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Friday, February 19, 2021

Mopani deal in simple terms

Economy Mopani deal in simple terms

Glencore has agreed to sell 90% of its shareholding in Mopani Copper Mines to the Government of Zambia(ZCCM-IH). At the completion of the transaction Mopani will be wholly owned(100%) by ZCCM-IH.

Terms of the Transaction:
ZCCM-IH will pay of US$1 for the assets and liabilities. The liabilities include the debt of US$1.5bn Mopani owes Glencore group. This will be a transaction debt on completion.
Glenmore will retain the off take rights of Mopani Copper production until the debt is fully settled.

The debt will be paid as follows;

  1. Interest of transaction debt will be capitalized for the first 3 months (simply meaning it will report to the balance sheet and not the income and expenditure statement) and thereafter paid quarterly at LIBOR+3%
  2. Principal outstanding payment(dual mechanism):
    (i) 3% of gross revenue of Mopani(2021-23) and 10-17.5% of gross revenue thereafter and (ii) 33.3% of EBITDA minus (tax +changes in working capital+royalty payments+interest+payment in first mechanism).

Is it a good deal?

The sponsor and shareholders on Glencore’s side love it, and they did not waste time to confirm it in writing. Glencore has a net debt of about US$15bn and if this deal goes through they would have managed to slice off their net debt by 10% by a stroke of a pen. This is killing two birds with one stone, getting rid of underperforming assets and improving the credit score in the process.

What exactly is GRZ buying in Mopani?

  1. Measured Mineral Resources at 207Mt @ 2.08%Cu and 0.08%Co(4.3MtCu and 165ktCo). NPV of US$1.9bn at metal production rate of 100kt over LOM of 43yrs at copper price of US$6800/t, discount rate of 5% and unit cost of US$3400.
  2. Proved Ore Reserves at 110Mt @ 1.98%Cu(2.2MtCu). NPV of US$2.6bn at metal production rate of 100kt over LOM of 22yrs at copper price of US$6800/t, discount rate of 5% and unit cost of US$3400. Take away the debt the NPV goes down to only US$1.1bn

Current Performance of Mopani

Mopani has produced 153.2kt of copper from its own sources in the last 45 months, that is an average of 3400tpm of copper. At the price of US$6800/t that is a revenue of only US$278m per year.

To be able to pay off the debt Mopani needs to go back to the production performance levels of 2011 when it produced 101.4kt of Cu and 0.6t of Cobalt and pray hard that the prices of these two commodities go up and match those prevailing at the time.

In 2011 Mopani grossed US$893.6m from copper and US$21.2m from Cobalt, making total revenue of US$914.8m(yes almost a billion dollars!!). The average copper price in that year was unprecedentedly high at US$8813/t and Cobalt at US$35242/t, almost everyone made money in that year.

Was it a fools paradise at Mopani? Are good times on the horizon?

Yes, good times are back but not as good as 2011, with Covid-19 you just don’t know.

I am not a fan of the government, any government, especially our GRZ running any business, especially serious businesses like mining where reputation with suppliers, financial institutions, and customers is a treasured commodity. I have every confidence in the technocrats at Mopani to pull it off, that is getting Mopani to above 9ktpm but the problem is, will they get the financial and governance support they need?

In the current state in which Mopani is right now, Glencore has scored, it is very good on their side because they know very well how much money is needed to get Mopani to a 100ktCu per year operation, its not a small change.

The government will need to spend serious money on development which might need some shafts and turn the measured mineral resources into proved reserves and increase the Mopani NPV to US$3bn.

By B.Mushikita

(Facebook post)

22 COMMENTS

  1. The current price is over $8000 not your $6800.
    It has been much higher than your figure for a sustained period therefore, your assessment of trying to conservatively downplay the deal in favor of Glencore.
    Remember, the financial benefit is one and the sustained contribution of the continuous operation of Mopani is another especially employment and surrounding businesses as opposed to having a non operational mine in Kitwe and Mugulira.

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  2. Glencoe needed to sort out their liabilities without Govt involvement. But this deal simply means Government has guarateed Glencor’s liability no wonder they are very happy & we look stupid

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  3. Actually most of these mine owners came in the same way. They paid for the mines from proceeds of sales of ore. Kaleza. We Africans are just … kaya mwandini

  4. The history to this deal is that Mopani had wanted to place its Nkana and Mufulira operations on care and Maintenance for an unspecified period. And they were damn serious! A lot of people would have been on the streets as we speak. When Anglo exited KCM, a catastrophe was looming and LPM sold the whole mine for a song. Chambishi Metals has now clocked one year on care and Maintenance and there is almost zero employment, zero PAYE, zero mineral royalty and zero contracts.

  5. I have my a problem with govt running mines and the problem is exhibited in this transaction .They have forgone all the negatives of this deal just to guarantee 15,000 jobs .Even the decision making while running this mine will be based on preserving jobs .Now ask yourself if such an entity can be profitable ?

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  6. We never learned anything…you send politicians to negotiate a billion dollar deal and they are worried about short-term gains like elections in August…sad reading indeed.

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  7. When you simplify things it means explaining all the Acronyms and abbreviations as well. LIBOR – London Inter Bank Offered Rate. This is the rate at which international banks lend to each other. It has been prone to manipulation and will be phased out.
    EBITDA- Earnings before tax, interest and amortisation (gross earnings in short).
    And LOM means- Losers of mines kikikikikiki

  8. This is a good deal, my word of caution to the PF is that this isn’t like running the Black Mountain. Mutwale ubushilu ukutali. Not fye uwo mwanyenga ati ni supplier ku Mopani mukaponoka. Richard Musukwa you know what Mufulira is going through. Don’t bring the old generation of managers from the archives and giVe them the mine. Don’t bring bena Pilula, Bantubonse, Mutati, Pius Mutale, etc we want brilliant young men like Anthony Mumba the Kantanshi MP. Don’t bring jerabos like bena Sharwi Fawazi. We know that Edgar is a very weak leader but we won’t allow you to take advantage of a weak President. BEHAVE!

  9. Great deal for Glencore. The share price just went up 12.5%! ZCCM-IH is teetering on the brinks. Those who read the financial markets will tell you when a deal is good. Having said that, government has no business running business. When the PF needs money, it will now be a phone call to Kitwe. ‘Mwaiche, tumako ka K10 million.’ This is what killed ZCCM in the first place. History repeats and only f00ls never learn from it, but hey, who cares? The government must survive an election.

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  10. Do not be cheated my friend, the business of government is business. If you believe otherwise you end up with bandit investors like Glencore and Vedanta.

  11. That is why I questioned the objective of the transaction first. This is a good analysis, and the there is a price my brother on the offtake agreement am told, about $2,300/ tone. If the price of copper is say $8,000/ tone, our copper will be sold to Glencore at $2,300 and they will sell at the $8,000.
    In my opinion, this is what I would call “a long walk to the bank” for Glencore.

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  12. BaSatanist ba Glencore naba Mopani na Kleptoh².
    It is always costly to undo what was done muma 90s.
    We had very dull Zambians trading our mines causualy with nkusa kleptoh² overseeing the project.
    Glencore aliswamo kale.
    Our assets mwandi okay chilankalipa.
    Uyu chigili kleptoh² kuntu namulangulamo nelya kwikoshi awa napanshi.

  13. Ba Gundown, you could be misleading us. Is it true that Mopani will sell copper to Glencore at $2,300 per tonne? If it is true then there is no deal here. Already terms for paying back the principle amount are harsh. Who negotiated for this deal?

  14. Principal outstanding payment(dual mechanism):
    (i) 3% of gross revenue of Mopani(2021-23) and 10-17.5% of gross revenue thereafter AND (ii) 33.3% of EBITDA minus (tax +changes in working capital+royalty payments+interest+payment in first mechanism).

    This is as good as telling someone, the cow is yours but it’s milk and beef are mine

  15. Why are Mopani mines “bleeding” is the Glencore deal good for Zambia? In Perspective, Mopani Employs about 15 000 Employees and going the annual production of copper metal of 101 000 tonnes Worker productivity is 6.7 tonnes per worker per year (2011 year), Kansanshi FQM on the other hand employs about 13 000 workers produced 232 240 tonnes in 2019 and worker productivity was about 17.9 tonnes per worker per year. Now Compare this with Escondida in Chile in 2020, the mine produced 1 185 000 tonnes and employed directly about 3 000 workers and worker productivity was 395 tonnes per worker per year! in brief, Mopani worker productivity based on Cathode price of US$6 500 /t is US$ 43 550 per year, Kansanshi US$ 116 350 per year, Escondida, US 2 567 500 per Year!
    To make Mopani…

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