A story in today’s Post confirms that Zambia Competition Commission (ZCC) has received an application from the parties involved for an authorisation to transfer shares from ZCI to Vedanta (see previous entries mentioning ZCI, especially 17 Jan 2008, for much more information on this issue). Competition Commission director of mergers and acquisition Thula Kaira said it was mandatory for the two companies to seek ZCC authorisation to carry out such a large transaction. He added that a thorough independent assessment was yet to be carried out to ascertain the suitability of the transaction: “At the moment it is too early to say we have allowed the transaction or not but since they have applied, an independent assessment team will need to study the proposal before we can make a decision.”
ZCI, which is listed on the Johannesburg Stock Exchange, issued a statement: “Vedanta has accepted the bank’s valuation of our 24.8 per cent stake in KCM that is valued at US $ 213.15 million and the call option process has accordingly being finalised and in terms of the provisions of the call option deed. Vedanta has indicated that it intends to effect payment of the valuation price to ZCI by no later than 20 February 2008, where after ZCI would instruct KCM to effect transfer of the shares to Vedanta… It will also determine the nature of such amended focus, or whether a portion of the ZCI’s assets be distributed to shareholders by way of dividend or share buy-back and thereafter continue business as an investment or operating entity should the assets remaining after distribution/buy-back allow for a viable business case,” stated ZCI.
If the transaction goes ahead without blocking action from the Competition Commission or Zambian Government, which has previously expressed its opposition to Vedanta taking such a large share of the company, Vedanta will take a 75.8 per cent shares of Zambia’s largest copper mines. ZCI stated that it would soon present shareholders with their proposals for the future of the company that would determine whether the company should wind up operations and its assets distributed to shareholders, or whether it should continue as an investment or operating entity. When ZCI was established it included a mechanism, the Copperbelt Development Foundation, to compensate former employees and promote development for local residents and communities. The organization appears to have done almost nothing during the years of its existence. Some difficult questions face the Zambian Government, Anglo America, Vedanta, and the international aid donors that were involved in establishing CDF as a sweetener on the Anglo-American’s pull-out from the Zambian mining sector.
1 comment:
For the Attention of the Executive Director
19th February 2008
Dear Sirs,
At this opportune moment I feel that the letter, whose copy appears hereafter, can provide valid input to the competitive commission analysis that is currently deciding if the Vedanta acquisition of the remaining ZCI shares is in the interest of the Zambian people.
The proposed share purchase at a price considered by eminent analysts to be only 30% of the current value will deplete the cash available to the Copperbelt Foundation to accomplish the Zambian social activity for which it was created in addition to "Selling Zambia by the Tonne" at a give-away price.
I trust that the letter below will add precision to my remarks and have confidence in the commission's impartiality in deciding what is best for the Zambian people.
Yours Faithfully. Stephen C Judge.
Government of the Republic of Zambia
C/o The Embassy of the Republic of Zambia,
63 Rue Pierre Charron (5th Floor)
75003 Paris.
28th January 2008.
Subject: Konkola Mining Company.
- The Implications of the Vedanta – Zambian Copper Investments acquisition.
For the attention of:
The Honourable Minister of Mines and Mineral Development - Davison Mulela esquire.
The Honourable Minister of Foreign Affaires – Kalombo Mwansa esquire.
Honourable Minister,
I would ask you to excuse my soliciting your attention, but I feel that my opinion as a longstanding shareholder of Konkola Mining Company, via the Zambia Copper Investments Limited participation, would provide a valuable insight into the opinions currently expressed by ZCI Shareholders.
The democratically elected Government of the Republic of Zambia expresses the Zambian people's opinion and dynamically defends their interests. Consequently, when a decision concerning the future of natural resource exploitation is made it is primordial that the Government is furnished with all the decision criteria that will lead to a conclusion that is beneficial for the Zambian economy and the population.
As a ZCI minority shareholder since 10 years, I feel compelled to submit an International viewpoint as to the interpretation of the 2004 agreement between ZCI and Vedanta concerning the Vedanta acquisition of the 56.8% ZCI equity in KCM.
Following the Rothschild report concerning the 2005 value of the remaining 28.4% ZCI equity in KCM, it is considered by all shareholders that the $213 Million identified is greatly undervalued, due to parameters that were fixed during the 2004 agreement and today have become gravely inaccurate.
In consequence, the eventual Vedanta acquisition of the remaining ZCI equity for only $213 Million can be considered as a second “spoliation” of the ZCI Zambian and International shareholders investment. In parallel raising questions as to the remaining value to be attributed to Konkola Mining resources and future investment prospects in Zambia.
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 de facto would not obtain almost 80% ownership of this prime Zambian national heritage. If this is the position of the Zambian Government, does Vedanta have the pretension to ignore and defy the democratically elected representatives of the Zambian people?
Furthermore it is common practice internationally to see Government intervention to arbitrate commercial transactions that have a major impact upon the future economy, political stability and public opinion generated by a foreign investor monopolising a prime national resource.
It is logical and democratically sound that the Zambian Government and local or foreign minority shareholders maintain participation in a company that they have supported for many years.
It is also perceived that the pro-Vedanta arguments belittle the former KCM management (ZCI/GRZ) capabilities, which were not profitable and were "saved" by Vedanta's expertise. The fact that profitability was radically increased by the spectacular rise in copper ore price is conveniently ignored !
One cannot dispute that Vedanta have made investments, (that have in part been funded from KCM profits, reducing shareholder dividends) and that they have generated productivity and high revenues, which will increase over the coming decades.
Credit to Vedanta, but the 2004 agreement between ZCI /GRZ and Vedanta was supposed to attain this goal and, without diminishing their performance, Vedanta have achieved an extremely good return on their investment even more rapidly than initially planned, due to the increase in copper ore prices over the past 3 years.
The 2004 agreement 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 such a low price ? Were GRZ /ZCI not aware of the value of KCM ? Of course they were !
It was clear that 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 !
This was an attractive business opportunity for Vedanta, so the image of a philanthropic Indian mining conglomerate coming to the rescue of ZCI/GRZ is distasteful and unjustified.
The 2004 agreement “Call Option” also gave Vedanta access to the remaining 28.4% of ZCI's KCM equity, but supposedly 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 format also avoided a repetition of the "spoliation" denounced by the late Jean-Pierre Rozan who inherited the Presidency 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 Vedanta position, it is clear that for them the ZCI acquisition 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 30% of the just minimum, the difference being recovered 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 for the total KCM value, based upon the financial and contractual parameters established in the October 2004 agreement, estimate at $750 Million the 2005 KCM value at approximately a third that of the amount attributed by other reputable analysts !
Does the Honourable Minister consider that this reduction of the Zambian patrimony is justified and will not influence foreign investors as to the magnitude of the country's assets ?
Vedanta's intention to obtain 80% of KCM is not in the interest of Zambia or the shareholder groups in my opinion. However, if at least the acquisition price were fair it would compensate those concerned and generate liquidity for the Zambian economy. The fair price, in my opinion, is between USD 400 - 700 million, so scope for negotiation exists, but within this level considerably more Zambian internal revenue would be generated.
For my part, two viable possibilities identified hereafter could be proposed to Vedanta as an alternative to the implementation of the ZCI “Call Option”.
1) The ZCCM option. The fact that the Zambian Government has communicated to Vedanta that they are unfavourable to their monopoly of almost 80% of Konkola Copper Mines equity remains an opportunity 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 resource.
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.
The Zambian Government could assist as the majority shareholder in ZCCM by coordinating the approach of ZCI, Vedanta and ZCCM in favour of a fusion between ZCI & ZCCM, thus maintaining coherence in the national resource management policy and increased benefit for the Zambian Government and population in the coordinated exploitation of this national resource
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 International and local shareholders (grouped as ZCI majority shareholders), the ZCCM/ZCI participation to the future evolution of the KCM national resource would seem logical. The increased ZCCM assets could then be offered to additional shareholders to expand the ZCCM capitalisation.
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 hereafter.
This "politically correct" solution would be subject to Vedanta's refusal to maintain the "Call option" but under the circumstance, where it can be argued effectively that Vedanta have obtained 51% of KCM at a cost considerably below the market value. In addition, their currently generated handsome profits will increase over the many years that remain to exploit the KCM deposits and a "hard line" Government approach is justified to convince them that they have more to lose than to gain by opposing the Government's preference.
2) The Rothschild Evaluation. Assuming that the Rothschild evaluation of KCM is credible at the 2005 perceived value, in October 2004 Vedanta obtained 28.4% of the 56.8% ZCI equity in KCM for $23,2 Million, or 10.8% of the true value. .
The January 2008 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 in 2004 by the understanding that ZCI would recuperate the differential value due to increased profitability 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 British arbitration decision.
Vedanta has invested, but part of this investment has been financed by ZCI due to reduced operating profit, which negatively influenced the dividends paid by KCM to ZCI since Vedanta's 51% controlling interest.
Thus, the argument that the ZCI 56.8% participation at 2005 levels should be valued at a minimum of $ 426 Million is valid. This based upon Rothschild's January 2008 survey and excluding the increase in copper ore prices. Vedanta is currently settling the stage payments of the $23.2 Million due to ZCI, but when finalised, the logic behind this “fair” evaluation would generate an outstanding settlement due to ZCI of $402.8 Million to attain the 56.8% perceived equity value at 2005 level.
The 2005 Dollar exchange rate being around $1.20/€ the remaining €336 Million due would add approximately €2.6 per share to the current level and would position ZCI shares around €3.5 at current market rate. I feel this a realistic and “fair” value that eliminates the potential “second spoliation” of the ZCI shareholder groups.
In conclusion, I consider it is urgent that the Zambian Government intervene to protect KCM employees, the Copperbelt Development Foundation and minority shareholders from the pending dilapidation 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 foregoing remarks and personal opinions will add precision to the Ministerial decision parameters and assist positively in the defence of the Zambian people.
My sincere thanks for your patience in evaluating this lengthy communication, which I trust will be of non-negligible strategic importance.
Yours Faithfully,
Mr S.C. Judge. Management Consultant and ZCI Shareholder.
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