at improved maintenance, productivity increases andreduction of operating costs; (ii) a training program to upgrade skills oftechnical supervisory and managerial personnel; and (iii) pre-investment andtechnical studies including those for preparation of investments after theProject period.

1. Mining and Plant Replacement and Rehabilitation Component

5.09 The mining and plant investment component would consist of a number ofprojects designed to maintain the productive capacity of the existingfacilities. It would include replacement of worn and obsolete plant and miningequipment, and rehabilitation of sections of large plant facilities, in order toeliminate bottlenecks or improve efficiency. This would include:

(i) in the mining operations: replacement of equipment and provision ofspare parts used in drilling, loading and transporting ore, includingloaders, shovels, trucks, drills, bulldozers, graders, cranes andforklifts; improvement of communications and truck dispatch inopen-pit mining; partial electrification of trucks; installation ofin-pit crushing and conveying equipment in the KOV open-pit; andrenewal and improvement of dewatering and ventilation equipment;

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(ii) in the concentrators: rehabilitation of grinding and classificationsections, flotation sections, and tailing retreatment and disposalsystems;

(iii) in the metallurgical plants: rehabilitation of concentrate handlingsystems, leaching circuits, and tailings and solutions treatmentsections, as well as completion of construction of the Luiluelectrorefinery;

(iv) in transport and workshops: acquisition of rail cars for concentratetransport; replacement of worn rails; replacement of light vehicles,trucks, and buses; renewal of workshop machines; rehabilitation of thefoundry at the Central Workshop in Likasi; and

(v) at central services: replacement of data processing equipment;improvement of telecommunications systems; acquisition of medicalequipment; and investments for social services and administration.

2. Training Component

5.10 ThL training component would consist of:

(i) strengthening of the Company's training capability at the head officethrough the creation of two new units: the Training Planning Unit,which would be responsible for collecting and processing all data ontraining needs and investigating the need to boost and assignmanpower, equipment and financial resources in order to accomplish theCompany's established goals; the Managerial Level Technical TrainingUnit, which would be responsible for studying and proposing a policyand plan for the technical training of managerial level personnel andfor coordinating all managerial level training activities both abroadand in Zaire;

(ii) at the Training Center for Managerial and Supervisory personnel:evaluation and reorientation of its activities; training for trainersabroad; strengthening of practical training; organization of specificcourses on technical and commercial subjects in Zaire and abroad; andstudy on the creation of a Technical Training Center for managerialand supervisory personnel. Over a period of five years, there will be1,350 man-months of training for managerial and supervisory personnel;12 seminars a year, each lasting on average of 15 days for 15management staff and 24 seminars each lasting an average of 15 daysfor 15 supervisors. For the training of top management personnelabroad there will be 25 three-month fellowships per year for fiveyears;

(iii) review of on-the-job training and plant training programs to introducemodern training methods and to standardize courses in centersthroughout the Company; training which will be given to about 3,000staff a year would require additional staff and materials. Theteaching materials and equipment will be renewed, particularly in thecase of hydraulic and pneumatic equipment and electric controls;

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(iv) on-the-job training for supervisors in the open-pit mines under theprogram developed by the technical assistance team; and

(v) on-the-job theoretical and practical training for staff in theprocurement and purchasing departments.

Background and details o. the training component may be found in Annex4-3.

3. Pre-Investme'nt, Studies and Technical Assistance

5.11 The pre-investment and technical studies would supplement and completethe changes initiated under the organizational study and the mining assistancecarried out under the IDA-financed technical assistance project (Credit No.1336-ZR) to prepare for longer term developments and to analyze specificactivities with cost reduction potential. This would include:

(i) provision of inventory management specialists, review of therequisitioning/ordering and warehousing systess and implementation ofresulting action plan to reduce lead times in ordering and to improveinventory control;

(ii) provision of purchasing and procurement specialists, review ofpurchasing practices, and implementation, in cooperation withSONATRAD, of resulting action plan to improve on preparation of biddocumentation, relations with suppliers, and negotiating skills;

(iii) optimization of open-pit mining operations in selected areas such astruck dispatching and short-term (up to two years) planning;

(iv) exploration work within Gecamines' concession and feasibility andengineering studies for future orientation of the Kipushi mine anddevelopment of the Tenke deposits;

(v) a comprehensive review of the Company's social activities, costs andtheir links to operations; and

(vi) a comprehensive review of the copper wirebars and cobalt markets, andpreparation of a plan of progressive wirebsr replacement.

Draft terms of reference for these studies prepared by Gecamines were submittedto the Bank for review at the time of negotiations.

D. Project Implementation and Schedule

5.12 The various components of the Project will be implemented byrespective departments in Gecamines. For the replacement and rehabilitationcomponent, the managements of the different operating departments will providetechnical specifications, assist in bid evaluation and sanage all on-site work,while procurement will be handled by the purchasing division of Gecamines incoordination with SONATRAD (paras. 6.12 and 6.13). For the training component,

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the Department of Training will be responsible. The technical assistance willalso involve the Supplies and Services Department and the Kolwezi productiongroup and would generally be coordinated by the Department for Planning andResearch. While in a Project of this nature, It is unavoidable thatimplementation responsibilities be disseminated throughout the Company,Gecamines has the ability to carry out all tasks without undue burden on itsorganizational structure. However, the Project is relatively ambitious andexceeds past implementation levels achieved by Gecamines, and the Company willhave to rely more heavily than in the past on outside contractors forconstruction and installation. In order to assure implementation of the Projectaccording to schedule Gecamines has reviewed the impact of outside contractingon the basis of its own implementation capacity with particular emphasis onmanpower requirements, and has submitted a proposal for allocation ofimplementation responsibilities to different departments of the Company and tocontractors.

5.13 The Project activities described above represent about 5 years ofGecamines' rehabilitation effort. An implementation schedule for the 3 projectcomponents is given in Annex 5-1. The training component would be initiated in1986, and the pre-investment and technical studies component would be concludedby December 1988. The replacement and rehabilitation component would be carriedout between 1986 and end of 1990.

E. Safety and Environmental Aspects

5.14 General worker protection in underground and open pit mines isgoverned by legislation concerning occupational health and safety. Specifichazards, such as noise, dust and gases, and mine hoisting cables, are the objectof Gecamines' regulations based on standards in Europe and the USA, and are wellcontrolled from health and safety perspective. In the surface facilities thestandard of control is not as high and working conditions in the oldpyrometallurgical plants are poor.

5.15 Solid Residues. Significant quantities of gaseous, liquid, and solidwastes are generated in the large-scale recovery of metals from ores. Gecaminesutilizes conventional technology in the application of tailings ponds to removefine particulate matter and soluble organic residues from tailings slurries.Some of these tailings ponds cover large areas particularly in the Kolweziregion, but are very effective solids retention basins. Gecamines has done verylittle so far to reclaim open pits, waste rock dumps and tailing disposalareas. The major mining area at Kolwezi suffers from severe dust storms duringthe dry months which present a health hazard to people in the region. Gecamineswill be requested to submit by December 31, 1986 to the Bank a plan of action tohelp alleviate this problem.

5.16 Gaseous and Particulate Emissions. The sulfur in the concentrates isalmost totally oxidized to sulfur dioxide. In Gecamines' operations, about onequarter of this sulfur dioxide is captured as sulfuric acid and eventuallyreports in solid wastes as calcium sulfate. The other three quarters aredischarged from the stacks at the metallurgical plants. The gases and dust

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particles from these stacks disperse over the entire district but of course arestrongest within the plant and nearby town areas. The major air pollutionproblem is encountered in Lubumbashi due to low level emissions of sulfurdioxide and dust from the blast furnaces. A project currently underway willgreatly reduce this impact by use of cyclones and scrubbers and high leveldischarge of cleaned gases.

5.17 Liquid Effluents. Large quantities of water and chemicals are addedto the finely ground ore during concentration and to concentrates during theleaching operations. This water, containing both soluble and insoluble matter,flows into neighboring streams after it has been discharged into tailings pondsor dams. Since 1974, Gecamines has monitored the effluents from theiroperations. Typical results of monitoring the flows which discharge directlyfrom operations or which drain mine and plant areas, and the river above andbelow the operations, indicate that pH is within standards but total suspendedsolids are well above. At the Luilu hydrometallurgical plant proposed plantimprovements will greatly reduce acid and metal losses. Until plantimprovements are made at the zinc and acid plants it will be necessary to addlime tc a pH of about 10 to neutralize acids and remove soluble metals.Ignoring the metal content of these suspended solids, while discharges fromplants and mines do not meet US and Canadian standards, the streams and riversdo.

5.18 While monitoring of pollution levels by Gecamines is generallyadequate, in practice the quantities of effluents exceed the limits accepted inthe industrialized countries. Gecamines has agreed to meet these standards inthe future and submit to the Bank regular reports on pollution control andeffluent discharge monitoring, and to discuss with the Bank any furthercorrective measures required.

VI. CAPITAL COSTS, FINANCING PLAN, PROCUREMENT AND DISBURSEMENT

A. Capital Costs

6.01 The total financing required for the Rehabilitation Project isestimated at US$703 million, excluding incremental working capital and interestduring construction, of which US$436 million, or 62Z in foreign exchange. Ofthe total base cost of US$567.6 million about US$532 million (94%) will beneeded for the investments in physical facilities, US$31 million (5%) forpre-investment and technical studies component, and US$5 million (12) for thetraining component. Detailed Project costs estimates are presented in Annex 6-1and summarized below.

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S&==7y of Cgpital Cost EstmaLtes

- -Z mnl1n-_ -- - - - i$ milUln - _-- Z of % ForelgLocal Foreign Total Local Forein Total Base Cost &XbWge

1. PFehab1itation andReplacCeUnt Equipe

Mlnirg 4,917 7,172 12,089 89.4 130.4 219.8 38.8 59Cbocentrators 660 1,562 2,222 12.0 28.4 40.4 7.1 70Hetalluzgical plants 2,464 3,922 6,386 44.8 71.3 116.1 20.5 61Others 2,926 5,610 8,536 53.2 102.0 155.2 27.4 66

Subtotal 10,967 18,266 29,233 199.4 332.1 531.5 93.8 62

2. Indrg 138 138 276 2.5 2.5 5.0 .9 50

3. Pre-lnvestmet and Teclical Studies

Pre-lnNTstment Studies 644 957 1,601 11.7 17.4 29.1 5.1 40Other Studies and T.A. 22 88 110 0.4 1.6 2.0 0.4 60

Subtotal 666 1,045 1,711 12.1 19.0 31.1 5.5 61

Total Base Cost 11,770 19,393 31,163 214.0 352.6 567.6 100.0 62

Physical Coitndes 930 1,441 2,371 16.9 26.2 43.1 7.6 61Price Contiesi 1,964 3,097 5,060 35.7 56.3 92.0 16.2 61

Total Project Cost 14,664 23,986 38,648 266.6 436.1 702.7 123.8 62of wich taxes 7,100 - 7,100 129.1 - 129.1 22.8 -

6.02 The capital cost estimates were prepared during 1984 by Gecamines'Planning and Research Department based on previous experience with procurementof similar equipment, updated suppliers' quotations and engineering studies.Both base costs and the Project's implementation schedule were reviewed andupdated to end-1985. The difficulty in the cost estimation has been todetermine which equipment items can be considered as rehabilitation andreplacement equipment, as compared to consumables and spares. Overall,estimating methods have been adequate and the capital costs estimates reviewedextensively during the May 1985 audit (para. 5.07), are considered reliableparticularly since many of the items are equipment used regularly by Gecamines.Physical contingencies of 5% have been assumed for mobile equipment andequipment with little installation requirement while 10% was estimated forinvestments with high installation content. Price contingencies are based onescalation of 7% each in 1986 and 1987, and 7.5%, 7.7% and 7.6% in 1988, 1989and 1990, respectively, both for foreign and local costs since the exchange rateof the Zaire currency has been assumed to adjust in accordance with thedifferential between local and foreign price escalations as a result ofcontinued Implementation of the Government's floating exchange rate policy.Consultant services for technical studies are estimated on the basis of 160man-months.

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6.03 About 33% of the investments are maintenance investments; 59%represent investments designed to improve productivity and reduce costs, and theremaining 8% is mostly related to the completion of the electrorefinery aimingat diversification into higher grade products. In response to the priorityneeds of the Western group and its importance for the future of the Company,about 62% of planned investments are allocated to this group, against 16% forthe South, 11% for the Center and 11% for not directly allocatable investments(e.g., social services, telecommunications).

B. Financing Plan

6.04 The financing plan of the Project is summarized below.

Financing Plan(US$ million)

Local Foreign Total %EquityGecamines 266.6 150.5 417.1 59

Debt a/Bank - 110.0 110.0 16EEC-SYSMIN - 27.0 27.0 4ADB - 65.0 65.0 9EIB - 48.0 48.0 7CCE - 28.6 28.6 4Others (incl. Italy) - 7.0 7.0 1Subtotal - 285.6 285.6 41

Total Financing 266.6 436.1 702.7 100

a/ Additional financing from bilateral sources in the amount of about US$30million is expected to F'e available.

6.05 The Project would be financed about 59% by internal cash generationand 41% by external sources. The proposed Bank financing from IBRD would coverabout 16% of the Project's total cost, and 25% of the total foreign exchangerequirements. The European Economic Community (through their Hinerals Systemsfacility--SYSMIN), the African Development Bank (ADB), the European InvestmentBank (EIB) and the French Caisse Centrale de Cooperation Economique (CCCE) wouldcofinance the Rehabilitation Program. The effectiveness of all loans/creditswould be a condition of effectiveness of the Bank loan. Gecamines is consideredcapable of meeting its share of Project cost in local and foreign currenciesfrom internal cash generation (para. 7.05). Should the Project experience acost increase, Gecamines has agreed to finance this increase by borrowing withina maximum overall 50:50 debt to equity ratio which should not pose any majorproblem given G.camines' profitability and ability to service debt.

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6.06 The proposed Bank loan of US$110 million would be extended toGecamines for a period of 15 years, including 3 years of grace aud at the IBRDinterest rate plus a 10% premium -hereof as guarantee fee to the Government.Gecamines will bear all foreign exchange risk and reinburse to the Governmentthe commitment and service fees.

6.07 Although debt service for external financing for the Project would beguaranteed by the Government, special trust arrangements would be made for theBank loan and other loans made directly to Gecamines on commercial terms,considering the substantial amounts of financing involved. These would besimilar to the set-aside arrangement established under the Gecamines expansionproject that have worked well since 1975. They provide for debt service to bepaid out of a special fund managed by an independent commercial bank outside ofZaire, the Union des Banques Arabes et Frangaise (UBAF), of London. The fund isreplenished by Gecamines by monthly allocations of 1/6 of the aggregate amountof debt service due semi-annually, directly from export sales proceeds, andcontain at all times at least half of the following semi-annual debt servicepayment due. Satisfactory arrangements on the second trust fund would be acondition of effectiveness of the proposed Bank loan.

C. Procurement

6.08 Procurement for all Bank-financed items will follow the Bank'sprocurement guidelines. Procurement of items financed by the other colenderswill follow the respective procurement procedures of these institutions. Thespecific allocation of procurement packages was established during thecolenders' meeting of March 1986.

6.09 The in-pit crushing and cor.veying unit, the anode preparation module,and the equipment and spare parts, including transport to Zaire, will beprocured primarily through International Competitive Bidding (ICB) in accordancewith Bank's procurement guidelines. However, equipment and spare partsamounting to about US$10 million, or about 9% of the proposed Bank loan amountis to be procured through Limited International Bidding (LIB) from at least 4suppliers from at least 3 different countries, to replace or serve existing mineand plant equipment. This would include packages costing less than US$300,000,up to US$3 million. In addition, approximately US$10 million, or about 9% ofthe proposed Bank loan amount will be used for direct purchase of proprietaryequipment which will replace or add to proprietary equipment already operatingin the mines and plants. Equipment items are grouped into packages designed toachieve maximum efficiency and economy under a complex financing package.

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6.10 Training and technical studies. Contracting for training staff willbe handled by the Training Department of Gecamines and will be done followingprocedures acceptable to the Bank. All technical studies will be contractedunder Bank Guidelines.

6.11 Contract Review. On the basis of Gecamines' list of procurementpackages, the Bank would do a prior review of bidding documents for packagesestimated to value more than US$300,000 each (representing about 98% ofequipment financing). Packages below US$300,000 would be subject to post reviewby the Bank.

D. Allocation and Disbursement of IBRD Loan

6.12 The Bank loan of US$110 million would finance goods and services asdetailed in Annex 6-1 and as summarized below.

Allocation of IBRD(US$ million)

Loan Allocation % of ExpenditureCategories Amount z to be Financed

1. In-Pit Crushing and Conveying 65.7 59.7 100% of foreignexpenditure

2. Metallurgical Plant 11.1 10.1

3. Equipment and Spare Parts:a. Mining 13.8 12.6b. Mobile and Rail 1.1 1.0 "c. Data Processing 13.3 12.1 - -

d. Training 0.2 0.2

4. Training 2.8 2.5

5. Studies 1.0 0.9 "

6. Marketing Study 0.1 0.1 " "

7. Technical Assistance 0.9 0.8

Total 110.0 100.0-

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All expenditures will be fully documented except expenditures In respect ofcontracts, purchase orders, or training programs valued at less than US$50,000whlch should be covered by Statement of Expenditures. In order to ensure thatfunds for the proposed Project would be made available when needed, a SpecialAccount to be operated by Gecamines would be established with an initial depositof US$5 million, which would be withdrawn after effectiveness. The accountwould be replenished on the basis of documentary evidence, to be provided to theBank by Gecamines, of payments made from the account for goods and servicesrequired for the Project. It is expected that the account would be used mainlytor rcyments against the training and technical studies categories, and forequipment packages costing less than US$1 million.

5.13 The disbursement profiles for the Project (Annex 6-3) are based onestimates of order placements, payment schedules, and expected delivery times.It differs from the standard country and industry profiles as the Project is arehabilitation project with limited erection work and an implementation periodconsiderably less than a greenfield project. The loan and credit are expectedto be fully disbursed by June 1992.

VII. FINANCIAL ANALYSIS

7.01 Financial projections for Gecamines have been prepared in currentUS$ terms based on (i) assumed copper production levels of 470,000 tons; (ii)forecast capital and operating costs taking into account the productivityImprovement and cost reduction impacts of the investment program; and (iii)expected metal prices. The projections are based on a prevailing exchange rateof Z 55 to the US dollar (Feb. 1986) and the following international inflationassumptions.

International Inflation, 1986-95

1986 1987 1988 1989 1990 1991-95

Inflation Rate (Z p.a.) 7.0 7.0 7.5 7.7 7.6 4.5

The exchange rate of the Zaire currency to the US dollar is expected to developin line with the differential between international and local iu'iation, basedon the assumption that the Government will continue to implement its liberalexchange rate policy.

A. Revenues

7.02 The following copper, cobalt and zinc sales volumes are expected:

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Gecamines - Metals Sales, 1985-95(000 tonnes)

1985 1986 1987 1988 1989 1990 and afterCopper Sales 463 473 470 472 470 470Cobalt Sales 10 10 10 10 11 12Zinc Sales 64 65 65 65 65 65

Copper and zinc sales are based on the assumption of Gecamines' full capacityproduction while cobalt sales are expected to remain at the relatively low levelof 10,000 tpy until 1988, given the depressed cobalt market, and to increase toand remain at 12,000 tpy after 1990. Sales revenues are the result of theprojected sales volumes and average metal price levels presented in ChapterIII. The price forecasts used for the projections are summarized below.

Price Assumptions, 1985-95(USS/lb)

1985 1986 1987 1988 1989 1990 1995Constant Terms (1985)Copper 0.64 0.65 0.64 0.64 0.66 0.68 0.74Cobalt 7.30 6.80 7.40 7.50 7.50 7.80 8.00Zinc 0.39 0.39 0.39 0.39 0.40 0.40 0.40

Current TermsCopper 0.64 0.67 0.71 0.76 0.84 0.94 1.29Cobalt 7.30 7.00 8.20 8.90 9.60 10.70 13.90Zinc 0.39 0.40 0.43 0.46 0.51 0.55 0.70

B. Operating Costs

7.03 Operating cost projections are based on Gecamines' present coststructure, and the expected development of the different cost categories as aresult of the Project. The principal assumptions are (i) reduction ofexpatriate labor to about half its current level; (ii) increases from 2,500 to3,600 of local supervisory staff and reduction of the local labor force by about8Z over the next 10 years; (iii) increases of wages and salaries of supervisorystaff by 25% in real terms, and of the labor force by 50% over 10 years, coupledwith a reduction of fringe benefits reflected in a 15% decrease in costs forservices; (iv) an increase in consumables and spare parts costs in real terms by10% over 5 years because of the impact of opening of new open-pits and mining atincreased depths; and (iv) increases In electricity rates by 5% in real termsover the 10-year projection period. Although the Project includes measures forcost reductions and productivity increases in concentrators and metallurgicalplants and for more efficient mining, average production costs in real terms areexpected to vary only little because of the cost increasing impact of opening ofnew pits and of mining at continuously greater depths. Without the Project,however, the production costs would have increased in real terms by about 2-3%p.a.

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C. Financial Projections

7.04 Projections of Gecamines' financial performance for 1986-95 have beenprepared on the basis of detailed assumptions presented in Annex 7-1. Projectedfinancial statements are given in Annexes 7-2 through 7-4 and summarizedoverleaf. Gecamines is expected to remain a profitable operation throughout theperiod, with profits after taxes increasing from US$36 million in 1985 (or 4% ofsales revenues) to US$105 million (or 7% of sales revenues) in 1990, and netcash generation increasing from US$152 million in 1985 to US$258 million in1990. Financial charges would increase moderately as a result of the financingarrangements for the Project from US$21 million in 1985 to a peak of US$34million in 1991. The projections also show continued strong capital andliquidity positions, with debt to equity ratio remaining at all times below15:85, the current ratio equal or higher than 3.0 and the quick ratio equal orhigher than 1.2. Debt service coverage ratio after taxes is expected to behigher than 3.5 at all times; in addition, security arrangements outlined inpara. 6.07 establish a debt repayment mechanism which improves overall debtservice coverage.

7.05 Gecamines is expected to generate a substantial amount of cash, afteradequate levels of reinvestments and debt repayment, accumulating over US$305million over the period 1986-90. While Gecamines has never paid dividends inthe past (except for 1984), Gecamines cash flow prospects indicate that itshould be, largely as a result of the investment proposed under the Project, ina position to distribute dividends again in the coming years while maintaining asound financial structure. Dividend payments should take place only aftersatisfactory liquidity, indebtedness and debt service ratios are met, and aftertaking into account the copper and cobalt market risks, the Company's futureinvestment program, and the requirements to build up proper reserves forlong-term expansion plans. The Government and Gecamines have agreed to have astudy carried out and propose to the Bank by December 31, 1986 on appropriatepolicy of dividends distribution which would, inter alia, determine (i) theappropriate levels of capitalization and liquidity ratios; (ii) the appropriatelevels of statutory reserves; and (iii) the dividends (and form thereof)payments allowable after taxation and creation of reserves. The proposal, afterBank and Government approvals, should be implemented starting in fiscal year1987.

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Geczrms - Sum.z, of Fin1al Perfome. 1985-91(US$ mt4lw - awrs term)

19M85 1986 1987 1988 189 1990 1991Sales (eveaae)

Copper 673.7 701.6 734.4 791.7 874.0 969.4 1,046.1Cobalt 160.9 155.2 180.7 196.4 232.4 2839 302.6zinc 54.8 57.6 61.5 64.5 73.0 78.6 833Oter tals 18.2 19.7 24.0 23.1 24.5 26.2 28.0

Natal Revem,es 907.6 934.1 1,006 1,075.7 1 ).9 1,5.0 1,460.1Other Sales 38.9 40.3 43.1 46.2 49.7 53.5 56.8

Total r~ues 946.5 9741. 1,tVi3.6 11 21.9 1,25316 1,411.5 1,516.8

Operatit and h4eting Costs 826.0 860.6 912.2 %5.6 1,066.2 1,169.0 1,29.1

OperatingT e120.5 113.8 131.4 1563 1871 242.6 287.7Finanaal urg 20.8 21.4 23.0 26.1 293 33.9 33.5Corporate l d I ExpotV t M 63.5 6514 70.0 753 843 95.1 102.2Net Ine After TaC 36.1 27.0 383 54.9 73.8 104.8 127.1

Cash Flow

Internal Cah Generatim 152.2 1509 160.8 184.6 214.0 257.5 282.9Capital Eqmexpitxe 151.0 150.0 160.0 180.0 170.0 108.0 160.0

Assets

Current Assets 529.9 485.0 468.9 483.0 514.1 5491. 585.9Acimalated Cbh Surplus/(dicit) 25.7 49.6 90.2 109.7 152.5 330.8 415.7Net FMd Assets 1,21814 1,228.0 1,250.6 1,278.1 1,306.3 1,2669 1,278.6Othe Assets 19.6 19.6 19.6 19.6 19.6 19.6 19.6

Total 1,818.3 182317 1,885.5 1,96914 2,073.1 2,242.1 2,367.6

Liabilitier and FAiuty

Curreat Liablities 1469 135.9 129.2 123.9 12D.2 122.2 126.6Log'Term Debt 132.5 117.6 145.9 173.5 230.7 285.1 274.2ProvxiBsio 76.1 76.1 76.1 76.1 76.1 76.1 76.1Equity 1,440.2 1,467.2 1,505.6 1,560.5 1,634 3 1,739.1 1,866.2

Total 1,818.3 1,231J4 1,J85.5 1,96914 2,023.1 2,242.1 2367.6

Ratios

Opecating Ie d Sal 12.6 119 12.9 14.3 15.6 17.7 19.5Net Profit fSalS 3.8 2.8 3.7 4.9 5.9 71. 8.4Qwrent Ratio 3.1 3.0 3.0 3.0 3.9 3.9 4.0QuicklRatio 1.5 1.3 1.2 1.2 1.6 1.7 1.7L-T DEbt:Equity 8:92 7:93 9:91 10:90 12:88 14:86 13:87Debt rvi Covera 41. 4.0 3.8 3.9 3.8 714 6.6

a/ Estimated.

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D. Breakeven Analysis

7.06 Profit and cash breakeven prices have been calculated for copper on anannual basis and are presented in the table below.

Gecamines - Breakeven Prices for Copper, 1986-90(USe/lb - Current terms)

1986 1987 1988 1989 1990

Profit breakeven price (a) 62 64 68 74 80Cash breakeven price (a) '5 58 62 68 73

(b) - 3 56 59 64 65Realized price 67 71 76 84 94

Note: (a) Under (a) the cash breakeven copper prices are calculated on thebasis of a prorata allocation of costs in accordance with theproducts' shares in revenues.

(b) Under (b) the cash breakeven copper prices are calculated with fullcrediting of co-products sales to copper.

Throughout the forecast period, Gecamines is expected to realize copper pricesabove its profit breakeven point, providing a satisfactory cushion in the eventof a downturn of copper prices. Cobalt also plays an important role, since, asa co-product, it considerably improves the Company's ability to sustain lowcopper prices; this has been Gecamines' experience in the late 1970s (para.4.36), when low cobalt sales levels and prices compounded an already difficultcopper situation and Gecamines was losing money as a result. It also emphasizesthe need for the Company to define a cobalt production and marketing strategythat preserves this situation (para. 4.50).

E. Sensitivity Analysis

7.07 The favorable situation presented above would, of course, becompromised if (i) the productivity increases and cost savings do not take placeas expected as a result of the Project, or take place with considerable delays;(ii) copper revenues do not materialize because the targeted copper productionlevels cannot be met or copper price decrease further in real terms; (iii)Gecamines' cobalt sales revenues decrease as a result of uncarefully plannedmarketing approach. Gecamines' future financial position has been examinedconsidering (i) a possible increase in production costs in real terms by 10%;(ii) a decline in copper prices by 5 cents/lb until 1990; (iii) a productiondecline by 35,000 tpy (from 470,000 tpy); (iv) a stabilization. of cobaltproduction at 8,000 tpy (instead of 12,000 tpy); (v) and an increase in cobaltprices by US$3/lb. The results are summarized below.

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Gecdzw -Smuitivity Case Key Indicators(US$ million - airrent nu)

1986 1987High Prod Low Oa Lw Oa HighCGo [LOW Hi ghProd lac LawO CIUHghCOn LOWrOD

Cost Price Prod Price Pmd Cast Price Pmd Prie Pid

Sales Reens 974.4 963.6 949.1 997.2 958.9 1,043.6 1,020.7 1,010.9 1,092.5 1,007.5Net Incae

after 1mx -59.0 17.2 8.1 47.3 13.5 -52.9 17.4 13.9 77.6 6.8Interml Cash

Geneatio 64.8 141.1 131.9 171.2 137.4 69.6 139.9 136.4 2D0.0 129.2Equity 1,298.6 1,457.0 1,448.2 1,563.6 1,453.7 1,245.7 1,474.8 1,462.1 1,565.1 1,460.5

Current Ratio 3.0 3.0 2.9 3.0 3.0 3.0 3.0 3.0 3.1 3.0L[rT Debt:Equity 8:92 7.93 8:92 7:93 7:93 10:9D 9:91 9.91 9:91 9:91Debt Servioe

Coverage Ratio 1.7 3.8 3.5 4.6 3.7 1.6 3.3 3.2 4.7 3.0Cash Breaieven

Cbpper Prlce 59 56 56 54 56 62 59 60 56 61

7.08 These indicators confirm that the Company's financial situation islikely to remain healthy even under difficult operational or market conditions.The only exception is that of the sharp increase in production cost which wouldseriously affect the Company's financial situation. It also highlights the needto keep strict track of the parameters it controls most, namely its productioncosts and its cobalt sales. However, even if copper prices failed to recover asexpected during this period or if the cobalt market remained depressed, theCompany's internal cash generation would still be sufficient to finance its partof the Project investments, as well as replacement investments, and maintenanceafter the Project period.

F. Financial Covenants

7.09 In order to ensure the necessary financing for the Project andits completion in a sound manner, agreement was reached on the following financialcovenants.

(a) from the Government

(i) that it would ensure that Gecamines has adequate access tosufficient foreign exchange to complete the Project and tooperate the Company (para. 4.39);

(ii) t.at the financial relations between the Government and Gecamineswould be governed exclusively by the existing tax regime and by adividend policy acceptable to the Bank (paras. 4.31 and 7.05); and

(iii) that it will abide by the financial covenants to ensureGecamines' viability and ability to implement the Project.

-55-

(b) from Gecamines

(i) that it will prepare every year (a) 5-year financial projections,including its foreign exchange and local currency requirements,and (b) foreign exchange and local currency budgets on an annualbasis;

(ii) that, in any given year, it will not make capital investments,i.e., additional to the slready approved Investment Program,exceeding in aggregate US$15 million without prior Bank approval;and

(iii) that it will maintain a current ratio of at least 1.3 and a Latioof debt (excluding short-term maturities thereof) to equity ofnot more than 40:60.

G. Auditing and Reporting Requirements

7.10 All Gecamines companies would be requested to submit to the Bankannual reports audited by independent auditors acceptable to the Bank within 4months of the end of the accounting year. Gecamines has in the past beenaudited by independent auditors acceptable to the Bank and no specialarrangements for selection of auditors have to be made. In addition to theannual audit reports, Gecamines will submit quarterly financial statementswithin 45 days after the end of each quarter and monthly project progressreports and procurement status reports within three weeks of the end of eachquarter. Finally, within 6 months after the closing date for the Project,Gecamines will prepare and furnish to the Bank a completion report on theProject dealing with its Implementation, and the costs and benefits derived andexpected to be derived therefrom. Gecamines record of the last 10 years onreporting to the Bank and alerting the Bank on potential problems has beenexcellent and no problem is expected to comply with the Bank's requirements.

H. Financial Rate of Return and Sensitivity Tests

7.11 The financial rate of return for the Project has been calculated on anincremental basis in real terms. For assessment of the Project's results it wasassumed that without the Project, output even from viable and competitiveoperations would decrease. The specific assumptions on production and costdevelopment without Project are subject to a considerable margin of uncertaintydepending on the adjustments to low investment levels by management, therepercussions on Gecamines finances, and the impact on Zaire's balance ofpayments and creditworthiness. The main assumption made here is that, shouldthe Project not be implemented, Gecamines' copper production would decrease at1.5% p.a. from 465,000 tonnes in 1985 to about 437,000 tpy in 1990.

7.12 The cost and benefit streams in real terms have been prepared on thebasis of the financial projections presented, and are given in Annex 7-5. Basedon these assumptions, the incremental financial rate of return is 21% beforetaxes and 16% after taxes.

-56-

7.13 Sensitivity Tests. As could be expected from an incremental analysis,the return is mostly sensitive to the assumptions made on the percentage declinein production expected should the Project not be implemented. If thispercentage varies from 1.5% p.a. to 1% p.a. (447,000 tons in 1990), the returndecreases from 16% to 12%, demonstrating both the financial risks of the Projectand the limited validity of an incremental analysis when applied to a Project ofthis nature. The return is less sensitive to copper price variations, operatingcosts or investment costs. Switching values have been calculated to equal thereturn to 12% after tax for the most sensitive variables, and are presentedbelow in order of declining sensitivity. The most critical variable is theproduction level to be attained; with this clearly the main emphasis of theProject and to a large extent under Gecamines' control, and on the basis ofGecamines encouraging record of the last 3 years, the probability of theswitching values being reached is small in the 10-15% range. The Project'sreturn is also sensitive to metals prices over which Gecamines has little(copper) or reasonably good control (cobalt). Because of this favorablecopper-cobalt mix, and assuming a rational approach to cobalt sales the overalldownside risk on sales receipts is also small in the 15-20% range, a veryfavorable and in fact rather unique situation for a copper producer.

Switching Values of Critical Variables

Variable Switching Value a/

Production Decrease -17Metals Prices -22Production Costs +29Investment Costs +34

a/ The percentage change that reduces the financial rate of return aftertax to 12%.

I. Major Risks

7.14 The technical risks to the Project are small. The rehabilitation andreplacement component is relatively straightforward in terms of teehnical designand operation; it forms part of Gecamines' recurrent investment needs and hastaken adequately into account on-going operating arrangements.

7.15 As discussed in Chapter IV, while Gecamines is not expected toencounter difficulties in marketing its copper production, it cannot be excludedthat copper prices decline more than has been assumed in the sensitivityanalysis in this Chapter and that cobalt prices and sales remain depressed.Future copper price projections are subject to considerable uncertainty, andwhile most experts expect some improvement, there remains a non-negligeableprobability (in the 20-25% range) that prices remain below the low copper pricescenario presented in para. 7.08. The risk on cobalt sales is to a greaterextent controllable by Gecamines and a prudent marketing strategy shouldminimize this risk. However, given Gecamines' competitive cost structure andgenerally high profitability, it is not considered to present a major problemfor Project implementation. The Project is not expected to influence the generallevel of copper prices, as Gecamines is expected to maintain its present shareof around 7% of the international copper market.

-57-

7.16 One of the main financial risks for Gecamines is the resumption ofundue government interferences in marketing, introduction of additional taxburdens, and demands for transfer of maximum amounts of net profits as dividendswithout due regard to the Company's cash needs for operations and investmentfinancing. In order to minimize this risk, assurances would be sought from theGovernment on clear financial relations with Gecamines governed by the existingtax regime and a suitable dividend policy (paras. 4.3 and 7.05). In order toprovide an adequate base for assessment of its financial needs, the Companywould revise its financial projections annually and submit them to theGovernment and the Bank for review (para. 7.09 (b)(i)). The risk ofinsufficient access to foreign exchange is low because of the right of Gecaminesto retain 45Z of its sales revenues net of marketing expenditures from metals inforeign currency to service its debt and cover its foreign exchange requirementsfor operations and investments (para. 4.39). Lastly, the risk of inefficientpurchasing activities would be minimized through the creation of SONATRAD(para. 4.58).

7.17 Finally, there is also a managerial risk in this Project. The successof the rehabilitation program depends heavily on the management whose task is toimplement the Project successfully and correct past practices that had led to adeteriorating situation. In order to assure effective management, assuranceswould be sought on Bank consultation before changes in the organization are made(para. 4.02). Moreover, the training program should improve technical skills oflocal employees and thus lay the basis for improvement, and for the successfulintroduction of cost effective production methods. Finally, the Project'ssuccess depends heavily on the Government's and Gecamines' commitment totransform the agreed upon long-term objectives in a consistent action program.Gecamines has agreed to prepare during the Project implementation period andsubmit by December 1989 a draft of its next 5-year investment program for theperiod 1991-1995, including the principal features of its program after 1995.

VIII. ECONOMIC ANALYSIS

8.01 The Project is an important element of the Government's objective toimprove Zaire's balance of payments through continuing export and foreignexchange earnings. Gecamines' continued ability to generate foreign exchange isessential to support the Government's strategy of diversification of itseconomic structure, attract foreign capital, and permit economic growth.Gecamines is expected to generate in current terms a total of US$5.8 billiongross foreign exchange over the next 5 years (or US$1.2 billion p.a. on theaverage), which is expected to continue to represent over 55% of the country'sforeign exchange earnings. On a net basis, the net foreign inflow would amountto US$3.2 billion over the next 5 years (or US$0.6 billion p.a. on the average),after taking into account on the one hand foreign loan disbursements (US$0.3billion), and, on the other, foreign exchange expenditures for capitalinvestments (US$0.4 billion), operating costs (US$2.3 billion), and debtservicing (US$0.2 billion).

-58-

A. Economic Rate of Return

8.02 The economic rate of return of the Project has been calculated in realterms, on an incremental basis based on the streams given in Annex 8-1. Theeconomic cost and benefit streams are measured from the viewpoint of the economyas a whole, and have been adjusted to reflect distortions in the market pricesof the project inputs and outputs. They have been based on the same assumptionsused for the financial return, except for the exclusion of all identifiabletaxes, as a standard conversion factor of 1 was applied, which assumes that theGovernment would continue to apply exchange rate and tariff policies which wouldeliminate distortions between international and domestic price levels. Asexpected for a project of this nature, the economic rate of return is highamounting to 24%. As in the case of the financial return, the economic returnis most sensitive to the without-Project production levels. Should the Projectprevent a drop in production of only 1% p.a. during 1986-90, instead of 1.5Zp.a., the return would still be acceptable at 17%. As the financial return, theeconomic return is less sensitive to variations in revenues, operating costs,and investment costs.

B. Foreign Exchange Benefits

8.03 The net foreign exchange benefits of the Project are high sinceGecamines generates 10OZ foreign exchange from export sales of copper, cobalt,and zinc; and about 45% of its cost, in addition to the service of foreign debt,is in foreign exchange.

8.04 Incremental foreign exchange benefits have been calculated based onthe streams for the incremental financial rate of return plus debt-service onforeign financing. Metal revenues have been calculated as 100% foreignexchange, as practically all incremental production will be exported. Theforeign exchange portion of operations and capital costs include the direct andindirect foreign exchange costs. The total foreign exchange portion foroperating and capital costs are about 45% and 60%, respectively. The resultingincremental net foreign exchange benefits of the Project are considerable,averaging about US$66 million p.a. in current terms over the next 5 years (Annex8-2).

C. Other Benefits

8.05 Other macro-economic benefits are the financial revenues which willaccrue to the Government (income and other taxes). On the basis of the presenttaxation system, during the next 5 years, Gecamines is expected to pay aboutUS$0.9 billion in direct and indirect taxes, (or US$180 million p.a.), of whichUS$0.4 billion in export and corporate taxes and US$0.5 billion in other taxesincluding import duties. Substantial additional benefits could accrue to theGovernment from dividend payments.

8.06 As a part of the institution building effort, training programswill be instituted for Gecamines. The unquantifiable economic benefits oftraining add to the attractiveness of the Project. Finally, the Bank will beworking closely with Gecamines to help prepare a sound investment program forits long-term development.

-59-

IX. AGREEMENTS REACHED AND RECOMENDATIONS

9.01 The following agreements have been reached:

(a) With the Government that:

(i) it would consult with the Bank prior to any decision affectingthe organization of the Gecamines group (para. 4.02);

(ii) it would consult with the Bank before making any changes to thetax regime governing Gecamines' finances (para. 4.31);

(iii) it would continue to allow Gecamines to retain 45Z of its foreignexchange earnings (para. 4.39);

(iv) financial relations between the Government and Gecamines would begoverned exclusively by the existing tax regulations and thedividend policy to be agreed upon between the Company and theGovernment, and that no sales without proper and promptcompensation would take place (para. 4.40);

(v) along with Gecamines, it would be requested to discuss with theBank its expansion investment plans and the structure of thepartnership envisaged for such investment (para. 5.05);

(vi) along with Gecamines, it would have a study carried out andpropose to the Bank, by December 31, 1986, an appropriate policyof dividends distribution (para. 7.05); and

(vii) it will abide by the financial covenants for Gecamines asdescribed in para. ,.09.

(b) With Gecamines/Holding that:

it would consult with the Bank prior to any decision affecting theorganization of the Gecamines group (para. 4.02).

(c) With Gecamines/Exploitation that:

(i) it would establish, by September 30, 1986, an adequately staffedcorporate planning and strategy department reporting to theDirector General (para. 4.07);

(ii) it would prepare, by December 31, 1986, a plan to implement itsstated policy of gradually increasing wages over the next severalyears and of reducing fringe benefits (para. 4.15);

(iii) it would prepare, not later than December 31, 1986, acomprehensive manpower development and training program for itssupervisory staff (para. 4.18);

-60-

(iv) it would present by December 31, 1986 a plan to reorganize itsmine planning at all mining divisions, and particularly at theKolwezi open-pits (para. 4.22)

(v) it would submit for the Bank's review, by December 31, 1986, aprogram for cost accounting, cost control and cost reduction byproduction center (para. 4.32);

(vi) it would submit half-yearly external audited reports of itscommercial operations (para. 4.42);

(vii) it would submit quarterly external audited reports of itspurchasing operations (para. 4.58);

(viii) it would submit at regular intervals reports on pollution controland discuss corrective measures required (para. 5.18);

(ix) it would finance cost overrun on the Project within a maximumoverall 50:50 debt to equity ratio (para. 6.05);

(x) it would abide by the financial covenants described in para.7.09; and

(xi) it would prepare and submit to the Bank not later than December1989 a draft of its 1991-95 investment program (para. 7.17).

(d) With Gecamines/Commerciale that:

(i) it would not amend its Marketing Agreement withGecamines/Exploitation without Bank prior approval (para. 4.42);

(ii) it would have its operations audited half-yearly (para. 4.42);

(iii) it would market its products on the basis of arm's lengtharrangements (para. 4.43); and

(iv) it would prepare, not later than June 30, 1987, ,- plan definingits strategy for marketing wirebars (para. 4.4B) and cobalt(para. 4.49).

(e) With SONATRAD that:

(i) it would not amend its Purchasing Agreement with Gecamines/Exploitation without Bank prior approval (para. 4.58);

(ii) it would have its operations audited quarterly (para. 4.58); arid

-61-

(iii) its threshold would be reviewed every six months and could not bechanged without prior Bank's approval.

9.02 A condition of effectiveness of the proposed Bank loan would be theeffectiveness of all other loans/credits for the Project (para. 6.05). Anadditional condition of effectiveness would be signing of satisfactory set-asidearrangements for the Bank Loan (para. 6.07).

9.03 On the basis of the preceding commitments and agreements, the Projectis suitable for a Bank loan amounting to US$110 million for 15 years, including3 years of grace.

Industry DepartmentMarch 1986

-62- ANNEX 2-1

ZAIRE - GECAMINES REHABILITATION PROJECTNON-COPPER MINING ACTIVITIES

Diamonds

1. Zaire is the world's leading industrial diamond producer, accountingin 1984 for 29% in volume of world mine production. This industry has been animportant earner of foreign exchange, contributing between 4X (1981) and 13%(1984) of Zaire's foreign exchange earnings over the past decade. Diamondextractiot is carried out in two ways: industrial production by the SocieteNiniare de Bakwanga (MIBA), a state-owned company managed by the Societed'Entreprise et d'Investissements which also owns 20Z of MIBA.1/ Between 1978and 1982, exports from MIRA deposits at Mbuji-Mayi in the Kasai Orientalprovince represented approximately 881 of Zaire's total officially recordeddiamond exports. Individual prospectors account for the rest of Zaire'sdiamonds production: artisanal diggers operate near Tshikapa in Kasai Orientaland illicit mining on the MIBA concession also occupies some 15,000 people.Officials of that company estimate that in the past up to 5 million carats ofindustrial diamonds have been smuggled out of its concession area annually andsold illegally. Total recorded production more than tripled from 6 millioncarats in 1982 to 18.5 million carats in 1984, with MIBA's production growingfrom 5.7 to 7.0 million carats during that period and the remainder beingproduced by artisans.

2. Although diamond mining is by far not as important overall as copper,its impact on the regional economy in Kasai Oriental is substantial as itprovides the base of living for at least 100,000 people. Although MIBA'sactivities declined until 1982, small-scale mining induced by illicit trade andsubsequently the Government's liberalization of private diamond purchases maywell have couLterbalanced this company's decreasing importance and contributedto maintaining an economic boom in the area around Mbuji Mayi which is estimatedto be among Zaire's fastest growing cities.

Gold

3. A state-owned company, the Office des Mines d'Or de Kilo-Moto, is themost important gold producer in Zaire. Other producers include Societe Miniereet Industrielle de Kivu (SOMINKI) and Gecamines. Kilo-Moto operates severalmines in a remote area near the Uganda and Sudan borders in the Haut-Zaireprovince, and faces serious logistical problems. Its output has declinedsteadily from about 4 tonnes in 1968 less than one tonne in 1980, mostly onaccount of management weaknesses, departure of expatriates, obsolete equipment,

1/ This public limited liability company registered in Belgium, iscontrolled by Societe Generale de Belgique, which owns 53% of theshare capital; De Beers Consolidated Mines owns 19%.

ANNEX 2-1

-63- Page 2 of 2

and lack of imported raw materials and spare parts, but admittedly theproduction may have been higher and exported illegally. The gold produced byKilo-Moto is refined at Hoboken (Belgium) and sold by Its own office inBrussels. Kilo-Moto's reserves are estimated at approximately 90 tonnes, or 2.9million troy ounces of gold. A reversal of the sharp decline in Kilo-Moto'soutput calls for the development of new reserves; the replacement of theobsolete processing facility; and changes to the marketing arrangementspresently in effect.

Manganese

4. Since the closure in 1975 of the Benguela railways, its sole viableexport route, the state-owned company, Soci&te Miniere de Kisenge (SMK) hasconsiderably reduced manganese ore production and stopped ore shipments, ineffect building up ore inventories. Since the technical reopening of therailways in July 1979, a few tonnes of manganese have been shipped: some 21,000tonnes arrived at Lobito (Angola), between April 1979 and April, 1981. At thebeginning of July 1984, the company had a total stock of over 1 million tonnesof manganese ore awaiting export. The 500 workers still on the payroll of thecompany are subsidized by the Government. The company is reportedly consideringbuilding a refinery which would convert the manganese carbonate into electrolytemanganese oxide for battery manufacture.

Tin

5. Societe Miniare et Industrielle du Kivu (SOMINKI), a joint venture ofthe Government of Zaire (28%) and Cogemin (72%), of the Belgo-French Empaingroup, is a company based in the Kivu province which produces mainlycassiterite, but also some gold, wolframite, columbo-tantalite and monazite.The company is also acting on behalf of SOMIKIVU (90% owned by the U.S.-basedMetallurgy Mining Group and 10% by the Empain group) in order to exploitdeposits of niobium (used in nuclear reactors) in Kivu.

6. Societe ZAIRETAIN is a tin and tungsten producer in the Northern Shabaprovince which is owned 50% by the Government and 50Z by Geomines Cie, ofBelgium. ZAIRETAIN has encountered increasing difficulties in recent yearsbecause of lack of exploration work, depletion of secondary, weathered ore andtechnical difficulties in crushing and grinding the underlying primary ore, andinsufficient availability of foreign exchange for operational equipment suppliesand spare parts, and investments. Additional adverse factors have beenincreasing restrictions in expatriate employment, insufficient training ofZairians to take over their positions, and low attractiveness of the company'slocation.

Industry DepartmentDecember 1985

ANNEX 3-1-64-

ZAIREGECAMINES REHABILITATION PROJECT

THE ZINC MARKET

1. World reserves of zinc are estimated at 162 million tonnes(contained metal), of which 61 million tonnes (38Z) are located in Australia,Canada and the USA. The remaining reserves are w:dely distributed in manycountries. In addition 163 million tonnes of resources are known. Zinc iscommonly found in association with other metals, with 60X and 10% of mineproduction obtained from zinc-lead ores and zinc-copper ores, respectively.

2. The following table summarizes the recent development of zincproduction.

ZincWorld Mine Production. 1960-83 a/

('000 tonnes)

1960 1965 1970 1975 1980 1983

Industrialized CountriesCanada 369 746 1,139 1,230 1,059 1,070United States 396 554 496 468 348 302Australia 322 355 484 501 495 695Japan 157 221 280 254 238 234Other 556 558 723 701 1,016 965Subtotal 1,800 2,434 3,122 3,154 3,156 3,266

Developing CountriesPeru 157 255 316 365 488 527Mexico 271 225 266 221 243 252South Africa 25 30 54 67 82 108Zaire 83 91 87 80 67 82Other 258 280 343 588 510 545Subtotal 794 88i 1,066 1,321 1,390 1,514

Total 2,594 3,315 4,188 4,475 4,546 4,780

a/ Excludes CPEs.

Source: World Metal Statistics, World Bureau of Metal Statistics (WBMS).

As shown in the above table, Canada, Australia, and the UnitedStates accounted for 43Z of world mine production in 1983, and otherindustrialized countries accounted for another 25%. Developing countriesaccounted for 32%, with Peru contributing the major share of 11%. Threecountries - Australia, Canada, and Peru accounted for 55% of the zinc oreexport trade. Secondary production from old scrap is relatively smallcompared to other metals, estimated at 5Z of refined production.

ANNEX 3-1Page 2 of 4

3. World zinc production grew strongly in the 1960's but stagnated inthe 1970's. New capacity came on stream, particularly in the Tara mine inIreland and the Rubilas in Spain, in the mid-seventies, resulting in loweroverall capacity utlllzation (80-85%) in the late seventies. However, mlneproduction was limited by strikes in North America and Ireland from 1979 to1981, preventing a build-up in concentrate stocks. Zinc mining capacity islargely controlled by eight companies holding directly and indirectly overfifty percent of mining capacity. During periods of low prices, mineproduction is as a result more readily adjusted to demand than is the casefor other metals. Discoveries of large zinc deposits, in recent years shouldassure an adequate supply, although some of these deposits require priceswhich are considerably higher than recent levels, to be viable.

4. There has been a shift in zinc refining to producing countries awayfrom consuming countries, resulting in a surplus of refining capacity andclosure of older facilities, particularly in the USA. Host of the newerplants are based on electrolytic processes, which now represent 75% ofrefining capacity, as opposed to 25% for pyrometallurgical plants.

ZincWorld Slab Production, 1960-83 a/

('000 tonnes)

1960 1965 1970 1975 1980 1983Industrialized Countries

Canada 237 325 418 427 592 617United States 792 978 866 450 370 296Australia 122 202 268 201 301 303Japan 181 368 676 698 735 701Germany, FR 192 182 301 295 365 356Other 729 820 1,073 1,086 1,365 1.404Subtotal 2,253 2,875 3,602 3,157 3,728 3,677

Developing CountriesPeru 33 61 69 63 64 155Mexico 53 63 85 163 145 180South Africa - - 27 66 81 83Zaire 53 57 64 61 44 62Other 47 79 127 258 39b 459

Subtotal 186 260 372 611 730 939

Total 2,439 3,135 3,974 3,768 4,458 4,616

a/ Excludes CPEs.

Source: World Metal Statistics, World Bureau of Metal Statistics (WBMS).

-66- ANNEX 3-1Page 3 of 4

5. The major uses of zinc are in galvanizing (40% of consumption) aa aprotective coating for steel products; die castings (20%) for automotive andother hardware; and brass products (20%) In plumbing, electrical, and otherapplications. Use in galvanizing has expanded but growth has been restrainedby development of new processes, such as electrogalvanizing which permit moreefficient use of zinc. With downsizing of automobiles during the seventies,zinc lost market share to plastics, but development of thin wall diecastingswhich are lighter and of higher quality than plastics arrested thedowntrend. Other uses of zinc include zinc oxides in rubber products, and inother chemicals, rolled zinc in dry cell batteries, and recently in coinage.

6. Zinc consumption grew strongly during the sixties, but stagnatedfrom the mid-seventies to the early eighties due to lower consumption inautomotive uses, and more efficient use of zinc in many applications. Zincconsumption is concentrated in the transportation and constructionindustries, and their cyclical nature makes for volatile demand on a year toyear basis. Growth in demand is projected to average 2.3% during the1985-1995 period.

ZincWorld Slab Consumption, 1960-83 a!

(t000 tonnes)

1960 1965 1970 1975 1980 1983

Industrialized CountriesUnited States 796 1,221 1,077 839 810 770Japan 198 322 623 563 752 771Germany, FR 297 334 396 297 406 418France 172 278 220 222 330 275Italy 85 186 178 150 236 207Other 736 685 953 845 918 903Subtotal 2,284 3,026 3,447 2,916 3,452 3,344

Developing CountriesBrazil 31 32 52 82 138 102Mexico 23 33 48 63 88 89Korea, R. n.a n.a n.a 24 68 illIndia 60 70 97 82 95 82Other 43 140 220 375 569 591Subtotal 157 275 406 626 958 975

Total 2,441 3,301 3,864 3,542 4,410 4,318

a/ Excludes CPEs.

7. There are three principal price quotations for zinc -- the USproducer price, the producer price outside North America (commonly known asthe European producer price), and the London Metal Exchange (LME) price.Most trade in zinc concentrates and metal is based on the producer prices.However, the LME price better reflects free market conditions. The evolutionin LME prices as well as projections are given in the table below.

ANNEX 3-1-67- Page 4 of 4

LME Zinc PricesActual and Projected

(US$ per pound)

Year Current Terms 1983 $ TermsActual

1965 0.14 0.411966 0.13 0.361967 0.12 0.341968 0.12 0.311969 0.13 0.32

1970 0.13 0.321971 0.14 0.311972 0.17 0.371973 0.39 0.791974 0.56 1.05

1975 0.34 0.581976 0.32 0.531977 0.27 0.411978 0.27 0.381979 0.34 0.44

1980 0.34 0.421981 0.38 0.421982 0.34 0.351983 0.35 0.351984 0.42 0.431985 0.38 0.36

Projected

1986 0.36 0.34

1990 0.56 0.41

1995 0.69 0.41

Source: Metals Week (Actual).Bank forecasts.

Industry DepartmentMarch 1986

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-70-ANNEX 4-3

ZAIRE - GECAMINES REHABILITATION PROJECT

GECAMINES/EXPLOITATION MANPOWER AND TRAINING

I. Gecamines' Staffing Situation

1. Number of staff. In May 1985 GCM had a staff of 36,787, made upof 162 directors (directeuro), 1,248 managerial staff (cadres), 1,779supervisory staff (agents de analtrise) and 33,598 workers (agentsd'execution) (Table 1). Expatriate staff numbered 648, i.e. 1.8% of thecompany's total staff. This number was made up of 81 directors compared to81 Zairian, 368 managerial staff compared to 880 Zairian, and 199supervisory staff compared to 1,580 Zairian. In 1984 expatriate salaries(before tax) and benefits accounted for 27.69% of total labor costs. Thiscreated a serious problem at GCM, which came under heavy Governmentpressure to cut back rapidly on the number of expatriates, not to mentionthe internal complications of having two quite different salary systems forthe same level of responsibility.

2. The GC4 Management plans to cut the number of expatriates by 5-6%each year. As most of them occupy key posts their replacement withZairians is proving extremely difficult. In order to carry this out withas little upheaval as possible, steps should be taken to identify Zairianstaff who show potential, organize virtually -tailor-made' training forthem, and conduct periodic evaluations of their performance, which couldperhaps be done while the expatriates are away on leave. So far there hasbeen no sign of such a program. Most expatriate departures seem to havebeen decided on in a hurry and in response to political pressure ratherthan in accordance with a pre-established plan based on servicepriorities. There has therefore been a feeling of insecurity andbitterness among expatriates, many of whom have helped to ensure the smoothrunning of the Company for years.

3. Salary structure. GCM staff are, in general, by far the bestpaid compared with other public or private sectors in Zaire. Because ofthe austerity measures imposed by the Government, however, basic salarieshave not kept pace with the rate of inflation in the past five years.Following the example of other State corporations, the GC4 Management hastherefore had to increase its contribution in the form of allowances andbenefits paid and provided. Total monetary pay accounts, on average, foronly 47.7% of total labor costs compared to 52.32 for benefits paid andprovided by the Company. For workers, in particular, monetary payrepresented 30% of total pay for this category of staff in 1984, whilesocial benefits accounted for 70Z. Aware --f this siLuQ_inn, the Managementwanted to correct these distortions, the harmful consequences of which havealready begun to appear. In several cases there are reports of a declinein motivation, an increase in absenteeism, a relaxation in discipline andless respect for the production equipment. A new pay system is understudy, which would be based on the responsibilities of the post occupied,production performance and respect for the equipment. Because of political

ANNEX 4-3-71- Page 2 of 9

constraints, however, GCH's room to maneuver in terms of wage policy willremain extremely limited: motivation for better productivity cannot betranslated into substantial increases as long as the social benefitsreceived constitute the bulk of total pay.

4. Training level of workers. In July 1984 the operating personnel(main-d'oeuvre d'execution - MOE) or workers comprised 7,915 laborers(241), 19,211 semi-skilled workers (57Z), 5,137 skilled workers (15X) and1,281 highly skilled workers (4Z), i.e. 33,544 workers in all; 11% of thesewere trained at technical schools, 89% were trained either on the job or atcompany training centers (Table 2). Semi-skilled workers therefore accountfor the bulk of the operating personnel. To upgrade the skill level ofthese workers the concept of in-house training would have to be radicallyrevised, since it is not at present geared to technological development orto the labor structure of a company expected to compete wi-. otherinternational companies. Such a revision would have' to meet the followingcriteria: (i) comply with long-term production goals; (ii) establishcohesion among the different training courses within a trade or group oftrades; and (iii) encourage young staff with a certain level of training totake part in advanced training courses through a realistic motivationpolicy, guaranteeing them career development opportunities.

5. Age of staff. Most of the Zairian managerial staff are in the31-40 age bracket; there are 23,500 staff under 41, i.e. 651 of the totalstaff (Table 3). If retirement age were set at 59 there would be ?0departures of African managerial staff, about 2,000 departures of workersand 114 departures of expatriate managerial staff between now and .89.The departures of Zairian staff will not cause much of a problem. n factthe departure of those in the worker category is even desirable, since thiswill enable GCM to replace poorly trained workers with low productivitywith young people who are better educated and more adaptable totechnological change. According to labor legislation in Zaire, however,employees who reach the age of 59 are entitled to retire but cannot beforced to retire without their consent. GCH has approached the Departmentof Labor and Social Welfare with a view to obtaining the right to terminatestaff whose work is no longer satisfactory at age 59. There is little hopeof these steps proving successful, given the large package of socialbenefits offered to active staff and the difficulties encountered by theState-run Pension Fund (Caisse de Pension) in meeting its commitmentsvis-A-vis pensioned workers.

II. Personnel Management

6. The Personnel Directorate, which was reorganized in 1982, isdivided into two departments: the Personnel Management Department and theStaff Training Department. This new structure is characterized by: (i) theaddition of two new divisions, i.e. the Manpower Planning and ControlDivision (Division de la Planification et du Contr8le des Effectifs) andthe Professi.2nal Qualification and Promotion Division (Division de laQualification et de la Promotion Professionnelles); (ii) the

-72- ANNEX 4-3Page 3 of 9

decentralization of decision-making with regard to personnel management atthe different levels of responsibility, in accordance with a set ofregulations prepared for the purpose; and (iii) the incorporation oftraining within personnel management through the establishment of the StaffTraining Department.

7. Manpower planning is now an integral part of the Company'soverall planning and management. Managers at the production unit level arerequired to forecast their manpower needs and to prepare their manpowerplans, in terms of activity and production programs, in accordance with thepolicies and rules governing the creation or elimination of posts. At thecentral level the Manpower Planning and Control Division studies and, ifnecessary, revises the manpower plans proposed by the production units andis in charge of monitoring and supervising their implementation.

8. The Professional Qualification and Promotion Division isresponsible for conducting qualitative staff evaluations. It isresponsible for: (i)'updating job classifications, (ii) establishingstandards for professional qualifications for each category of staff, (iii)organizing evaluation tests for switching from one category to another, and(iv) ensuring the best possible match between staff and jobs.

9. Based on a comparison of the internal supply of staff and theCompany's quantitative and qualitative needs, the central personneldepartments are able to prepare recruitment, training, career developmentand succession programs. Training is therefore no longer an isolatedactivity; instead, it is incorporated within production, plays a role inimproving productivity and, at the same time, aims at giving every employeethe opportunity to progress in his career.

10. The existence of the new structure undoubtedly makes it easier tocontrol the staffing situation and ensure a fairer and more rational use ofhuman resources. Some major moves have also been made by the Management,viz: (i) the establishment of the Manpower Committee chaired by thePresident/Managing Director of the Company, whose mandate consists offormulating general policy for training and retraining and examining keystrategies and policies for personnel administration and management; (ii)the adoption of new rules and procedures and the assignment and hiring ofstaff to make management more clear-cut and less arbitrary; (iii) theappointment of personnel management department heads to all operatingcenters and to the main functional departments.

11. These efforts are indicative of the desire of the Directorate togive the Company a personnel management system that is both coherent andeffective. At the organizational level the results are visiblysignificant. It will take another two years at least, however, before thesystem which has been put in place can really become operational.Procedures for the processing of personnel statistics have not yet beenfully mastered, since the data are not yet being presented in a usableformat, which could periodically provide managers with an accurate andcomplete set of performance indicators. The manpower plans have been

-73- ANNEX 4-3Page 4 of 9

prepared on the basis of the annual needs of each production unit but thequality of this work varies from one unit to the next and the 12-month timeframe does not give sufficient scope to prepare a long-term training planaimed at the supervisory staff and the highly skilled staff. The personneldepartment heads do not all have the necessary training or the experienceand know-how needed to handle the role of manpower planner and trainingcoordinator. The job classification prepared some twenty years ago is alsoin the process of revision. The Professional Qualification and PromotionDivision, led by a top-level expatriate expert, does not have sufficienttrained staff to accomplish this important and tedious operation while atthe same time fully assuming the responsibilities outlined in paragraph 8.Technical assistance would be needed to remedy this situation. The mainpurpose of such assistance would be to help to prepare the methodology usedto classified GCM jobs and to train the national analysts responsible forcontinuing this work.

III. Training at Gecamines

12. Vocational training at GCM comprises: Ci) classroom instruction,(ii) technicel in-house training, (iii) training for managerial andsupervisory personnel, (iv) traineeships (stages) abroad. All thistraining is administered at the central level by the Staff TrainingDepartment. This department also manages the Centre de Formation desCadres et des Agents de la MaItrise - CFC (Training Center for Managerialand Supervisory Personnel), the Institut Technique de Mutoshi - UMT(Mutoshi Technical Institute), and the Technical Training Division.Proposals have been made at appraisal, which would make the organization oftraining more efficient and coherent. They consist in: (i) merging the,-utoshi Technical Institute with the Technical Training Division, whichalready supervises the vocational institutes and in-house training; (ii)establishing two new units, one of which would be in charge of technicaltraining for managerial personnel, the other being responsible for trainingplanning at GCM.

13. Classroom instruction. Classroom instruction is provided by anetwork of establishments comprising:

(i) The Mutoshi Technical Institute, which trains A2 leveltechnicians (five years after orientation cycle) in electronicsand general mechanical engineering and A3 level skilled workers(three years after orientation cycle) in mining, maintenanceengineering and metallurgy. There are a total of 800 studentsfor the two levels and, on average, it produces 50 A2 and 50 A3graduates each year. The curricula are those established by theState but the quality of the teaching is far superior to that inthe public schools. The success rate in the State examinationsis by far the highest in the Shaba Region and even in thecountry. This success is attributable to several factors: (i)the teachers (instructors) are better trained and better paid --generally 10-15 times better paid than State teachers; (ii)enrollment is based on the establishment's capacity and entry is

ANNEX 4-3Page 5 of 9

more carefully screened; (iii) the operating allocations to GCKschools are based on their needs, unlike the situatlon in thepublic schools. However, although 80-90% of the A3 graduates arehired by GCM, more than 70Z of the A2 graduates set their sightson higher education. In the long term, GCM, with its competitivesalary structure, should be able to recover these students afterthey liave completed their university training. The short-termgoal fo. the A2 cycle cannot, however, be said to have beenachieved, since it has not proved very profitable in economicterms.

(il) The seven vocational institutes (three in Kolwezi, one each inKambove, Lubumbashi, Likasi and Kipushi). Enrollment in theseschools is about 1,600, with approximately 300 graduating eachyear. These graduates must take entrance tests before beinghired by the Company, which accepts 80X on average; this figurestill does not meet the Company's needs for workers. Thestandard of teaching is good but there is still room forimprovement. While the general courses have oeen taught byteachers with a university degree, two-thirds of the teachers oftechnical subjects are from the worker category. GCM should takesteps to hire qualified teachers who have graduated from theInstituts Superieurs Pedagogiques Techniques, one of which islocated in Likasi and was financed by the Third Education Projectsponsored by the World Bank.

14. Technical in-house training. The in-house training is designedfor the workers. It is given at the centers attached, on a hierarchicaland operational basis, to each major production unit. There are 14 centersin all, which provide advanced training to some 3,000 staff each year. In1984, 3,300 staff were invited to take advanced training and the averagelength of training for each trainee was 170 hours. This technical trainingwas primarily a requirement for the promotion of workers to supervisoryposts (500 promotions in 10 years) and for the promotion of workers to thehighly skilled category (495 promotions in 10 years). Since 1982 there hasbeen a unit (the In-House Training Monitoring Unit) within the TechnicalTraining Division to keep track of in-house training activities byproduction unit and to help standardize the format for technical trainingcourses. There still remains much to be done to improve this program. Thetraining methods and programs vary from one center to another. Theinstructors are not hired on the basis of uniform criteria. There is alack of modern teaching equipment in some centers and existing equipment Isoutdated. The personnel department heads are, in theory, responsible formonitoring the effectiveness of the training by obtaining as much data aspossible from the production units. But they do not yet have theexperience needed to perform this role effectively. Finally, there isstill no in-house training policy geared to long-term production and careerdevelopment goals. The training programs are not prepared from a globalstandpoint based on an in-depth study of trades or occupations and theirdevelopment. At the technical level the programs are not divided intounits which would enable the most capable personnel to gradually improvethemselves.

ANNEX 4-3Page 6 of 9

15. Training of managerial and supervisory personnel. This trainingis given at the Centre de Formation des Cadres et des Agents de MaItrise -CFC (Training Center for Managerial and Supervisory Personnel).Established in 1981, this center has received special attention fromManagement. The reasons for this are: (i) the rapid increase in thepercentage of African staff, which is expected to go from 76% to 85% by theend of 1989; and (il) the inclusion of 930 Zairians at the supervisorylevel in the past five years, 500 of whom require retraining. The traininggiven at CFC comprises: (i) courses up to the first and second supervisorylevel; (ii) training for young university graduates in preparation fortheir role as department heads; (iii) the retraining of department heads;and (iv) seminars for directors. A complete training cycle comprisestheoretical courses interspersed with periods of practical training on thejob. The length of the cycle depends on the level of the training;generally the duration varies from two to six months. The young universitystudents also are the subject of special monitoring by an integrationunit. The training programs prepared especially for them comprise threephases: (i) the initiation phase, organized in the third and fourthuniversity year during vacations; (ii) the integration phase, which beginswith the hiring, for a probationary period of two years, of universitygraduates; and (iii) the temporary assignment phase, organized for thosehired permanently by the Company on completion of the integration period.

16. The Center has trained 473 staff members since it opened, 290 ofthem supervisory staff, 86 department heads and 97 directors. Thelast-mentioned have attended two short seminars led by a consultantprovided under the technical assistance scheme financed by the World Bank.The Center's results seem very encouraging, despite certain weaknesses,which are discussed later on. An overall evaluation should be made of thisprogram, however, with a view to making it even better suited to theCompany's needs before launching the second phase of its development.

17. Several points need to be kept in mind to impruve the training ofmanagerial personnel: i) the management training given by the CFC shouldbe supplemented by technical training adapted to each field ofspecialization, this being urgently needed because of rapid technologicaldevelopment and the deterioration in the quality of the training given inthe Facultes Polytechniques; (ii) a study of the training needs ofmanagerial and supervisory staff should not be limited to the opinions"xpressed by the production unit heads; it should be based on staff,erformance evaluations, on the one hand, and on an in-depth study of themanpower situation, on the other, from the point of view of age and skilldistribution and reductions in expatriate manpower and the replacement ofretirees; (iii) the teaching staff at CFC needs to be strengthened andretrained; although this staff has an average service of eight years withGCM and eight to ten years' teaching experience, their management know-howis limited to theoretical knowledge and to the technical assistance supportreceived by the Center; (iv) finally, one cf the main weaknesses lies inthe coordination of the practical training (stages) in the productionunits, which is handled by a team made up of five people, three of whomhave no experience in operations. Apart from these flaws, CFC's activities

ANNEX 4-3-76- Page 7 of 9

are generally successful and its competence was recently confirmed by theadoption of new personnel management procedures, whereby one of theprerequisites for the promotion of managerial and supervisory staff will bethe successful completion of training at CFC.

IV. Program of Action for 1986-90

18. At the present time GCM has the data and human resources only forthe preparation of annual manpower programs. The quality of thepreparation also varies from one production unit to another. In theabsence of any medium-term plan for manpower development and training, aprogram of action has been prepared by GCM along the following lines:

(i) The level of expertise of the managerial personnel should beimproved or maintained during the period in qniestion; there arealso plans to increase the number of managerial/supervisorypersonnel at the works level, while cutting back the number ofmanagerial personnel in the departments and in the Company'ssocial programs. The total number of manr -erial/supervisorypersonnel will go from 3,000 to 3,700 by the end of 1990, mainlythrough internal promotion.

(ii) During this same period the number of expatriate personnel willdrop from 648 to 460.

(ii) The total number of workers will fall by 2X per annum, while theCompany plans to upgrade the skill level of the semi-skilled andskilled category by developing in-house training.

19. With regard to personnel management, G04 should for an initialperiod (two years) take steps to accomplish the following: (i) establishjob descriptions for supervisory posts in terms of the programs andactivities planned, together with the professional requirements for theseposts; (ii) complete a detailed inventory of managerial and supervisorypersonnel; (iii) complete the formulation of mechanisms, procedures andrules for personnel management and introduce these at the production unitlevel; (iv) train personnel management staff and initiate them in themanpower planning process; (v) strengthen personnel departments at thecentral level (production units) through the hiring of trainingspecialists. Special attention should also be paid to revising theclassifications, since these are no longer consistent with changes thathave occurred in the trades and professions, and to formulating themethodology used for personnel evaluation.

20. It is expected that by the end of this initial phase thepersonnal management structures will be capable of functioning normally,effectively implementing the decentralization policy, furnishing precisedata on the manpower situation of each unit, and forecasting itsmedium-term development. It should be possible to prepare a preliminarymedium-term manpower development plan in 1987 on the basis of these dataand to identify manpower needs according to production and activity

ANNEX 4-3Page 8 of 9

programs. This plan would have to be adjusted periodically, however, asand when the Professional Qualification and Promotion Division, with thehelp of technical assistance, prepares the methodology to be used for jobclassification and personnel evaluation.

21. With regard to training, the following measures should beadopted:

- Strengthening of the organizational structure at the centrallevel. Two new units should be established: the TrainingPlanning Unit, which would be responsible for (i) collecting andprocessing all data on training needs, and (ii) investigating theneed to boost and assign manpower, equipment and financialresources in order to accomplish the Company's established goals;the Managerial Level Technical Training Unit, which would beresponsible for studying and proposing a policy and plan for thetechnical training of managerial level personnel and forcoordinating all managerial level training activities both abroadand in Zaire. The Inspection Department should also bestrengthened and would be responsible, among other things, forarranging for the retraining of instructors in conjunction withCFC, investigating the use of new teaching equipment,periodically revising, with the assistance of professionalcommittees, the content of curricula (study programs) andmonitoring the implementation of new teaching methods.

- Improving the training of managerial personnel: this activitywould be considered a top priority. An evaluation of CFC'sperformance would be made to identify its weaknesses from anorganizational, technical and manpower standpoint, new strategieswould be proposed and recommendations would be prepared for aprogram of action for the Center for the next five years. Thisevaluation could be conducted by the same consultant who helpedwith the start-up of CFC. It would be advisable for thisexercise to be carried out with the assistance of CENACOF (CentreNational de la Coordination de la Formation au Developpement),given I's expertise in training techniques, with a view to (i)utilizing the manpower resources available in Zaire, and (ii)obtaining a more impartial view of the results achieved by CFC.Arrangements should be made for CFC personnel to attend trainingcourses (stages) abroad in business management and organization;combined with their professional experience, this training wouldenable them to enrich their teaching skills and might help themto play the role of training and management advisors. Finally,the team responsible for monitoring the practical trainingcourses (stages) in the production centers would be strengthenedby the addition of personnel with experience in operations andwith prior training in communication skills.

22. With regard to technical training for managerial and personnel,emphasis would be placed on special training seminars for each field ofspecialization. These 2-4 four-week seminars would be organized within GCM

ANNEX 4-3-78- Page 9 of 9

and would be led either by highly qualified company engineers or with theassistance of specialists provided in part through World Bank financing.It would be important here to call upon sectoral evaluation and trainingcommittees'/ to work with CFC and the Managerial Level Technical TrainingUnit in prewparing training programs and establishing requirements forlecturers. The second component would consist of organizing practicaltraining courses (stages) abroad designed either for fields ofspecialization for which it would be difficult to organize seminars inZaire, or for top-level managerial staff whose knowledge needs to beupdated periodically in order to keep up with developments in the Company'soperations and organization. During this period a study will be conductedinto the feasibility of establishing a technical training center formanagerial and supervisory personnel and to establish other financial,technical and human aspects of the project.

- In-house training for workers: this training should be steppedup and reorganized. The training activities will no longer be"isolated." The programs should be studied in their entirety,with common-core courses for all the sub-groups or trade groupsand with an identification of the various skill or qualificationlevels to permit transition from one level to the next. Theplanning work could be assigned to evaluation and trainingcommittees organized by sector, which would map out the generaloutlines before the actual work of program formulation isassigned to professional trade committees, under the leadershipof the Technical Training Division. Implementation would, inaccordance with the principle of decentralization, be monitoredby the Personnel Department at the level of each plant, but wouldalso be closely supervised by the Technical Training Division inorder to guarantee the quality and uniform standard of thetraining. Finally, the financing for this project would be usedto renew the teaching materials and equipment and to make itcompatible with the requirements of modern technology,particularly in the case of hydraulic and pneumatic equipment andelectric controls. It is essential for in-house training centersto have more say in organizing seminars in communications andtraining methods for technicians skilled in production with aview to strengthening the training corps and ensuring the moreeffective monitoring of trainees (stagiaires) in their place ofwork. In view of these new responsibilities, the Division forthe Monitoring of In-House Training should hire new experiencedspecialists to closely monitor the activities of each center.

1/ Sectoral committees for the following sectors: mining, metallurgy,maintenance and workshops, functional services, and operations.

Industrial DepartmentDecember 1985

FIVE-YEAR HANPOWER FDRECAST

CATICO0RIES 1985 1986 1987 1988 1989 199U

Dir. MOCA 81 86 91 96 101 106

ProfessLonals MOCA 880 902 935 942 953 970

Supervisory Staff MUCA 1.580 1.662 1.785 1.922 2.072 2.218

Total MOCA 2.541 2.650 2.811 2.960 3.126 3.294

Dir. MOCE 81 76 71 66 61 56

Professionals MOCE 368 346 326 310 294 272

Supervisory Staff MOCE 199 183 167 159 144 131

Total MOCE 648 605 564 535 499 459

Total MOC 3.189 3.255 3.375 3.495 3.625 3.753

H1OR C.L.4 2.431 2.451 2.471 2.491 2.511 2.531

MOE C.L.5-8 31.167 31.026 30.880 30.729 30.578 30.432

Total MOE 33.598 33.477 33.351 33.220 33.089 32.963

Total MOC + MOE 36.787 36.732 3b.726 36.715 36.714 36.716

Note: This forecast begins at the end of May 1985.

Abbreviations: Dir. HOCA = Director of "Main d'Oeuvre des Cadres Africain6" (Manpower of African Professionals);MOCE K "Main d'Oeuvre des Cadres Europeens" (Manpower of European Professionals);

MOE = "Main d'Oeuvre d'Exfcution" (Operating Personnel).

nI"

LEVEL OF STUDIES - HOE

STUDIES TOTAL FOR COTES0 GP CO A4 A3 A2 EACH GROUP IR.23 85

HQ 360 118 540 78 93 92 1.281 1.456Q 1.328 530 1.476 489 771 563 5.137 5.311SQ 8.075 4.302 5.263 1.196 209 146 19.211 19.716MS 1.629 3.027 1.971 62 9 4 6.702 5.789_ 57 778 368 5 2 3 3 1.213 848

Abbreviations: GP - 6 years of primary school;CO - "cycle d'orientation" (2 years of post-primary);A4 - graduates from the Professional Institutes;A3 - graduates from the Technical Institutes (shortened courne);A2 = graduates from the Technical Institutes (long course);IIQ - highly specialized;Q - skilled worker;SQ - semi-skilled worker;MS - speciali:ed manpower;

manpower.

ANNEX 4-3Table 3

-81-

TABLE OF PERSSONEL Y AGCE (as of June 30, 1985)

AL-E HOCA MOCE MOE TOTAL

17 - 20 rears _ - 181 18120 - 30 years 170 1 9.134 9.30531 - 40 years 1.381 118 12.576 14.07541 - 50 years 657 296 6.258 7.211Over 50 years 236 241 4.953 5.430

TOTAL 2.444 656 33.102 36.202

TABLE OF RETIREENT AND SEPARATIONS AT HOE

19_2 1983 198.4

GROUPs SEPARATIONS RET 11 IENT SEPARATIONS RETIREMENT SEPARATIONS RETIREMENT

CL. 4 CL. 5-8 CL. 4 CL. 5-8 CL. 4 CL. 5-8 CL. 4 CL. 5-8 CL. 4 CL. 5-8 CL. 4 CL. 5-8

SOUTH 1 2 1 98 4 9 3 94 2 4 6 130CENTER 1 1 9 182 2 4 8 173 2 3 2 ;184WEST 2 4 3 159 5 18 2 142 3 3 3 169KINSIHASA . _ _ 2

TOTAL 4 7 13 439 Ii 31 13 409 7 10 11485

Iw

ANNE 4-3Table 5

-83-

56 yrs 57 yrs 58 yrs 59 yrs

MOCE 33 26 14 41MOCA 18 11 18 43TOTAL MOC 51 37 32 84TOTAL MUE 544 563 448 403GRAND TOTAL 595 600 480 487

ANNFX 4 _R-84- ab1e 6

STAFF TRAINED AT THE -CPC- DURING THE LAST 3 YEARS(1982-84)

SUPERVISORY PROFESSIONAL

LEVEL TOTAL SU- LEVEL TOTALSECTORS YEAR I II III PERVISORY YEAR IV V PROF.

82 11 9 8 28MINE 83 15 - - 15 82 12 - 12

84 - 12 24 36

82 - - -

MET 83 27 9 - 36 83 13 62 7584 - 30 16 46

82 34 _ 34DEM/ATL 83 22 12 34 84 26 - 26

84 13 14 27

82 - 82 - -

SUPPORT 83 10 10 83 10- 35 4584 - _ 84 25 - 25

82SEC/DIR 83

84 24

TOTAL/LEVEL 122 60 84 290 TOT/LEV 86 97 183

Total no. of personnel during the 3 years: 473

Note: This table includes only chose who completed their training during theyears indicated above.

Abbeviations: DEM - Electro/Mechanical; MET - Metallurgy;SEC - Secretariat/administration

ANM1ZE 4- -,

-85-

COST OF TECHNICAL TRAINING(in Zaires)

1) Investment over a 5 year period

Vehicles, office machines, furniture, teaching materials,reproduction.

20,429,000 Z for 5 yrs,or 4,086,000 Z/yr

2) Running Costs

. Training - Enterprises

Mines and Quarry 40,000,000 Z/yr3Metallurgy and Concentration 10,000,000 Z/yrStudios 33,000,000 Z/yrVarious 10,000,000 Z/yr

93,000,000 ZIyr

. Professional Institute 24,000,000 Z/yr

. Technical Institute of Muroshi 67,000,000 Z/yr

184,000,000 Z/yr

Yearly Total 188,000,000 Z

-86-AUNEX 4-4

ZAIE - -GnAMuDtES r wGECAMD - ACIIM ShfSf=, 1975-84

1975 1976 1978 1980 1982 1983 1984Freuereya/

Uiderg3&mnd 230.3 131.0 52.7 33.0 34.7 32.7 21.1Surface 85.0 54.7 54.4 30.3 32.3 32.7 21.4

Awerage 103.8 65.5 54.2 30.7 32.5 32.7 21.3

Severiq b/UdePrgiOnnd 16.8 9.9 4.1 3.4 4.0 4.3 2.3Surfac 5.9 3.7 4.2 2.3 2.6 2.7 2.0

Average 7.3 4.5 4.2 2.4 2.7 2.9 2.1

Total. Fatalities 19 10 14 10 10 6 10

ay Frequency: Nmiber of accidents with over four (4) days lost time per 300,000 man-days of wok.bI Severity: Number of days lost per thousand (1,000) u.n-days of vork.

Source: Geckunes Amml RepDrts.

Irulty DeparmenMardh 1986

ANRM 4-5

-87-

ZA-;- M RBAJCADS - P = SiATXSt;, 1974-84

1974 1978 1979 1981 1982 1983 1984

Openrpit- Volume excmvated ('000 ) 30,697 21,995 23,465 26,507 22,430 27,411 28.708

of wbich SKM a/ 26,462 19,229 19,729 24,845 21,387 25,190 26,369- Ore ('000 t) - 10,351 8,468 7,430 9,708 8,506 10,205 9,91

of which SKM a/ 9,611 7,262 6,622 8,480 7,924 9,095 9,437

-Ore ('000 t) 4,237 5 729 6,019 5,215 5,755 6,036 6,121Total Ore ('000 t) 14,588 14,197 13,449 14,923 14,261 16,241 16,052Average Grade (X Cu) 4.5 4.9 4.4 4.4 4.2 4.0 4.1

CcxicentratorsOre Feed ('000 t) 14,22 14,056 14,048 15,868 16,014 17,482 17,536Concentrates ('000 t) 1,803 1,641 1,570 1,766 1,576 1,701 1,818Average Grade (2 Qi) 28.6 28.0 25.5 29.4 30.6 29.4 29.0

,1Mt aical Plan1uhmiashi Sud ter- Blister Ccpper ('000 t) 130.5 135.3 142.0 156.9 153.9 160.3 156.8- Blak Copper ('0O0 t) 22.0 10.6 0.0 7.7 3.7 0.0 0.0

Shituru Hydrcuttallurgical Plant- Copper Deposited ('000 t) 135.6 97.4 95.8 130.9 132.7 137.5 136.4

I udlu Plant- Copper Deposited ('000 t) 179.8 147.0 135.4 171.0 169.7 166.6 172.7

Shituru Refinery- Electro Copper ('0o0 t) 254.6 103.0 103.2 151.5 175.1 227.2 224.5

K olwezi Lr Pl t- Zinc Deposited ('000 t) 73.4 49.7 49.9 65.4 72.6 70.5 74.8- Cacdmix Deposited (t) 301.0 305.0 232.0 255.8 304.8 338.5 355.0

ProductioCopper ('000 t)

Wirebat 254.6 102.9 103.1 151.3 175.0 226.9 225.2Electrrwn Cathodes 69.6 142.8 125.1 152.5 132.9 80.5 82.6Blister 130.0 135.1 141.5 156.7 153.4 158.4 157.7Otbers 16.9 10.5 0.1

471.1 391.3 369.8 468.2 466.2 465.8 465.5Cobalt (t)

Chips 9,074 6,578 7,509 6,960 5,087 3,363 5,266Granules 3,586 5,245 4,897 3,247 - 1,897 2,827Others 4,885 1,272 1,623 917 486 90 982

17,545 13,095 142029 11f124 5,573 5,350 9,075

Zinc (t) 68,700 43,500 43,700 57,600 64,425 62,500 66,100Cadnmm (t) 272 186 212 230 281 308 318

Siiege YKlei Mines (MO: Kolezi openit nes.

Source: Gecandnes Mu-'l Reports.

Iedwtry DepartmentMardh 1986

ANNEX 4-6-88-

Z - raG fl nrr

-SS - AnEM DIM SYAEns

CZ audifimo

1978 1979 1980 1981 1982 1983 19E4

copper r.a 959 2,473 3,612 4,592 7,791 22,021Cobalt n.a 1,313 1,206 2,231 864 1,312 8,384Otber Metals n.a 165 159 441 550 953 1,713Otbur Sales n.a 147 275 351 237 591 456

Total ReveM 977 2,584 4,113 6,636 6,243 10,646 34,058c-t

0peretr Gc3Ots 780 1j958 3,211 4,657 7 707a/ 11J155 29,077Opergtizg Prafit (Lass) lW7 626 9(2 1,979 ( Y i5O9) 4581Net FIIanclA1 Chouzi 150 125 210 436 369 477 635

Profit (lOBB) before Tsem 47 501 692 1,543 (1,833) (986) 4,364Corporate IzEchim Tnm b/ (98) 289 1 1 1 443 2,8

Net ProEfit (Lem.) after Moem 145 212 691 1,542 (1,834) (1,429) 1,I58

0permtin Profit X of Revewes 2D 24 22 30 (23) (5) 15Net Profit X of Reaenu 15 8 17 23 (30) (13) 4

a/ In 1982, s eindn lwTed reyt1atal 1mW I of Z 1,778 million fold wingIuplrmtatkn of tie wnrkei wt SZAM a¶ the _reutirgNoazuer of mest and 1iabditim.

b/ Until L982, the bulk of tur paid mm irdtrect tam included in(ofnnowes' pjrodtik casts. In L978, (wmfne received an exceptinaiizens tut zu 1 z zu m of Z 121 uilIoa.

March 1986

-89-AlNEX 4-7

ZAIRE - GECAMESi IU Dm

MAM - AUD W SEW

(Z mnilion

1978 1979 1980 1981 1982 a 1983 1984

Cirrent Aseets:Stores and Stodcs 284 832 1,666 2,085 4,192 7,053 11,651Recuivables 468 1,866 4,105 6, _-'. 1,68D 8,707 10,702Cash 99 272 407 560 557 1,309 3,126

Total QCrnent Asset 851 2,970 6,178 8,901 6,429 17,069 25,479

Tud Assets:Gross Fixed Asets 843 1,842 2,314 2,685 23,506 98,102 118,288Minu: Dp redatim 363 902 996 1,136 12,620 60,788 74,582Net Fixd Assets 480 940 1,318 1,551 10,886 37,314 43,706Oter Assets 2 16 30 31 11 679 899Total Fbwd Asse 481 956 1,349 1,581 10,897 37,993 44,605

Total Assets 1,333 3,926 7,526 10,482 17,326 55,062 70,085

Cirent LUaaUAities 352 2,033 4,389 5,360 3,294 9,143 10,837Prcwisioi 97 160 196 249 564 2,539 3,846lavg- andtKwurMm DEk 205 361 751 1,113 1,064 4,072 5,134

Matal Liahlities 654 2,554 5,336 6,722 4,922 15,754 19,817

hare Catal 260 260 259 260 260 260 8,787Reserves 419 1,112 1.931 3,500 12,144 39,048 41,480

Total Equity 679 1,372 2,190 3,760 12,404 39,30B 50,257

Total Liabilities and Equity 1,333 3,926 7,526 10,482 17,326 55,062 70,085

RAT [ ND NEI WM= CAMLNept Wozkig Capital 499 937 1,789 3,541 3,135 7,926 14,642Crrent Ratio 2.4 3.5 1.4 1.7 2.0 1.9 2.4Qilcd Ratio 1.6 1.1 1.8 1.6 0.7 1.1 1.3I"g- 'em Debtl:Equity 23:77 21:79 26:74 23:77 8:92 9:91 9:91Total Liabilities:Equity 49:51 65:35 71:29 64:36 28:72 29:71 28:72

al In 1982, Gezunss' fixed aeets were revalued.

Mbrdhy D19r8Mardi 1986

-90-

ANNeX 4-8

GNS -GRUMINES REHUBILITA2ION PROJECTGECANINES COPPERt AND COBALT SAL FS 1961-64

Table 1: Gecamines - COPPER SALES BY REGION. 1982-84(000 tonnes)

1984

1981 1982 1983 1984 (Z)

Belgium 66.9 130.4 84.0 40.2 9France 102.2 57.6 65.8 54.4 13Germany 48.5 61.8 75.7 106.3 24Holland - 15.9 12.3 48.4 11Italy 35.3 36.0 26.4 32.5 7Yugoslavia - - - 23.0 5Other Europe 110.2 115.4 140.6 54.4 12United States 18.2 21.8 33.1 29.2 7Other Americas 8.1 7.0 8.0 21.0 5Japan 3.7 1.8 1.8 5.5 1Taiwan 3.1 9.3 8.0 7.5 2Other Aria 9.8 10.1 8.0 6.4 2CPEs 2.4 4.2 20.0 10.3 2Others 3.0 0.0 3.0 1.0 -

Total 411.4 471.3 486.7 440.0 100

Sources: Gecamines/Commerciale, SOZAC0K Annual Reports.

Table 2: Gecamines - COBALT SALES BY REGION, 1982-84(tonnes)

19841981 19B2 1983 1984 %

North America 3,165 2,371 2,994 3,001 31Europe 1,717 2,254 3,187 3,086 32Japan ( 902 1,462 1,683 17CPEs ( 916 401 1,141 1,508 16Others 430 1,190 388 4

Total 5.798 6,358 9,935 9,665 100- _

Sources: Gecamines/Cosmerciale, SOZACM4 Annual Reports.

Industry DepartmentMarch 1986

-91-

ANNEX 4-9

ZAIRE - GECAMINS REHAILITATIO IKTECTSOZACOM - AUDrTED INCOME STATERIK=TS

(Z 1ilin)

1980 1981 1982 &/ 1983 1984 blRevenues

Diamonds Sales - 60.3 518.8 726.0 971.5Sales Concessions 59.3 66.5 71.8 141.4 54i5.Other Revenues 14.7 23.1 54.9 61.6 69.8Total 74.0 1W'i9 IRE:5 9Z9.0 1,587.1

Costs

Costs of Diamonds & Other Metals - 42.2 452.8 666.6 894.3Other Costs 47.0 94.2 138.0 259.6 526.4Net Financial Charges 0.8 2.1 2.2 13.1 31.0

Gross Profit 26.2 11.4 52.5 (10.3) 135.4

Depreciation and Amortization 7.3 4.5 14.2 9.1 8.5Exchange Losses (Net) 2.7 27.2 (4.5) 133.0 (10.1)Other Charges 6.1 14.2 5.6 6.8 3.2

Net Profit (Loss) after Taxes 10.1 (34.5) 37.2 (159.2) 133.8

Exchange Rate (Z/US$) 2.8 4.4 5.8 12.9 36.1

a/ Since August 6, 1982, the relationship between SOZACOK *nd Gecamines havebeen regulated by a new Marketing Agreement, giving Gecamines full ownershipof its mineral production, and appointing SOZACOK as its sole agent.

b/ Provisional. SOZACOM was abolished on July 2, 1984, and its accounts closedon December 31, 1984.

Industry DepartmentMarch 1986

-92-

ANNEX 4-10

ZAIRE - GECAMINES REHABILITATION PROJECTSOZACOM - AUDITED BALANCE SHEETS

(Z million)

1980 1981 1982 a/ 1983 1984 b/

AssetsCurrent Assets:

Stocks 3,179.5 4,362.2 53.5 118.1 14.4Receivables 429.9 645.4 93.5 181.5 953.4Cash 86.7 439.9 185.5 602.8 755.9Total Current Assets 3,696.1 5,447.5 332.4 902.4 1,723.7

Net Fixed Assets 30.3 34.3 47.0 47.7 51.3Other Assets 6.2 5.9 4.5 11.0 11.8Loans & Participation 98.8 112.5 93.3 87.9 73.1

Total Assets 3,831.4 5,600.2 477.2 1,035.0 1,859.9

LiabilitiesCurrent Liabilities:

Payables 2,125.4 2,898.0 207.3 470.0 980.1Prefinancing 1,480.8 2,374.2 - 109.6 -Others 51.5 183.7 143.5 420.8 758.7

Total Current Liabilities 3,657.7 5,455.9 350.8 1,000.4 1,738.8

Long & Medium Term Debts 97.2 102.3 53.3 120.8 73.4Total Liabilities 3,754.9 5,558.3 404.0 1,121.2 1,812.2

EquityShare Capital 31.3 31.3 31.3 31.3 31.3Reserves 45.2 10.7 41.8 (117.5) 16.4Total Equity 76.5 42.0 73.1 (86.2) 47.7Total Liabilities & Equity 3,831.4 5,600.2 477.2 1,035.0 1,859.9

Exchange Rate (Z/US$) 2.8 4.4 5.8 12.9 36.1

a/ Since August 6, 1982, the relationship between SOZACOM and Gecamines have beenregulated by a new Marketing Agreement, giving Gecamines full ownership of itsmineral production, and appointing SOZACOM as its sole agent.

b/ Provisional. SOZACOM was abolished on July 2, 1985, and its accounts closed onDecember 31, 1984.

Industry DepartmentMarch 1986

-93 ANNM 5-1

ZOWREGECAMINES REHAILITATN PROECT

Impsmsntatlo Schedule of RFsYeor Plogn

Yew I ~ ... " s I~ *WoI P T1Cl 2 1 2 3 4 2 2 3 1 1 * 2 3 * 2 3 4 * 2 3 4 * 2 3

Cbs 0_ TX ELXb~~~~~~~~~~- -II -. . , . . .

f. "woo,. I , t I -I

E I I i L- -t -; . -I- LotnIeiowW u _ _ I'**

a~~~~~~~~~~~~~ tI L I

-Es . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I . _

C, ce w,o 141 j .

E : ;:'I e , ; . i

-DA , l . , ,. ., I I ; ! ;~~~~~~~~~I Ii ~~~ � i . , i _ ,. ! I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~I I,!

- IT slo 1it Wl1

l~~~~~~~~~~~~~~~~~~~~ I

,~~~~~~~~~~~~~~~~~ I

- Cnarge Pnoo.to' g

, - III I

T-o Tconvnijocat.o,s

h IRAMOr. NCOWAONIN I SRO Tmrng Carw~~ ~ ~~i--I__

- Rem-, Stan ~ ~ ~ ~ ~ ~ ~ ~ ~ I -I

Oven Psi Ssocvnc I - ascru-I SIC" ~ ~ ~ ~ ~ II

-E-IOIOv -

Odmng a. wwoiov C4vnWOI.

Con. P., Ove.?Ws i

Mwroct"We.8e0

- ~~~~o'a Bwd4bwon9k-27672

GECANINES RNHA6hllltlONI P1OJECI/GIC*INE1S PROJil 01 1lHA1t181MAtlONtable 1. IOUtH/1011PI 5UD

Detailed Cost table(US - 00ttA* NilIoni

Breakdown of totals Incl ContIUSS Nitionl

late Cosls Iiscls Including ContInq inclas tocal........... ............. ................................................ lap. lel. Duties A

log6 tie? oss 1g96 1990 lotal 1166 19t7 199t 1919 1990 total Etch. taxes) tel s total

1. INvESIlIUI CO0IS....... .............

A. MIIUSiI NINE............

MINING EOUIPEINI INCR./IENGINS ACCR. 0.56 0.10 0.1 0 1.56 0.62 0.58 0.62 * 1.84 1.28 * 0.55 1.84NINE PEIPAUAtION/tE*VAUI PREPAIAtOlRES 3. 00 3.00 4. 00 4.00 2.50 16.80 2.42 3.65 5.23 1.62 4.24 22. 16 1. 11 II. 13 3.31 22. isOERINAOE/EIHIURE 2.62 2.84 2.30 2.00 9. i6 2.t8 3. 45 2.01 2.81 *1. 26 2.82 7.1sO 1.14 12. 26IUUNSIRUCIUIE 0.13 0. 04 0.13 0. 11 * 0.41 0.15 0.05 0.15 0.16 0.52 0.26 0.11 0.06 0.12N EINtINANCE/Ni*lEhI1N 0.. 0.0 05 0.01 - 0. Is 0. 06 .06 0. 01 - 0 . 18 . 10 0. 06 0. 03 0. to

Ss- total RIPUSiI NINE 6. 3 6.4 54 .95 6.11 2.80 28.69 1.23 1.10 9.09 8i.19 4.24 36.15 1.59 25.54 S.6 236.916. tIPUSlI CONCENtRPItO

....................

CASCADE I.SCCDE-R01GE I . . . . . .NAINIEN*NCI/mAN11IE111 0. 17 0.08 0. 12 - . 0.31 0. 13 0. 10 0. 15 * 0.38 0.23 0. 10 0.06 0.38

Sth-lttol NItPUSHI CONCENISAICO 0.17 0.08 0. 12 - - 0.31 0. 13 0. 0 0. 15 - 0.J6 0.23 0. 10 0.05 0.38..... ..... . ..... ..... ...... ..... ...... ..... ...... ..... ...... ..... ........ ....... ..... ...... ..... . ............ .... ... ..... .... ....... ..

total INVSINENI COSTS 6.50 6l.50 1.01 6. 11 2.60 2t.01 7.37 1.30 9.24 8.51 4.74 31.33 5.87 25.54 5.66 31.33

total 6.0 55 .1 61 .02.1 13 .0 12;4 6.1 s"4.2 13 .2 2.4 16 13

March 19 IIttl IS: 36

IT

GfECAINIS REHABIIIIAIION PROJICTt/OCAMNItS PRuJtit of NEHAISIIIAIIOWtable 2. CENtER/04011PE CENTRE

Detailed Cost table(US - 0OILK NIllianI

Sreakdomn at Total% Intl. Cantilull NillionI

Bale Cosls Totals Including Contlngencies toeal...................................................... for. lustl. GuIles 8

lii1381 loll 1283 fa3 ttal loge lilt logo tHlS 1920 ltotal fIch. Ilaest ol tae Total

I.INVEStMEtNt COStS

A. RIMBOVI NINE

MINING EUIPNENT/EuaI1IS Et SOUS-ENSEUOLES - . - . . - - . . . .MNIN PNEPARATIOW/tIAVAUR PREPARAYIOINS 0.0 01 0. 11 Oa .2 00 0. 02 0. 11uaiitINANCtnailticuf 0.120 0. 20 0. 20 0. 20 0. 20 1.00 0.123 0. 24 0. 26 0. 28 0. 30 1. 32 0.176 0. 36 0. 20 1. 32

5*t-total RAMOVE MINE 0.30 0. 20 0. 20 0. 20 0. 20 I. 10 0. 34 0. 24 0.26 0. 28 0. 30 1. 43 0.178 0. 43 0. 21 1. 43S. NRBNDAN-RANIUNONA OPEN 1PIi/CARRnERS

MINING E9IIPHINt/ENGINS (It SOUS-ENSIMSLIS 0.53- 0. 53 0. 58 - - 0.58s 0.40 - 0. it 0. 58NINE PUEPIRAtINII11AVLUI PRIPAPAIQIRES 3. 14 -- 3. 14 2.5? - 3.57 I. 13 1. 25 0.54 3. 57I

MINI. -NFRASt. /MAIMIIN-INI*StN.0. 64 0. 44 0. 01 - 1. 08 0. 72 0. 53 0.01 -1. 21 0. 63 0. 44 0. IS 1. 2?M

5*A-Ttota NANANDA-KANFUN0144 OPEN PIT/CARRIERES 4. 31 0.44 0.01 - -4. 75 4.8? 0. 53 0. 01 5 42 2.863 I. T0 0.90 5. 42C. RARANO*-ANIOVE CONCENWAORS

MIINTINANCE-OPII/NAINI IIN-ERPL 1. 06 1. 55 0.52 - 3. 13 1. 20 1. ! 0.68 -3.18 2. 21 0.34 0.5S? 3.168

3*i-totall RANANDA-RAN8OVI CONCENIRAIOIS 1. 06 1. 55 0. 52 - -3. 13 1. 20 1.852 0.68 -3. 18 2. 2? 0 94 0. 5? 3.178

lintel INVISIIIENI COSIS 5. 56 2. II0. 73 0. 20 0. 20 8.9! 5.42 2.6? 0.95 0. 28 0. 30 10.63 5.87y 3. 07 1. 68 10.5

Tolel 5.66 .15 0.13 0.2 0.20 LIs 1 2 tI 0.96 0.28s 0.30 t0. 131 5.8? 3.07l 1. 68 10. 63

March II. 1386 IS: 36

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GECANIN(S 11H86111181103 PROJICI/0C11911S PROJUI Ofi UEtAIIRtlltItNlable 1.IANPN-CKP-IM/ISPU-ltt-uuS

Saeallad Coat table

beoak*w, of letals Isti. cmlt(USS NhlIflOfi

Base Coats legals I'ieludlng CefItilleficlaw Local

ious fool los ta n 1110 toa IMs ion III11 loss 1110 Ttal* for. Each. foals Tome ftotl

I.INvtItENt Costs

A. hNAMIPOfT

uaumisnaus fEHEE[S 1. 20 1.120 1. 20 2.00 1.30 9. 40 1.10O 4. 20 2.14 0.29 9. 01 4.20PAILCASNI1M0m TtUNICS 1.00 S." 5.00 11.00 S.42 S. 61 1.24 17.46 12.24 - S1.21 I. 4161VtNitiCtIflNI WItS I. 0 .0 7.0 100 6.1 as 20.61 0. 78 6. 14 S. 123 II1 31.84 14. 13 a. Is A.1 Iis3. 64

Sib-Total tUAWSIPW 11.20 12.120 13.20 5.1 AS 48,45 16.11 1I. 3 1 I. 45 0. 1I 57.51 30.01 2.35 11.16 97.11S. N06151W/IfTEl US

MACGUlS 2.00 1.60 2.00 2.10 - .20 2 1i 2.0 3. 2.5 3.35 11, 24 6.00 1. 46 .6so to.124FOtINOIW tAlIIlOfhI8 ICOtNhIE 0.21s 0.60 1. 00 1.30 - 3. 31 0. 21 0 13 1.215 1.174 - 4.19s 2.73 0684 0.513 4. I0SUS-SSItWLlIE/SOUS-FUS1MLE5 7. 00 8.00 3.419 22.4 17. 6 90.20 10.14 - 17.41 11.21 1.01 6.231 27. 41 OINEE N*,tE11ILIIUiRIEIS 981l11IlE1,S 1. 00 0.115 2. 21 2. 40 - 5.20 1.00f 0.64 2.51I 3.22 - 1.11 1.43 I. Is 1. Is 7.715

Sub-tetal *UNSIIOPSAitEtIUS 10.21 It. II 14.060 5. 20 42. 20 ff. 14 12.097 16. 21 8. 31 - 0.63 31.46 1.38 3.101 10.53C. atwRim IVCII(NINSIAUIRUS INVUSISIIGCWNEIS

DII PUOCE1SIN/tEII lMit 0 iNIghPIINI gal .20 7. 30 7.00 5.42 26. 03 6.16f 0.10 1.30 0.20 33.01 22.1 19. 02 10. 11 33.5TittCaMIiCAiii 6.0 2.00 0.8 as - 8.895 6.152 1.22 1. 06 - 3.091 6.14 0061 P i26 2.01HutCht tOUIPMNlIAtAltUhtL REICIAL 0. 64 0.54 0.644 1.191 0.51 0.174 0.11 - - 2.23 III0 0. is 0. II 2. 23SOCIAL SIRWICES/SERWICEI SOCIAUK 1.953 1. @*i 1. 44 - .05 1 B I 66 e 15 197 - 4. 61 1. 36 1.12 0.50 4.651UUNCIIO EIIWL 1.154 1. 48 1.1 - - 4.31 1.5?7 1.12 I.561 - S1.0 2.10 1.1is 0.15s 1.01HIICUUMUOUS/3l VIS 1.238 4. 70 1. 00 4.90 -is. 17 5.81 5.17 5. 31 1.04 -23.81 11.021 8.34 2. 17 23.61f

Si-total GIRlS INVtSIKtMS/IUIICS IUVISIISSINIWS 11. 00 11. 21 Is.5i 11.50o 5.43 64. 83 l6. 40 17.1 so10.71 15. 43 0.10s 70.51I 47. 04 14.81g 17.13 71.11

Total tIVESiKNti COSTS 40.54 36.156 44.41 14.11 1.43 111. 46 44.01 46.00 11.31 32.11 0.20 1lUll 122. 41 12.5 3 42.64 117. 673,3*331 133 33S 33;333*33 23 lt 33 3l 1:1: ;;33t3t 143 4f33 333333

Total 4.421644.42.5 6.3114 4440 6001.33211205.7 1241 253 2545.7

Ntech It. fo66 11: 36

GECANINES Hl*I lf*1tTIOW PNOdECIt/GCAKIWIS PRO31t Ot *EHiUILITBTIOITable 6. SIUDIES 410D tRulhhO/tIUOES El FORltifNi4

Detallod Cost fablefUS f- 00LAN NillIoII

Ireabdoen of Toalal Intl. Cantfulsl mllion)

Base Costs letals lrmludtlg Continag ntes loeal................................... ......................-. -- -.---............. For, lEel. Duties a1986 Iog? 1968 1969 1990 Totl 1986 Its7 1966 1999 1990 fotal Eich. Ia.esl lans lotalseatl lfll 33322 tilt I 511...2X.... , lass itftl sf12 a ls 3S 1f ..... 33Xff I2:f32 :S tials

1. IKWISIIIENI COSS................

A. Stuol aScaEOlaT,/ClUoES-caolaou...............................

SURVEY EOUIPHINI/EQUIPIENII SON04AES 0. 1i 0. is 0.26 0 64 0.20 0.23 0.312 - 071 0.3 0 11 0. 11 0.15OPUAlltoNSI SIUDItS/EtlUtS flPI. 3.64 4. 43 4.25 1. 00 13. 53 4. Id S. 15 5.30 1.34 15. 97 it. 8 0.80 1 40 iS.9?PROJCtC SIUOIES/IlUOES 01 PROJEI 0. 40 0.40 0.40 0. 40 0.40 1.00 0. 43 0. 47 0.50 0. 54 0.58 2.51 2.01 O. 13 0.38 2. 51RECONS0IIUIION OF OEPOSII/NECONSIITUI1IN GISSENENE 6.64 4. 13 4.13 . 14.69 7.21 4.60 S. 14 - 17. 16 7.04 .155 2.57 17 16

Set-fatal SIUOIES.CIOIOOGYEIUDES-GEO1,0l1 11.O7 9. 16 9.04 1.40 0.40 31.06 12.02 lO.SS 11.27 1.86 0.56 36.40 22.31 8.59 5 46 36.40S. t3hIlN1I 1ORN£RION 1. 10 1. 10 1. 10 1.10 1. 10 5.50 1.20 1.28 1.37 1.4 19 6.91 3.46 2.42 1.04 6.91

Total INWVtlNWt COStS 12. It 10.26 10. 14 2.10 1.10 36.55 13. 22 1.92 12. 5.1 3.36 2. 1? 43.31 25.51 11.01 6.50 43.31i... il. ,,t 321.1 tiltS flit th itlta Stills lisZt *11 12122............ 12:: 122332 *::::ustiut,t ............... :2122 |

total 12.1? 10.26 10.14 2.10 1.10 36.16 I3.22 till2 flu4 3.36 2.1? 43.31 11.61 It 6.50 43.31.,,,, 13322 2:122 Notes ilsIS 13855 itiU 2,312 lease22. .225 . 2 3 tt..... . *.iiittt thitf tSl ll *22531ese

..................................... .............. .......... ............... .............................................................................. .........

arech It. luau 1": 36

II4

i[at X [ g r I jWlrj% I'IIfI Sfl *l^}nlZ re3 l g- ------ -- ['---

5~~~~~~~~g| 'e voo 'dtoe I i'i;ij-,,g igibijbiL-z;_' i-!!Wk,- ' g ri~~~~~~~

- C- -. a h,..6 i..s.".". " . .. IZI lol -e oooooLLL Lt.b!-L * xo.b-: bXB o o o s s e _ e _

|i||W ~ Cco @0000 4bb OcaCcaCa m omC@SC'^bbbeUCCmCoCCmOc-c@O@ - -

I 1- ~ . S-.0 . b b, '_ L, L, , .b . . ..L6 ' . . . . b .j . .L .b LL tbbLLh - Mo

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c*

lb I z ; .... . . . . .* ii . * , i g ii i c. i. . . ..S- a. mama , .

I ° S:1 o| | ||, , I I e4,. . .- . . . . . . . . .

L i . -~... - --

| 5 Z . P oo ' ......... ........... I ..... -zzz '' Z Z.

|I '' uS*b -LL.l ... .,|

| _,. , , , , ,, , , , .,_. . . . . . . . . . . . . . . .a

.. l.. ..... ' '.' ' ' ' o .

-101-AN 6-

Z_E~~~FADISE! SOEW PFR MBAC IL

W.sbizu.ut Profiles Czu,itive ZTlD Fisma1 MUn1t Eist Africa Dlsbuset Otmlative

Yewn & Qurtw Bwk-Wide Z Dlrbwsu.te

1987

III 1 1

III 7 8.2 82

IV 7 4 16 9.4 17.6

19B8

I 24 9.4 27.0

II 16 10 33 9.4 36.4m 41 8.4 44.8

IV 25 17 48 8.4 53.2

1989

I 56 &4 61.6

TT 37 27 64 8.4 70.0III 72 9.1 79.1

LV 48 37 8D 9.1 88.2

1990

I 86 6.2 94.4

II 59 48 90 4.3 98.7III 93 3.3 102.0

LV 69 59 95 2.8 104.8

1991

T 96 1.4 106.2

II 77 68 98 1.4 107.6LTI 99 1.4 109.0

LV 84 76 100 1.0 110.0

nimtry Dep Ent

Mw&d~ 1986

-102- ANNEX 7-1Page 1 of 3

ZAIRE - GECAMINES REHABILITATION PROJECT

ASSUMPTIONS FOR FINANCIAL PROJECTIONS

A. Inflation

1. Since the financial projections have been carried out in current USdollar terms, orojected international inflation rates have been applied asfollows:

Inflation Rates(Z p.a.)

1986 1987 1988 1989 1990 1991-927.0 7.0 7.5 7.7 7.6 4.5

B. Sales

2. Sales volumes during the period 1985-88 have been forecast to fluctuatearound 470,000 tpy of copper in accordance with Gecaminest own estimates.Thereafter sales are assumed to stabilize at 470,000 tpy. Cobalt sales havebeen assumed to amount to 10,000 tpy until 1988 to increase to 11,000 tpy in1989, 12,000 tpy in 1990 and to remain at that level thereafter. Zinc saleshave been assumed to fluctuate around 64,000 tpy until 1988, based onGecamines' own estimates, and to remain constant at that level thereafter.

C. Investments

3. Gecamines' investment program is expected to cover all investmentneeds of the Company until 1989. Thereafter reinvestment levels have beenassumed of about 10X of Gecamines' annual revenues. Depreciation assumptionsare based on Gecamines' practice of linear depreciation which is applied formajor investment categories as follows:

Buildings 30 yearsMining Equipment 4-8 yearsVehicles 5-10 yearsRailway infrastructure and equipment 10-30 yearsOther materials and equipment 10-20 yearsMine development 5 yearsStudies and prospection 1 year

D. Costs

4. All elements of production costs have been estimated at theirpredicted 1985 values. The following assumptions have been made for thedifferent cost items:

-103- ANNEX 7-1Page 2 of 3

(a) Labor: (i) decrease o' the number of expatriates from about 660 in1985 to about 380 in 1992; real salary increase of 1.8% p.a.;(ii) increase oZ the number of the Zairian supervisory staff fromabout 2,500 in 1985 to about 3,600 in 1992; real salary increase of2.2% p.a.; (iii) decrease of the labor force from about 32,250 in1985 to 30,000 in 1988 and stabilization at that level; real wageincrease of 4% p.a. but reduction of fringe benefits which wouldbring the increase of total remuneration to about 2.5% p.a.

(b) C=sumables and spare parts: increase of 2.5Z p.a. in real termsuntil 1990 because of opening up of new mines and mining in greaterdepth.

(c) Electricity: cost increase of about 1% p.a. due to expected tariffincreases for electricity supplied through Inga-Shaba line.

(d) Services: decrease by 1.5% p.a. in real terms principally becauseof reduction of fringe benefits for Gecamines' personnel.

(e) Taxes: indirect taxes not included in cost items have been assumedto remain unchanged in real teL D. The royalty (part of corporaLeincome tax) has been calculated at 7% of metal revenues andadditional corporate tax payments were added when in years duringwhich the royalty amounts to less than Gecamines' corporate taxdues (50% of gross income).

(f) Marketing Costs

(i) Transport costs in Zaire: costs were assumed to remainunchanged in real terms;

(ii) Land Transport in Africa: costs were assumed to increase by4% p.a.;

(iii) Maritime Transport: costs were assumed to remain unchanged inreal terms;

(iv) Refining Costs: were assumed to decrease by 14% p.a. overfive years and to stabilize thereafter, to reflect morefavorable refining terms aCnieved through diversification ofrefiners.

(v) Commissions: were assumed to decrease from 1.4% of coppersales revenues in 1985 to 1.2% in 1986; for cobalt from 8.4%in 1984 to 4.5% in 1985 and 3.5% in 1986; for zinc from 2.Z%in 1984 to 1.4% in 1985 and 1.2% in 1986.

-104- ANNEX 7-1Page 3 of 3

(g) Financial Cges

(i) Interest: interest on existing loans was predicted on thebasis of Gecaminea' forecasts and interest on new loans wascalculated at an average 10% of the outstanding loan balance,and a comitment fee of 1% of the average undisbursed balancewas added;

(ii) Ewxort fees: 1.3% of part of sales revenues (55%) retrocededto Gecamines in Zaire currency.

E. Balance Sheet, Working Capital and Funds Flow

(a) Current assets: operating cash has been estimated at about 3.5months of wage and salary payments and has been assumed to remainat that level throughout the period. Receivables for sales havebeen assumed to decrease from about 1.5 months to about one monthof sales revenues, to reflect improved sales receipts management.Other receivables have been assumed to remain at approximately thecurrent level.

(b) Current liabilitles: accounts payable have been assumed todecrease from about four months to about three months ofconsumables consumption. Short-term debt is expected to decreaseto about one third df the current level by 1990 principally becauseof reduction of prefinancing of metal sales and also because ofImprovements in cash management.

(c) Outstanding long-term debt has been calculated for existing and newdebt along with the current portion which was included in currentliabilities.

(d) Other fixed assets, existing provisions, subscribed capital andexisting reserves have been assumed to remain unchanged in currentterms. Retained earnings have been calculated as accumulated netincome.

Industry DepartmentMarch 1986

-105- AUNfl 7-21111 SECT

ManE - IMEM rNSUTAnI Pam ewe PS: Om -K

DEMMSL. - PamniO Damrw

^s11 19" Il7 I'm M9 IM 1"1 I"mSan5vvi hl iw000 tu _ _

Coppr 4a.0M413.071 469e.Y 470.40 46.304 eu,om e.mCuWLt 9,WT ao*mn toGM 10ion n.m0 sans sien 1mliw 61.73 64.745 U440 6a20 64.75 64.760 6470 I4.740

Tuou Taump 50.741 3i, 11 544,5.3 605440 545.7 545.70 546.70 541.70

Slas k _nues lust uilliI

Capp 673.7 701.6 754.4 791.7 374.0 944 161.1 1112.2Cubit 160.9 155.2 13.7 196.4 MS.4 .9 UL 117.6Zinc 54. 57.6 41.5 64.5 73.6 7e.6 U.S 7.°Osr kitll l.2 19.7 24.0 2.1 24.5 21.2 3.6 10.0

kh"SSUREu 9 97. WA.1 13.6 1507S.7 13t9 1.0 14.01 1347.15lir SI" 3B.9 40.3 6.1 41.2 49.7 i3t iss. 59.3

TOa AiN. 94.5 974.4 106.6 1121.9 151. 1411.5 1516.3 H06.4

tuutliq Can. ISuuumg)

Lar ME. 135.5 14.5 130.9 71.9 19.1 M.5 214.3C-meshi. I S ft"s 267.3 33.1 316.5 841.0 33.3 414.1 44.6 41.0Ectriatv 26.0 17.0 29.1 11.3 38.9 s 1.7 19.1 41.6Services 116., I12.9 119.0 125.7 115.2 14.2 147.4 151.7Towns 7.0 7.2 7.1 R i 6.9 9.4 10.2 10.7Pusliun fur 01 kuum wd Other 0.6 0.0 1.1 -2.4 -0.7 -1.0 4.3 2.2Deprecatios 116.2 125.6 1.5 129.6 145.2 11.7 155.3 162.9

Tut tratu Ctaus s6.a 469.9 76.3 779.5 63.1 9.5 99e.5 1.3.9

TH* rhitut Cosn 169.4 170.7 171.9 131.2 3A.1 2e.5 33.4 3A.4

Tuu Pruducia but (Tot. turnmng

Cat + 1st HPMuIt Vt) '1.0 e 60.6 912.2 95.1 106. 1149.0 29.1 1.7

0P% Iscomm

T't. times - Tot. Praductiso Cast S2.S 11.8 1.A.4 156.3 L97.4 2.4 27.T 319.7

Ml F csd Dsp. i.8 21.4 23.0 26.1 29.8 31.9 39.S Sl.9

M& I.ncom A Ta 36.1 27.0 33.9 54.9 73.8 10N.9 127.1 143.4

Dhwidmb 6 6 0 o 0 0 6 0

taluS IZmu 31.1 27.e a.8 54.9 73.3 104.3 127.1 14.41 "ive tlmnd Incame 5.1 63.1 101.5 136.4 233.2 35.0 4e.1 6as.s

blis: Ise mf Tazsflon ki 16.5 9.5 16.4 UA. 12.1 14.9 16.3 17.9lla Afar TuulTt ka 3.8 2.6 9.T 4.9 5.9 7.4 3.4 9.9

Rtal IITut kAU 3.1 2.3 3.7 4.9 5.9 7.4 3.4 9.9

Imstri l _pant19Hur-01

-106- ANNEX 7-3

ZAI - 0 TUfES IUTAT!N PW:Jr

CECMWM - PDWE R*UOS

1995 19 19 1997 1999 1999 19 19 1991 1992

Saran of Fuds

Iht Income 36.1 27.0 39.3 54.9 73.8 104.8 127.1 143.4Dpr niatlu 116.2 12a.8 122.5 129.6 140.2 152.7 155.9 162.9

Intemal Cah nmaln 12.2 156.9 160.8 1914.6 214.0 57.s 2e2.9 36.3

Iltwet on LT DbT 14.4 14.7 15.9 19.4 20.7 23.2 23.1 21.9

Lug-Tsr. Loou.Euisting 17.6 2.7 0.0 0.0 0.0 0.0 0.0 0.0NM 0.0 9.0 57.0 63.0 69.0 74.0 13.6 0.0

Total 9.rrmulq 17.6 11.7 57.0 63.0 69.0 74.0 13.6 0.0

Toutl Sore 184.2 117.3 239.7 265.9 309.7 354.7 319.6 329.1

Applicstions of Fndo

I:assunts 151.0 150.0 160.0 180.0 170.0 109.0 160.0 172.0

DEbt SmiceImtiur on LT Dobt 14.4 14.7 15.9 18.4 20.7 23.2 3.1 21.9Principal kpqm t 20.6 22.6 26.6 29.7 35.4 11.9 19.6 24.5

Total Dobt Survics 35.0 37.3 40.5 47.1 56.1 35.0 40.7 46.3

Dividend Paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Chop in Varking Capital -Z7.5 -33.9 -9.5 19.4 34.8 39.3 32.1 26.7

Totl application 158.5 159.4 198.0 246.5 i60.9 176.3 234.8 245.0

Cuh SurplusI(D.Iieitl 25.7 23.9 40.7 19.4 42.9 178.3 94.9 09.1AaccumAvad Cib SIrplusI(eficit) 25.7 49.6 90.2 109.7 152.5 930.8 415.7 499.o

R&Uo

M *t Smivie Coverage 4.4 4.0 3.9 3.9 3.9 7.4 6.6 6.6

Imbdustt Departmnt19-IIg _sr-

-107- ANNEX 7-4

7AUE - CEUIMB inWrITAT PEEr

GEr84NEXPL. - PNAEC Lr

19 1996 1917 190 199 99M0 199 199

Carwe AxmUCob md Rmvinhlus 255.3 213.9 191.5 199.4 218.5 241.4 259.5 272.5In _umin 274.6 271.3 277.4 .6 295.5 309.a 37.4 96.5

Toual CEarrut tusI 529.9 4*J.0 468.9 499.0 514.1 54.4 5.9 616.0

AuIatud Cauh Surplus 25. 49.6 90.2 109.7 1U2.5 330.8 415.7 49.9

Find MustsGross 1359.2 1509.2 1669.2 1349.2 2019.2 2127.2 2W-2 249.3Las: Accumulated Dupretiaon 116.2 240.0 962.5 492.1 632.3 79.9 940.9 1103.7

Not Find Asss 12.1 1269.2 1306.7 1357.1 116.9 134a.3 1346.4 135.5

Other Fixed Assts 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6

TOtWl Asets 1319.3 1023.4 1395.5 1969.4 2073.1 224.1 Z367.6 2490.0

Liabilitis d Eit

Shri Term Liabilitin

-_rrnt Liabilities 146.9 135.9 129.2 123.9 120.2 12.2 126.6 130.1Current Portion LTD 22.6 26.6 23.7 35.4 11.9 19.6 24.5 24.4

Toutl ghwrt Twr LiiLitla 169.5 162.5 157.9 159.3 132.0 141.8 151.1 154.5

Lo- Twr Dit OnstamdingExisting 132.5 109.6 79.9 49.1 46.5 43.9 41.4 39.0mm 0.0 9.0 66.0 124.4 184.2 241.2 233.0 21O.9

Total 132.5 117.6 145.9 173.5 230.7 235.1 274.2 249.9

Prcvisioms 76.1 76.1 76.1 76.1 76.1 76.1 76.1 76.1

Equity

Capital 25.6 2Z5.6 22 5.6 2 35. 6 26 M.6 2es.6 225.6 225.6RAsreVs 109.3 109.3 109.3 109.3 109.3 109.3 109.3 109.9Capi',al Cain and Past Provisions 1069.2 1069.2 1069.2 1069.2 1069.2 1069.2 1069.2 1069.2Rlamed Income 36.1 63.1 101.5 156.4 230.2 3S.0 462.1 610.5

Total Equitg 143.2 1467.2 1515.6 1560.5 1464.3 1739.1 1966.2 2009.6

Tota LiabilU and Equitg 1819.3 1929.4 1995.5 1969.4 2073.1 2242.1 367.6 90.0

Ratios

Qulic ktio 1.51 1.32 1.21 1.25 1.66 1.70 1.71 1.76Current btio 3.13 2.91 2.97 3.03 3.89 3.0 3.08 3.99ODet Eqdtlg atio 0.03 0.07 0.09 0.10 0.12 0.14 0.13 0.11

IndustrIg Dmprut19 -9 6L

-108-

zAkIE - GECNIIES KmrBILITATION PROJECT ANNEX 7-5

CASH-FLOSS FOR FDMWCIL SSTE OF OTM

(U59 million)

1. Bae CaM Flows Productian and Sale Level Omn 1.51 p.a.Steudy Production and Sales Levels during 1985-9

Sales low Op.Couts Hk.Camts Taxs 5ales I,. Op.Cass Nk.Costs Taxsa

1995 946.5 151.0 689.7 168.6 63.5 946.5 94.6 659.7 168.3 63.41986 941.4 144.9 664.7 164.9 63.2 999.4 81.1 664.7 161.9 61.91997 942.7 144.5 665.6 155.3 63.2 919.3 90.9 670.1 151.6 61.91999 944.4 151.5 652.1 156.7 63.4 915.6 94.9 "61.0 14.3 60.11999 980.9 138.0 669.4 159.9 66.0 912.1 74.5 693.1 150.5 62.61990 1025.9 79.5 692.0 161.7 79.0 955.4 92.6 701.0 153.1 65.61991 1099.6 109.7 673.8 163.5 99.7 969.5 109.7 697.4 154.9 71.51992 1053.4 112.9 673.8 165.5 96.3 992.3 112.8 702.1 156.8 77.61993 1067.7 115.5 669.7 167.6 105.3 995.T 115.5 702.5 159.9 96.41994 1000.2 118.3 666.3 169.8 113.0 1007.3 118.3 703.7 160.9 94.01995 1092.8 121.3 666.5 172.1 118.T 1019.1 121.3 709.6 163.1 99.71996 1105.6 120.3 666.5 174.5 124.7 1031.0 120.0 713.2 165.4 104.7

2. Inoremental Cash Flaws 3. Nut Cash FlawsAfter Befor

Sale Inv Op.Costs Nk.Csts Taxs Taxe Taxns

1985 0 0 66.4 0.0 0.3 0.1 -66.8 -66.71996 2.0 63.8 0.0 3.0 1.3 -66.1 -64.91997 23.4 63.6 -4.5 3.7 1.4 -40.8 -39.41988 2.8 66.7 -9.9 8.4 3.3 -40.7 -37.41999 68.8 58.5 -13.7 8.4 9.4 12.2 15.619i 70.4 -14.1 -19.0 8.6 13.4 91.5 94.91991 70.1 0.0 -23.6 8.6 18.2 66.9 85.11992 71.1 0.0 -29.3 9.7 18.7 72.0 90.71993 72.0 0.0 -32.8 8.8 19.9 77.1 96.01994 72.9 0.0 -37.4 8.9 19.0 92.4 101.41995 73.7 0.0 -4.1 9.0 19.0 87.8 106.91996 74.6 0.3 -46.7 9.1 20.0 91.9 111.9

Fiancial Rate of Return: 16.141 20.461

-109-

7ZARE - CEC4NIES RMNITAT! PFJEC ANNEX 8-1

CASG-FLW FOR EINUC RAE OF EJIN

(US. millis.)

1. B, Csh Flom Proouetimn no Salu Los Dome 1.51 p.a.St2sdl Production and Sales Lavas durin 1985-B9

Sa1.q Inv Op.Cust Kk.Costs sales Inv Op.Costs Nh.CostS

1995 946.5 120.8 606.0 168.6 945.0 67.6 606.0 149.31996 941.4 115.9 611.5 164.9 924.2 64.9 U1.5 161.91987 942.7 115.6 612.3 155.3 921.6 64.7 616.5 151.6ilBm 944.4 l21.2 599.9 156.7 997.2 67.9 606.1 14B.31999 980.9 106.4 615.9 159.9 932.9 59.6 623.4 150.51990 1025.8 62.8 627.4 161.7 976.4 74.0 644.9 l15.11991 1039.6 87.8 U9.9 163.5 994.3 97.8 641.6 154.91992 1053.4 90.2 619.9 15.5 1002.2 90.2 &4M.9 156.91993 1067.7 92.4 616.1 167.6 1015.6 92.4 646.3 159.81994 1090.2 94.6 613.0 169.8 1027.2 94.6 647.4 160.91995 1092.8 97.0 613.2 172.1 1039.0 97.0 651.9 163.11996 1105.6 96.2 615.2 174.5 1050.9 95.9 656.1 165.4

2. Iuwrw.ental Cash Flos 3. Net Cuuh FlowSalm Inv Op.Costs Nk.Costs

1985 1.5 53.2 0.0 0.3 -52.01996 17.2 51.0 0.0 3.0 -36.81987 21.1 50.9 -4.2 3.7 -29.31998 47.2 53.3 -14.2 9.4 -0.31999 48.0 46.8 -12.6 9.4 5.41990 49.4 -11.2 -17.5 8.6 69.51991 S5.3 0.0 -21.7 8.6 68.41992 51.2 0.0 -26.0 8.7 68.51993 52.1 0.0 -30.2 8.8 78.51994 53.0 0.0 -34.4 8.9 79.51995 53.9 0.0 -38.7 9.0 83.51996 54.7 0.3 -42.9 9.1 03.2

Economic Rkt of Return: 24.ZY

-110-

ANEX 8-2

ZAIU-H A NPF3FZE E 7H E

(15$ LulIc.)

ProL Cap. TAM tamn ItReaim Cbut Em. Diab. nterest 3flw

1. Stey Produtio level

L986 984 372 90 9 23 15 4431987 1,001 388 96 57 27 16 5311988 1,076 410 108 63 29 I1 5741989 1,204 435 102 69 35 21 6801990 1,358 48D 65 74 12 23 852

2. Pmduction levels Dmtn 1.5Z p.s. untdl 1990

1986 902 372 53 23 23 13 4641987 963 388 57 2O 27 14 497L988 1,014 410 66 20 29 14 5171989 1,121 441 61 20 35 14 5901990 1,259 487 88 20 11 13 680

3. Ixcreital Farelp Edwge FJm

1986 32 - 37 (14) - 2 (21)1987 38 - 39 37 - 2 341988 62 - 44 43 - 4 571989 83 (6) 41 49 - 7 90990 99 (7) (23) 54 1 1 172

Izdustry D1)ertuHri1986

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