By Webby Banda
On 19th January 2021, Minister of Mines Richard Musukwa announced the Government’s strategic step to own 100 percent shares in Mopani Copper Mine through the state mining investment arm, ZCCM-IH. Before this development, the ownership structure of the mine initially constituted 90 percent shares owned by Carlisa investment and 10 percent owned by ZCCM-IH. Technical information of this deal seems to be masked with the Government having a monopoly of information. However, clear statements on this deal are those coming from the Minister’s speech and other sources regarding the interest and principal payment of the transaction debt ($1.5 billion).
From the Ministers speech, the three main features of the transaction are (taken as verbatim):
- The $4.8 billion loan owned by MCM has been agreed to be reduced to $1.5 billion. MCM as an asset was owing loans amounting to $4.8 billion from Glencore (Bermuda), Glencore International and Carlisa.
- The sale price is $1.
- The 1.5 billion transaction debt is to be repaid through an off-take agreement granted to Glencore international using 10% percent of the production. That means the loan will be repaid between 10 to 17 years depending on the price of copper.
According to other sources, the following are some of the features of the transaction in terms of the payment process of the transaction debt (1.5 Billion dollars).
- Interest payment of the debt will be capitalised for the first three months and thereafter paid quarterly at LIBOR + 3%
- The principal amount will be settled using the following dual mechanism:
(a) 3% of the gross revenue of MCM (2021-2023) and 10 – 17.5% of gross revenue thereafter
(b) 33.3% of EBITDA minus (taxes + changes in working capital + royalty payments + interest + principal payment in the first mechanism)
Who does this deal benefit?
Assessing the first point under the minister’s speech, it is quite clear that Glencore borrowed itself money for the operations of MCM. It is important to stress that multinational enterprises borrow themselves money to dodge tax payments. This subsequently translates into serious revenue leakages in the mining sector. The immediate question that remains unanswered is the value of the loan. How confident is the government that this loan has not been overpriced at the benefit of Glencore?
Did government undertake comprehensive financial due diligence to ascertain the true value of this loan? Another question that is to be answered is whether this approach to mine valuation (which seems to be a cost approach) is the best when valuing production properties like MCM? The best-known method of valuing production properties is the income approach particularly using a Discounted Cash Flow (DCF) analysis.
Looking at the sketchy details of this deal one can safely conclude that Glencore has transmitted all technical and market risk to ZCCM-IH and is to benefit from the riskless docile position of debt servicing by ZCCM-IH and arbitrage opportunity emanating from having buying rights on copper output. The trend of undervaluing and overpricing of mining assets will continue in perpetuity if the country does not craft its own mineral asset valuation code.
This does not involve reinventing the will because the government can easily fine-tune and adopt one of the international codes and pass it into law. When this is done the country will have a proper guideline on mining asset valuation. This is a matter that CTPD has been advocating for over the recent years.
Is the loan settlement mechanism sustainable?
Assessing the third point under the minister’s speech and two points from other sources it is still not clear whether the interest and principal payment shall be based on 10, 90, or 100 percent production. Also, it is still not clear as to what happens when ZCCM-IH defaults in servicing the principal and interest amounts.
Does Glencore repossess some of the mine assets? What are the agreed penalty charges if any? Will the principal amount be paid on a quarterly or annual basis? However, from the loan servicing mechanism, it appears the payment process will be self-serviced by the mining asset thus not exerting pressure on national coffers. Answering the question of whether this will be sustainable or not, well it depends on the production volume and copper price cycle over the agreed loan payment period.
Does the $1.5 billion transaction debt add to the current debt stock of Zambia?
We must appreciate the fact the debt is sitting on ZCCM-IH books and not the Ministry of Finance. This being so, it means the debt is to be wholly serviced by ZCMM-IH and not tax revenue from government coffers. However, we are of the view that the IMF and other creditors will closely watch this development in the negotiation process of a bailout package.
Can Zambia run its mines?
The idea of Zambia gaining strategic ownership of national assets such as mines is an important one. At least it sets a benchmark for running other mines. However, we must appreciate the fact that each mining project is unique with different cost and production profiles, technical features, and technology.
When it comes to the technical management of the mines, Zambia has a large technocrat’s base to support this. However, most state-managed business projects fail because of mismanagement arising from political interference, inefficiencies, and corruption. Just like in the nationalisation era the state failed to keep the mines afloat because of a lack of recapitalisation emanating from poor management. However, it must be mentioned that lower copper prices had a great effect too.
What is the way forward?
Looking at the circumstances in which the deal was negotiated it was unavoidable given the threat made by Glencore to place the mine on care and maintenance. This could have resulted in a loss of more than 15,000 jobs and this could have subsequently sent ripple effects to other businesses linked to mining. Considering this is an election year government could not trade the job losses with care and maintenance.
In going forward, we can only hope and trust that the government manages the MCM asset in the best interest of the people. This should gravitate towards poverty reduction which can be achieved through policy frameworks like local content. We further hope that the Mine shall be free from political interference and corruption. We also hope that trained and competent geologists, mining engineers, metallurgical engineers, and other skilled personnel shall be at the helm of the management process.
The Author is a Senior Researcher (Extractives) at the Centre for Trade Policy and Development (CTPD), a not- for –profit, membership based trade policy and development think tank
Kulandafye ati the risks are too many for an inept govt like ours to manage these mines..why are u trying to mint words here.
Its all a debt fuelled takeover and GRZ has no expertise running mines.
It will all end in tears
It’s not an illuminating piece. Inter-company borrowings are common in businesses that are owned and controlled by common interests. Wht’s key is that board approvals by both the borrower and the lender should be in place. This is important because business failure exists and without relevant approvals, it’s hard to enforce loan repayment. In the absence of access to key documents and parties to the agreement, no meaningful analysis is possible of the ZCCM-IH – Glencore agreement. But bad investment decisions do occur. However, people like Lubinda Habazoka hold the view that any investment by IDC and ZCCM-IH is a good investment. If life was like that, there would be no business failure.
Its obvious this Dr. Bambazonke does not or has not gotten to the grey areas of the whole transactions and just comments for the sake of being heard. The who deal is a big scum with little benefits to the nation. Glencore has offloaded a time bomb on GRZ whose effects will be felt shortly. I thought people like this Bambazonke Dr are supposed to be offering constructive criticism so that those charged with managing public affairs are not found wanting. Dr. Bambazonke no matter how best you try to make pleasing statements to the powers be’s ears you will never be appointed to a public office. You are out of the equation.
Scholarly and well clear for public consumption. IDC contact mental faculties of Webby Banda.
Fair analysis. Constructive criticism with solutions at hand. Thanks Webby.
KAIZER cant comment here because he only knows cadre issues
It doesn’t matter what you unpatriotic zambian thinks. You can analyse as much as you want but the fact remains that we as government have made the decision. You can choose to dance or cry about it. It won’t change
Interesting conclusion after stating clearly that this is a bad deal negotiated by politicians and technocrats….give us the reasons why Glencore wanted to put it under care and maintenance.
Kachasu analysis.
You have not mentioned the fact that MCM will sell Copper to Glencore at $2300/tonne
Clearly ECL and the PF in the Mopani deal or scam were looking for short term gains(Aug 2021 elections)
They care less about the future or viability of the mine. They are taking advantage of the ignorance of many of our Zambian colleagues.
A number of commentators are omitting obvious issues like, is there evidence of cashflow or business fixed assets from Glencore to Mopani after those loans were signed? The loans were allegedly more US$4 billion. How were these reduced to US$1.5 billion? This suggests that there was something fishy about Glencore’s loans to Mopani Mining Co which ZCCM-IH objected to. But this same ZCCM-IH has had a board seat on the Mopani Mining Co board of directors all these years. Why didn’t they flag these loans if they knew what they were doing on the Mopani board? Does Lubinda Habazoka care about such issues? Doesn’t this say something about Lubinda Habazoka’s knowledge of the issues he tries to champion? Is Habazoka capable of asking good questions?
According to Glencore, Mopani Mining Co has been losing money all these years. How come it’s suddenly worth US$1.5 billion? And why was Glencore lending money to Mopani Mining Co if it was losing money? Hw did Glencore expect to be repaid its loans? This whole transaction is fishy. Did Glencore offer some sweeteners to make some people commit the people of Zambia to a deal that looks one-sided? And in the event of a dispute between ZCCM-IH and Glencore, which country’s courts will adjudicate? Perhaps Zambian Citizen and Habazoka should clarify.
Firstly, Glencore had made it clear that they were going to put the mine on care and maintenance because of high cost of production. Now if copper will have to be sold to them at the price of $2300/T, Then how will ZCCM-HI be able to run the mine and what will be the profit? Mopani runs at an approximate expenditure of $2M per day. If this same lazy bums in the name of ZCCM-IH failed to run Kariba minerals, how the hell will they be able to run MCM?
It all depends on criteria applied to determine what is worthwhile and what is not worthwhile. ZCCM-IH needs to move fast in engaging an investor. It is not necessary for ZCCM-IH to own all shares because of risks involved in copper mines. It is better for ZCCM-H to share risks with investors with proven capacity to join the race. A call for expression of interest needs to be circulated as a matter of urgent using multimedia technologies for efficient publicity. It would not be astonishing to find that investors equivalent to Glencore will also participate in offers.
@Makasa
Who is going to be co-investor as a minority shareholder in a mine managed by a government? Wishful thinking
It’s also a matter of ZCCM-IH trying to do too much too soon. They’re still in court with Vedanta Resources with no resolution any time soon and they hv taken on the Mopani Mining Co burden. Add to that the Zamtel dispute with the Libyans and it dawns on u that we hv not been managing business risk carefully. And all this whn we cannot pay interest on Eurobonds, whn Tazara workers are going without pay. Do u see hw messy it looks? It’s scary and I wish political discourse would turn to these issues.
Correction:
You don’t ‘borrow yourself money.’
You lend yourself.
Repeat after me. ‘I borrowed money from Peter. Peter lent me his money.’ ‘Hello Peter. May I borrow your car? Please lend it to me. I will return it next week.’ ”Peter kindly lent me his car.’ ‘I borrowed Petr’s car.’
Reasonable analysis. The problem Zambia has is that, while they may have technically competent mining technocrats they badly need clever/crafty business men who can run mines. A few seasoned accountants would also
be useful. Zambians always get cheated in book work. Anil used our money to reap billions from our assets. Even in this deal the devil may lie in the details.
KKKKK ZAMBIA ZAMBIA who runs the mines at the moment ,who are the guys in the fore front doing the actual extraction? who is giving instructions to these guys doing the actual job. Zambians we can do it ,do not let yourselves down we can do it.All we need is commitment and trust. All the mines in Zambia are being runned by Zambians and if one is doubting go around all these mines and find out for yourself .I am a miner and I know what I am talking about
I noticed that, there’s confusion by using borrow instead of lend
@Nemwine
The bulk of the loans have been incurred as a result of upgrade works of facilities undertaken since Glencore took over the mine in the year 2000. Thuis is attributable to the Nkana synclinorium and the Mufulira deeps projects to mention two of the significant projects. These were undertaken as a matter of necessity to increase the life of mine to 38 to 40 years. The copper price quoted in the deal is tied to the ruling LME price not the $2300 being bandied around.
We can make running commentaries as much as we can but we need to be alive to the following
1. Glencore was agitating to place the MCM facility on care & maintenance thereby endangering the 15000 jobs in Kitwe and Muflira
2. GRZ had an option of forcibly grabbing the asset and kick start litigation that is not…
… only costly but lengthy and still jeopardize the 15000 jobs
3. The other option is the current route where you have both parties agreed
It boggles the mind how people here expect a buyer (ZCCM-IH) to be more of the beneficiary than the seller Glencore)! The above analysis is fair and seemingly coming from a level headed citizen. What we need to pray on is that individuals charge with this responsibility will be patriotic and above board.