Zambia vs. Vedanta: Could the government be paving the way for a Chinese buyer?
Zambia’s largest copper mining operation, KCM, has been liquidated. Many are asking now if the country could repossess private mining operations in a bid to shore up financing amid rising debt levels.
Zambia’s economic situation is getting dire. The Zambian Kwacha has fallen six percent against the US dollar this year alone. That makes it one of the world’s worst performing currencies. Last month, rating agency Moody’s downgraded the country’s credit worthiness to junk status. That means Zambia’s chances of defaulting on its debt — it owes around $10 billion (€8.88 billion) to creditors, more than 40% of the country’s gross domestic product (GDP).
So the recent liquidation of the country’s largest copper mining operation, Konkola Copper Mines (KCM), is being viewed with suspicion. The government alleges that India-based Vedanta Resources, which owns a majority stake of around 80% in KCM, has violated its mining licence and owes money in unpaid taxes.
The insolvency proceedings that led to KCM’s liquidation were started by the state-owned ZCCM Investment Holdings, which only owns a minority stake of around 20% in the company. Vedanta had no lawyers present at the court hearing in which a judge decided to place KCM under the administration of a liquidator.
Miners feel the pinch
Zambia may be trying to shore up its finances. Last week, news agency Bloomberg reported that the government had lined up two potential buyers for KCM. A sale of the country’s largest mining operation “could potentially alleviate short-term debt financing problems that the government has,” says Nick Branson, a Senior Africa Analyst at Verisk Maplecroft.
“I would say overall, this is all driven by financial consideration on the Zambian government side,” he adds.
But that isn’t the only reason. Many locals feel they haven’t benefited from rising copper prices on the global market. That’s why the government announced a sliding royalty tax regime for copper producers in the 2019 national budget. The tax is linked to the global price. That means miners pay more when the industry is performing well. The change was met with widespread criticism by investors and the industry.
“A stepped regime makes for sudden changes when prices cross thresholds, which can be quite unsettling to industry,” says Sokwani Chilembo, Zambia Chamber of Mines CEO.
According to him, mining companies had already been facing challenges. Vedanta says it has invested $3 billion in its Zambian subsidiary but the operation has not been making a profit in recent years. KCM runs one of the wettest copper mines in the world, and pumping water costs money. Power can also be a problem for miners, especially after a recent drought significantly reduced hydroelectric power output.
With so many challenges, mining operations had been importing copper ore from neighboring Democratic Republic of Congo to supplement shortfalls in production. That allowed them to maximize the refinery and smelting capacities in which they had invested. But that business was basically wiped out when the government introduced an import duty on foreign copper ore, according to Chilembo.
“Very, very limited amounts have some through, and it accounts for quite a significant proportion of what was forecast for the growth,” he says.
‘Divorce’ the investors
As a result, several investors in the mining sector, including Glencore and Vedanta, have threatened to reduce operations in the country. But it looks like the government isn’t about to let up.
“The government is trying to get breathing space here, and Vedanta’s operations at KCM look vulnerable,” says Maplecroft Verisk’s Nick Branson.
Vedanta is facing a lawsuit in UK courts for environmental damage. A London judge decided a case brought forward by Zambian villagers could be tried in the UK because it was unlikely they would receive a fair hearing in their own country. So it is odd that any damage to the environment has been brought up in the liquidation proceedings in Zambia.
Many observers are no longer asking whether the case has merit, they are more concerned by the fact that this is a government-led effort. Last month, Zambia’s President Edgar Lungu spoke of plans to “divorce” the government from many mining operations, including those owned by Glencore and Vedanta.
Lining up the buyers?
Meanwhile, Zambia’s Minister of Mines and Minerals Development Richard Musukwa, has said the government has no plans to nationalize the mines. So Zambia could very well be lining up buyers for KCM. Bloomberg reported that Kazakhstan-based Eurasian Resources Group and China Non-Ferrous Metals had expressed interest. The latter would not surprise Nick Branson. He says that a company that is looking to secure copper and cobalt resources for the next 20 or 30 years would consider the acquisition.
“I think the economics could make sense than one of these traditional big miners,” he explains.
China is Zambia’s biggest lender, and the country has been one of the biggest beneficiaries of Beijing’s external debt renegotiations. A recent report by New York-based Rhodium Group estimates that the country has renegotiated at least $4.4 billion of loans from China. But that could be a conservative figure because there is a significant lack of transparency regarding the Chinese loans to Zambia.A mine could provide collateral for any further loans, Branson says. “It adds up for a Chinese operator in a way that it doesn’t for a big commercial operator.”
Source: dw.com