GLENCORE Plc has transmitted all technical and market risk to ZCCM-IH following the sale of its majority stake in Mopani Copper Mines (MCM), a move that means that the former will benefit more than government, says the Centre for Trade Policy and Development.
And the CTPD says that government was only forced into accepting Glencore’s loan deal agreement to acquire Mopani because of the threat of massive job losses in an election year.
In a statement, Monday, CTPD senior researcher for the extractives sector Webby Banda observed that the Swiss-based commodities trader had benefited more than Zambia in selling off its 90 per cent stake in Mopani to ZCCM-IH.
“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,” Banda said in response to a press query.
“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 wheel because 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.”
Banda also cautioned that the International Monetary Fund (IMF), among other creditors, were watching the development in the ongoing negotiation process for Zambia’s much-needed bailout package.
“It is still not clear whether the interest and principal payment shall be based on 10, 90, or 100 per cent 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’s 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,” he noted.
“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. We must appreciate the fact that 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 ZCCM-IH and not tax revenue from government coffers. However, I am of the view that IMF and other creditors will closely watch this development in the negotiation process of a bailout package.”
And he stated that government was only forced into accepting Glencore’s loan deal agreement to acquire Mopani because of the threat of massive job losses ahead of polling day.
“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,” stated Banda.
“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 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.”
Last week, Mines Minister Richard Musukwa disclosed that MCM was owing loans amounting to US $4.8 billion from Glencore (Bermuda), Glencore International and Carlisa.
But he added that the US $4.8 billion loan owned by MCM had been agreed to be reduced to US $1.5 billion and would be repaid between 10 to 17 years depending on copper prices on the international market.