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;
- 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%
- 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?
- 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.
- 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.