Tuesday 22 January 2008

Guest blog: KCM 2008 - Will the Zambian People be Plundered Again?

Commentary received from Jean-Luc CHAILLAN, Chairman of an association of shareholders of ZCI and ZCCM. (www.zcdefense.com)

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The capital of KCM (Konkola Copper Mines) is divided between various owners as follows:
-51% VEDANTA, an Indian corporation
-28.4% ZCI (Zambia Copper Investment), a legal entity from Bermuda
-20.6 % ZCCM-IH (88% of which is owned by the Z government)

The Indian corporation VEDANTA bought 51% of KCM stock in November for a mere US$48m. Back then, this sale came under fire and was described as an outrageous pillaging of Zambian resources.

VEDANTA currently holds a call option on the 28.4 % of KCM still owned by ZCI. On Thursday, January 17, 2008, Rothschild banking, who had to assess its value as it stood in August 2005 (although the evaluation came out in 2008) came up with the figure of US$213.85m for the above mentioned 28.4%, thus evaluatingKCM at US$750m. Vedanta can either accept or refuse to go on with the call, but ZCI cannot refuse to sell.

Why call this a new plunder committed against the people of Zambia? At first sight, it might seem irrelevant to evoke Zambians since ZCI is based in Bermuda. In addition, most journalists and politicians in Zambia routinely refer to ZCI as exclusively foreign interests. In 2003, the Anglo-American Company owned half of ZCI when it decided to part with ZCM. At that point, it transferred its stock to a Zambian foundation and to the Trust of Employees of KCM. In the annual report of ZCI for the end of2002, available online at the following address: http://www.zci.lu/annual_report_2002.pdf, one can read (pp 1-2) : "As a consequence of this restructuring, your company is now owned 47.7% by public shareholders, 44.3% by the CDF (Copperbelt Development Foundation) and 8% by the ESOT (KCM Employee Share Ownership Trust)."

"The Copperbelt Development Foundation (CDF), whose objectives are, inter alia,to promote diversification of the economy of the Copperbelt Province of Zambiaand to promote the social development, relieve poverty and contribute to the provision of health, education and other social services in the Copperbelt Province and Mumbwa District of the Central Province of Zambia, (.)"

Public shareholders are shares on stock exchange, in Paris and Johannesburg, most of them possessed by small's shareholders. Between 2005 and 2006, ESOT distributed its stock to KCM employees, so that today, the latter must control 8% of ZCI. As a result, ZCI is owned majoritary(44,3+8=52,3%) by Zambian citizens. And we're not talking wealthy Zambians who took advantage of KCM's rise and thus of that of ZCI, but on the contrary low-income workers, thanks to the action of The Copperbelt Development Foundation.

When it was created, the CDF did not receive any cash, only ZCI stock. Consequently, the foundation will be able to conduct its charity work only when KCM distributes money. But Vedanta, which controls KCM, hardly ever gave anything, in spite of the huge benefits it made almost overnight.

Let's now come to the plunder. All the surveys, all the evaluations conducted by various financial audit agencies are way above this figure. For instance, for the year 2005, Morgan Stanley, in a survey about Vedanta dated December 15, 2005, evaluates the 51% of KCM as US$1,321m, which makes KCM worth US$2,590m, far above the US$750m proposed by Rothschild. Other subsequent assessments are even higher. When the evaluation came out, Lehman Brothers, a financial analyst, immediately concluded that it was a bargain because KCM was worth at least twice this amount.

Vedanta acquired KCM in November 2004. Between the end of December, 2004 and the end of September, 2007, the share of the benefits one can safely attribute to 28.4% of ZCI (and that has remained so far undistributed) reaches more thanUS$144m. (In ZCI financial reports, we found: in December 31, 2004 : "Investment inassociated companies 61,282" and KCM is the only one investment in associated companies of ZCI, and in September 30, 2007 (the last report): the line"Investment in associated companies" disappear, but the line "Assets classified as held for sale 205,398" appear, and the difference between the 2 lines = 205.398 - 61.282 = US$144.116m and represents the "Dividends not received").

So, Vedanta will pay only US$213.15m for shares with dividends not received attached of US$144.116m ? So the real price will only become 213.15-144.116=US$69.034m for Vedanta. About the amount of profit for one year of exploitation of the mine! Conclusion: This is plunder. This is highway robbery. ZCI being held in majority by Zambian interests, it is the Zambian people who, once again, are being deprived of retribution for their natural resources by a powerful foreigner. The ambition of the Foundation was, as quoted above, to "promote social development, relieve poverty and contribute to the provision of health,education and other social services"; this ambition has been thwarted, and it is not the wealthiest Zambians who will suffer from this plunder, but the poorest, the most needy, those precisely targeted by the Foundation.

Meanwhile an Indian billionaire is getting richer and richer. Will this state of affairs continue and will journalists, politicians and GRZ look the other way ? Or will the GRZ step in to stop the plunder?

7 comments:

Alastair Fraser said...

Interesting post. There are some signs that the Zambian Government is pressuring Vedanta not to exercise its option: Mineweb are reporting, "should Vedanta choose to reject the valuation, insiders indicate that would be more because of a request by the Zambia government that it maintains its stake in KCM at 51%. This request was announced late last November and to date, there has been no word from Vedanta." It was that comment from the Government in November that originally intrigued me. I still don't know if they want to block the sale for the reasons discussed in your post, or some other reason. Thanks anyway for the information.

Anonymous said...

Hi,

Maybe the Zambian government have made his own evaluation using Vedanta's wish of an evaluation on August 2005 and noticed the robbery!!

Anonymous said...

It is quite shocking to read some blatant inaccuracies
purported by the so called minority shareholder association that doesn't have any real legitimacy, the innacuracies concern the following points:

1-The entry of Vedanta in KCM:
In 2002 Anglo American plc announced its intention to close simply KCM due to the fact
that it was not economically viable anymore and was causing a huge hole in Anglo botton line.
From 2002 to 2004, KCM has been operating in very poor condition accumulating losses on losses.
The mine's equipment and infrastructure themeselves were in dire straits and close to collapse.
Thus to need to bring in a partner who has attributes that ZCI was badly lacking, namely:
-technical expertise and management experience; and
-And mostly funding support to ensure the financial stability of KCM.
Enter Vedanta as a savior into this shambolic situation, although some French
investor are try to name this enter the dragon or the devil.

Vedanta turned around completely the fortune of KCM and after several improvement, modernisation
and investments has turned KCM into a first class operation.

However, those same French investors more worried about their own profits and pockets would now like to
paint Vedanta as a sort of evil empire run by a greedy chairman, and chose to forget that in fact without
Vedanta, KCM would be closed today.

2-The call option amount:
The amount that Vedanta has to pay to ZCI should they choose to exercise their right to this
call option is 213 M$, no more, no less.
This amount was estimated by an independant bank as per normal process defined in the initial contract signed
by both parties. Vedanta didn't have any say in this.

The deductions of 144 Mthat this person from ZCDEFense mentions come out of his head and are absoluetly non sense.
This association has promised the moon to their members with some estimates posted on their site for the
call exceeding 1.5 Billion$ for 28% of KCM.... uncredible but true

3-Last point, the foundation is in fact a virtual private entity managed by ZCI only that was in fact intended set up by Anglo to mitigate amongst other things
the effect of the eventual closure of KCM on the staff and their families and ensure that they get some sustainance means
till they manage to find alternative employment.
As KCM is definitely not closing today, this foundation doesn't have any real role.

And KCM is not closing only thanks to the efforts, expertise and good management of Vedanta, which some ZCI shareholders
would like to suck dry.

Anonymous said...

Anonymous is probably a people who work for Vedanta
Our association has a legal existence, with a large number of members

1-The entry of Vedanta in KCM:
ZCI and ZCCM choose Vedanta as partner in KCM BECAUSE Vedanta has technical expertise, and may ensure the financial stability of KCM.
That because, in November 2004, Vedanta acquire 51% of KCM for only US$48m. This same 51% of KCM are estimated US$1,321m in December 2005 by Morgan Stanley (27 times more in only one year).
Vedanta is a savior, but it seems to be a very good thing to be the savior.
Without Vedanta, some months later, another company would make another offer because of the high copper prices.
Vedanta turned around completely the fortune of KCM and after several improvement, modernisation and investments has turned KCM into a first class operation. Vedanta was choose with a low entry price because their expertise. But now, Vedanta want buy another 28.4% of KCM as if KCM was still a second class operation.

2-The call option amount:
The amount that Vedanta has to pay to ZCI should they choose to exercise their right to this call option is 213 M$, no more, no less.
Vedanta enters KCM in November 2004. Between November 2004 and September 2007, the 28.4% of KCM (the part of ZCI shares) represent a profit of US$144m, but this wasn’t distributed to ZCI ; this amount of money is in KCM, and if Vedanta buy the 28% of KCM for 213m, this include this amount of 144m.
In fact, the value of US$213m was evaluated in January 2008 at the date of 12 august 2005 (before the high copper prices), and the profit during this period (more than 2 years) wasn’t acquire to zci. It’s too easy.

The association has promised nothing to our members, but many people have made many estimates, somes are lows, and others are highs; but none are so low than US$213m.

The Rothschild bank propose 213.15m for 28.4%, this represent US$750m for entire KCM. Compare with this others estimations:

Year 2005:
In September 2005, Jean-Pierre Rozan, the former Chairman of ZCI, the proposed amount of $ 1.2 billion for 28.4% of ZCI, or more than $ 4 billion for KCM, but refuses Vedanta.
On 15 December 2005, Morgan Stanley assesses 51% of KCM at $ 1,321 m, 2,590 m $ KCM

Year 2006:
On Jan. 19, 2006, Morgan Stanley assesses 51% of KCM at $ 1,057 m, 2,073 m $ KCM
The 08 February 2006, JPMorgan evaluates 51% of KCM to 636 million dollars, or $ 1,247 m for KCM.
On March 30, 2006, Morgan Stanley assesses 51% of KCM at $ 1,535 m, 3,010 m $ KCM
On May 19, 2006, Morgan Stanley assesses 51% of KCM at $ 2,107 m, 4,131 m $ KCM
On 01 June 2006, Morgan Stanley assesses 51% of KCM at $ 1,387 m, 2,720 m $ KCM
On 05 October 2006, Morgan Stanley assesses 51% of KCM at $ 1,937 m, 3,798 m $ KCM

Year 2007:
On 06 March 2007, JPMorgan evaluates 51% of KCM at $ 1,418 m, 2,780 m $ KCM.

Mr JP Rozan, Morgan Stanley, and JPMorgan aren’t members of our association.

3-Last point, the foundation isn’t managed by ZCI, but the foundation manages ZCI. The Foundation has 44.3% of ZCI.
If the call option is accepted, ZCI would have around US$235m of net asset value. If ZCI return this money to his shareholders, the Foundation would have around US$104m.
The goal of the foundation is, as writing in this laws: "The Copperbelt Development Foundation (CDF), whose objectives are, inter alia, to promote diversification of the economy of the Copperbelt Province of Zambia and to promote the social development, relieve poverty and contribute to the provision of health, education and other social services in the Copperbelt Province and Mumbwa District of the Central Province of Zambia, (.)"
Not to help the staff to survive before finding another job...
If Vedanta would pay a correct price, the Foundation would have at less US$300m or more to help the Zambian economy and people.

Night Ork said...

Who Governs Zambia -Vedanta or GRZ ?

Dear Sirs,

The answer to the subject question is obviously the democratically elected Government of the Republic of Zambia who expresses the Zambian people's opinion and dynamically defends their interests.

However, having read the pedantic and dictatorial pro-Vedanta text foregoing you would think Vedanta consider otherwise !

As a ZCI minority shareholder since 10 years I feel compelled to express my opinion on what I feel to be the true representation of the situation, when reading the pro - Vedanta offering "Anonymously" submitted by a writer that has not the courage to identify themselves and whose credibility can thus be questioned.

In November 2007 it is understood that the Zambian Government expressed its preference that Vedanta renounce their "Call Option" for the remaining 28.4% of KCM and thus not obtain almost 80% ownership of this primordial Zambian national heritage. If this is the Zambian Government's position, does Vedanta have the pretension to ignore and defy them?

It is logical and democratically sound that the Zambian Goverment and local or foreign minority shareholders maintain participation in a company that they have supported for many years.

The pro-Vedanta arguments belittle the former KCM management process which was losing money and was "saved" by Vedanta's expertise.

One should not dispute that Vedanta have made investments, (that have in part been funded from KCM profits, reducing shareholder dividends) and have generated productivity and high revenues which will increase over the coming decades.

Credit to them, but that was what the 2004 deal between ZCI /GRZ and Vedanta was supposed to attain and, without diminishing their performance, Vedanta have achieved an extremely good return on their investment even more rapidly due to the spectacular increase in copper ore prices over the past 3 years.

The 2004 deal with Vedanta gave their company access and 51% majority control of the "Worlds largest copper reserves" for the ridiculously low price of $48 Million.

Why so low ? Were GRZ /ZCI not aware of the value of KCM ? Is that possible, of course not !

A specialised mining partner was needed to maximise profitable production from KCM. Consequently, ZCI/GRZ participated to Vedanta's investment to achieve the profits that are forthcoming today by providing 51% of KCM reserves generally agreed to be worth in excess of $2.5 Billion for a token sum of less than $50 Million !

An attractive opportunity for Vedanta, so lets not have an image of a philanthropic Indian mining conglomerate coming to the rescue of poor ZCI/GRZ..

The 2004 deal also gave Vedanta access to the remaining 28.4% of ZCI's KCM equity......but this was supposed to be at a realistic value that was destined to represent an amount that took into consideration the initial participation provided by ZCI to Vedanta's purchase and restructuring of KCM.

This was supposed to avoid a repetition of the "spoliation" denounced by the late Jean-Pierre Rozan who inherited the Presidence of ZCI in 2005 after the departure of Barry Ireton, the ZCI President that concluded the Vedanta transaction. At that time it was stated that, (Journal des Finances 24/10/2005) " ZCI management would not accept an amount below $450 Million for the remaining 28.4% KCM equity".

However, from the dictatorial pro-Vedanta text foregoing, it is clear for the text author that the ZCI aquisition is a "done deal", $213.85 Million is the price and like it or not the Copper Belt Development Foundation, KCM Employee Share Ownership Trust and Minority Shareholders can consider their share value reduced to a third of the just minimum and the difference is in Vedanta's splendid profit margin !

I do not approach this subject in a hypocritical way, it is clear that I invested 10 years ago in ZCI shares with two objectives:

1) To place my capital in an environment that would generate a good return on investment, but also;

2) Having visited Zambia for business purposes, I felt that the development of the mining activity within the country was primordial for the country's economic growth and internal wealth of the Zambian population."

If both objectives were achieved this became a "win - win" situation for both parties.

Since the scandalous under evaluation of the ZCI 28.4% equity in KCM both Shareholders and the Zambian people are exposed to the loss of their rightfully acquired capital growth.

The Rothschild evaluation of the total KCM value, based upon the financial and contractual parameters established in the October 2004 deal, fix the $750 Million value at approx a third of the value attributed by other reputable analysts!

Does GRZ consider that this reduction of the Zambian patrimony is justified and will not influence foreign investors as to the country's assets ?

How can this be credible ? Vedanta's intention to obtain 80% of KCM is not in the interests of Zambia or shareholders in my opinion, but if the acquired price was fair it would compensate those concerned. The fair price, in my opinion, is between USD 400 - 700 million, so scope for negotiation exists, but at this level considerbly more Zambian internal revenue would be generated..

The proposals identified by myself hereafter in an "Open Letter" to ZCI general management have as yet not merited any acknowledgement of receipt from the persons to whom they were sent.

I feel that it is urgent that the Zambian Government intervene to protect KCM employees, the Copperbelt Development Foundation and minority shareholders from the pending delapidation of their patrimony if Vedanta are encouraged to proceed with the "ZCI call option" and obtain 79.4% of Zambia's largest Copper reserve.

I trust that the details below will complement the foregoing as to my personal opinions and wish you every success in the defense of the Zambian people.

Yours Faithfully, Mr S.C. Judge.

******************************

Sujet : Open letter to Tom Kamwendo and Steven Georgala
Date : 21/01/08
A : john.kleynhans@maitlandgroup.com



Dear Mr Kleynhans,

Please find herafter the text of an "Open Letter" that I would request you transmit to the "Zambian Copper Industries" board members on my behalf.

Specifically Mr Tom Kamwendo & Mr Steven Georgala.

You will note from the content of this communication that I personally do not accept the overall evaluation of USD 236.35 Million representing the total purchase price by Vedanta of ZCI's 56.8% equity in Konkola Copper Mines Plc.

I assume that the Board members will adopt a strategy that will block the cession of our company's assets at this greatly undervalued level, by appeal court or other means, in the same manner that Vedanta has blocked the "Call option" negotiations since 2005.

ZCI shareholders are confident that their investment will be agressively defended by their elected representatives and I for one will do all within my power to assure that this goal is attained.

Please be so kind to confirm your reception and transmission of this communication to those concerned.

Yours Faithfully, Stephen C. Judge.


***********************************************


Sujet : Open Letter to Messieurs Kamwendo, Clerc et Chaillan
Date : 20/01/08
A : amzci@yahoo.fr, jlzci@wanadoo.fr



Gentlemen,

For Mr Kamwendo's benefit this communication is in English so, not having his e-mail coordinates, I would ask that the other recipients forward his copy to him.

As competent managers of ZCI and/or shareholder associations I am sure that you are currently considering the actions to be taken to defend our position against the under evaluated amount given to our company's KCM assets by the Rothschild report.

As a ZCI shareholder since July 1997 I consider that my point of view as to your possible avenues to counter Vedanta's current advantage may be of assistance and could help us in re-establishing the true value of ZCI shares.

My "virtual" ZCI share depreciation of € 90K (60 000 x €1.5) has stimulated considerable reflexion since the 17th January Rothschild "Bombshell" and without the pretension of assuming that I could negociate a solution better than your good selves, the following two idea's may be of assistance to prepare our counter-attack.

After all, in the words of the regretted Jean-Pierre Rozan in his communication to me by letter dated 22 juin 2005,

" Je pense qu'au moment de l'evaluation de la valeur de Konkola Mining Company, qui devra être la base du rachat des actions de KCM détenues par ZCI, il ne pourra y avoir la même " spoliation" que précédemment."

I assume that his "fighting spirit" still survives within the ZCI management group and that we will not accept that the Rothschild setback initiate a second shareholder "spoliation" !

However, the defavourable arbritrage given by the British Judge, added to the Rothschild evaluation based upon a "photograph" of the 2005 KCM value which they admit was difficult to establish accurately, somewhat limits our avenues to contest the estimated KCM value.


1) Assuming that the Rothschild evaluation is accurate at the 2005 perceived value, in October 2004 Vedanta obtained 28.4% of the 56.8% ZCI equity in KCM for $23,2 Million.

The Rothschild 2005 estimated value of the remaining 28.4% KCM being $213 Million, it is clear that Vedanta grossly underpaid their ZCI equity in KCM. This was justified by the understanding that ZCI would recuperate the differential value due to increased profitabilty generated by Vedanta management of and investment in the mine operations. This, naturally, did not include the spectacular rise in copper ore price, which should have been an additional bonus for ZCI but is not considered in the Rothschild report due to the arbitration decision.

Vedanta has invested, but part of this investment has been financed by ZCI due to reduced operating profit which negatively influenced the dividend's paid by KCM to ZCI since Vedanta's 51% controlling interest.

The arguement that ZCI's 56.8% participation at 2005 levels was thus worth $ 426 Million, (based upon Rothschild's survey), for which Vedanta is still in the process of paying $23.2 Million, generates an outstanding settlement due to ZCI of $402.8 Million. (when the $23.2M has been settled)

At 2005 Dollars worth around €1.20 the remaining €336 Million due adds about €2.6 per share to the current level, which puts ZCI shares at approx €3.5, which we all know, is the minimum that they should be !


2) The ZCCM option. The fact that the Zambian Government has communicated to Vedanta that they are unfavourable to their possession of almost 80% of Konkola Copper Mines remains an option for ZCI to re-establish a realistic share value for its shareholders.

Vedanta has confirmed that KCM is "The world's largest copper mine" and this is a major part of the Zambian national ressource.

It is inconceivable that the 28.4% owned by ZCI is only worth $213 Million ! This evaluation has an extremely negative effect upon the Zambian economic environment and the Government's objective to encourage investors to develop their national assets.

ZCI's influence within the Zambian Government could assist in orientating the latter's intervention in favour of a fusion between ZCI & ZCCM, thus maintaining coherence in the national ressource management policy and increased benefit for the Zambian population in the exploitation of this national ressource

Due to the longstanding relationship of ZCI with the Zambian Government and the goal to grow the Zambian economy with mutually beneficial investment by the Copperbelt Development Foundation, KCM Employee Share Ownership Trust and Sicovam SA (together as ZCI majority shareholders), the ZCCM/ZCI participation to the future evolution of the KCM national ressource would seem logical.

In this case a share exchange option would be offered to ZCI shareholders and should maintain a ZCI share value equivalent to the € 3.5 minimum identified foregoing.

This "politically correct" option would be subject to Vedanta's refusal to maintain the "Call option" but under the circumstance, where it can be argued effectively that they have obtained 51% of KCM at a cost considerably below the market value and their currently generated handsome profits will increase over the many years that remain to exploit the KCM deposits, a "hard line" Government approach would convince them that they have more to lose than to gain by going against the Government's preference.

The foregoing comments are given as a purely personnal point of view as seen by a ZCI shareholder that visited ZCCM in Zambia, in the function of Industrial Equipment Sales Manager, in 1997.

The favourable impression given at that time prompted me to purchase ZCI's shares in July 1997 at the Frf equivalent of €2.39. Ten years later a unit value of €3.5 per share, bearing in mind the increase in inflation and copper ore price, would not appear excessive.

I trust that I can rely upon your combined motivation to assure this becomes a reality.

My thanks in advance for your attention, shareholder support and wishing you the best success in achieving our mutual objectives.

Please be so kind as to acknowledge reception of this communication.

Yours Faithfully, Stephen C. Judge. France

Anonymous said...

Night ork appears to be another of those neo colonialist who thinks he can tell our AFrican gouvernment what they should be doing and with who, and automatically assumes that our gouvernments are useless unless guided by some british or french bosses.
Not everyone disagreing with you is pedantic my friend and you have no right judging people even if your name lead you to believe so.

This era is over, and we dont need people from europe, trying to make a fortune with their shares on the sweat and tears of our miners, telling us how to run our countries.

Night Ork said...

Good morning Gerald N,

I respect your point of view, but you have missed my objective.

Yes, since 10 years I have invested in Zambian copper and have not received one penny in return, in fact I have lost 3000 Euro to date and will probably lose more if Vedanta takes over what is left of ZCI. Not a very good colonialist strategy I am sure you would agree !

However, the part you missed is that 52% of ZCI is owned by Zambians, either in KCM Employee Share Ownership Trust or the Copper Belt Foundation. If with my small part of the 126 Million ZCI shares I will lose considerably, how much do you think the Zambian people will lose with more than 65 Million shares!

So, if you think as a neo-colonialist I am only looking after my interest you are wrong, I am also giving a shareholders point of view to the legally elected representatives of the Zambian people and am sure they will react in the people’s interest.

That is my position but perhaps you prefer that an Indian mining conglomerate own 80% of the Konkola copper reserves rather than the Zambian people.

It is your free choice.......