Vendanta pressed to pass on ZCI shares to Zambian public

The Daily Mail, The Post, The Lusaka Times and The Times
all cover an interesting development in the ZCI / Vendanta negotiations for the transfer of shares in Konkola Copper Mines. It appears that the price Government has set for removing the Competition Commission enquiry into the sale, a development which enabled the sale to go ahead, has been to demand that some of the shares are released to the Zambian public via the Lusaka Stock Exchange.

All papers were reporting comments from Acting Finance Minister Felix Mutati who announced firstly that the call option deed was binding between Vedanta Resources Plc and Zambia Copper Investments and was not subject to any further approvals or consent of Government and secondly that Konkola Copper Mines (KCM) has pledged to offer part of its share holding in the mining company to the Zambian public.

Mutati announced "an agreement has been reached in principle for Vedanta to offer part of its Shareholding in KCM to the Zambian public, cognisant of the need for greater participation of Zambians in corporations operating in Zambia." Mr Mutati said the Government was now in the process of constituting a 'negotiating team', which would soon be meeting with a team from Vedanta.

Of course, under the previous arrangement many of the 28.4% of KCM's shares were already held by the Zambian public! That was part of the reason why Vedanta's decision to exercise its call option, agreed as one aspect of a deeply flawed Development Agreement caused some consternation in Zambia. The business friendly MMD Government has been looking for ways to appease popular anger at the minimal benefits flowing to the country from the copper boom. 'Zambianisation' has become one of their answers - a cynical reading would describe the process as the transfer of ownership of exploitative firms from the hands of rich foreigners to rich Zambians.

The Post also reports that Standard Chartered Bank regional head of research for Africa Razia Khan recently made the case that encouraging mining companies to list on the Lusaka Stock Exchange (LuSE) would increase local ownership in the sector which has been dominated by foreign investors. An editorial in the business section expands on the case.

Khan is quoted as saying, "The question that we would ask is, if the basic intent is to try to allow Zambians to gain more from copper mining, are there not other policy choices that might be considered alongside the choices that have already been implemented? Say for example looking at more domestic ownership, encouraging local listings of mining companies through tax incentives,” she said.

She observed that the mining sector in Zambia had been perceived to be owned and operated by foreign investors. “Already the tax regime has been designed so that it doesn’t make that much commercial sense to export copper in unrefined state. But what other room is there for tax policy to try to encourage increased beneficiation or increased value addition within Zambia?” she said. “Zambia’s economic outlook is still favourable. We are all looking at six per cent growth being sustained in the near future and the medium term as well despite the global economic slow down and given Zambia’s history that is very significant... If for example Zambia was seen to be a relatively cheap place to rise financing then you might see a change in behaviour of international companies wanting to seek that local listing.”

I am unconvinced this will lead to great benefits for the wider population on the Copperbelt, but we will see. Certainly the process has already angered many not-that-rich shareholders in ZCI - some of whom are Zambian. For some reason a mass of small shareholders in France have been the most vocal opponents of this process (see much previous debate on minewatch).

Govt removes ZCI case from Competition Commission, sale goes through

Mining Weekly report that the sale of ZCI's shares in Konkola Copper Mines (KCM) to Vedanta Resources has finally gone through. Vedanta have also issued a press release. So have ZCI.

The story is slightly strangely worded, "The Government of the Republic of Zambia had removed this transaction from the jurisdiction of the Zambian Competition Commission, ZCI said." Odd. The ZCI press release contains the same concept, "the Government of the Republic of Zambia invoked section 3f of the Zambian Competition and Fair Trading Act, which effectively removes this transaction from the jurisdiction of the ZCC." Does that mean the competition commission never completed its investigation and was politically interefered with?

Conspiracy theorisist (I don't necesarilly include myself, but there are plenty buzzing around this issue) will no doubt note the 'good news' of Vedanta's acceptance of the new tax regime in the last couple of days, and the Government's very welcoming response.

The story continues: "ZCI has, in turn, provided Vedanta with the requisite documentation to effect transfer of the remaining 28,4% of Konkola Copper Mines," it stated in a note to the Johannesburg bourse."As the transaction has now been completed, caution is no longer required to be exercised by shareholders when dealing in their securities," said ZCI. "The directors are currently examining the options for the future of the company and will shortly present shareholders with these proposals in order to involve all stakeholders in this process."

The documents keep leaking - Vedanta's Call Option Deed now online

I love the readership of this blog. You put out a request for someone to post a confidential document and moments later it appears in your inbox from an anonymous email address!

So I am grateful to our anonymous mole and proud to present again for the first time for public inspection, Vedanta's Call Option Deed on ZCI shares. It is now on this website at http://www.minewatchzambia.com/reports/vedantacalldeed.pdf

As discussed, Vedanta's attempt to exercise its claimed option on the shares is currently the subject of a heated debate and subject to an incomplete investigation by the Zambian Competition Commission. Do readers think this document helps clear anything up?

MinewatchZambia publishes Vedanta Resources secret contract to buy Konkola Copper Mines

MineWatchZambia, the website that brought the Zambian public access to previously secret Development Agreements between the state and international mining houses, is proud to announce another coup. We have received from an anonymous contact what we believe to be a genuine copy of one of the contracts we did not previously have access to. Unlike some of the other contracts previously leaked to us, these contracts are not signed so they should be treated with mild scepticism. On the other hand, they look pretty convincing to me!

The documents appear to be the Development Agreement between the Zambian state and Vedanta Resources, which took on a 51% stake in Konkola Copper Mines (KCM), and was signed in 2004.

The document is posted at http://www.minewatchzambia.com/reports/KCM2004.pdf .

Readers' analysis and discussion of the document would be extremely welcome. This site works best when readers get stuck into discussion.

I have not attempted a close reading of the whole thing, but a couple of things interested me:
1) Page 2, paras 6-11: discusses the 'call option' for ZCI's shares, which the company is currently trying to exercise, but the contract as a whole does not clarify the detail of this deal. The document refers to the call option, "Vedanta holds an option over ZCI Holdings' shares in KCM, exercisable in certain circumstances." That's not very helpful without access to the Call Option Deed. Any readers feeeling like leaking this further document would be making an important contribution to freedom of information in Zambia! Contact me if you want postal detals - otherwise use the email address on the site.
2) Sections 21-24: As previously discussed on this blog, some of the DAs contained clauses specifying that any arbitration between the Government and companies over the new mines taxes would occur under the World Bank's ICSID. In this updated KCM agreement, a different system is proposed, the "UNCITRAL Arbitration Rules" overseen by a sole arbitrator. UNCITRAL is a UN body with a mandate similar to that of ICSID. The document continues, "The appointing authority the Secretary General of the Permanent Court of Arbitration at the Hague. The place of arbitration shall be Johannesburg and the language of the arbitration shall be English." This helps explain comments made by some commentators during the politicised discussions over possible 'legal action' relating to breaches of stability clauses. I am currently assuming the companies are going to take the new tax regime on the chin and will not pursue their previous threats of legal action. Nonetheless, if we find ourselves having to revisit the issue, this might be relevant. So might the comments under Section 23 where the Government appears to waive its own sovereignty. Mr K's previous comments on the legality or otherwise of DAs might be relevant here, particularly since the following paragraph places the whole thing under 'Zambian law'. Interestingly confusing - can we call in the lawyers!

I look forward to others' comments.

Alastair

'Thorough investigation' delays ZCI's Konkola share sale to Vedanta

The Post reports that Zambia's Competition Commission has withdrawn authorisation for Zambia Copper Investments (ZCI) to sell its stake in Konkola Copper Mines (KCM) to Vedanta Resources. While the companies continue to insist that the delay is 'simply procedural', the tone of the Competition Commission's comments could be interpreted as reflecting a more serious concern with what has always been a controversial sale.

ZCI recognised that the Competition Commission has "withdrawn an interim authorisation that was granted earlier to Vedanta.” Zambia Competition Commission (ZCC) acting executive director Thula Kaira has said there was need to undertake a thorough independent assessment to ascertain the suitability of the transfer of 28.4 per cent shares in KCM to Vedanta Resources at a cost of US $213.15 million. “It is mandatory for the two companies to seek our authorisation to carryout a transaction of that magnitude but it is too early to say we have allowed the transaction or not since they have just applied and an independent assessment team will need to study the proposal before we can make a decision," said Kaira.

Currently, the KCM share structure comprises Vedanta with 51 per cent while ZCI has 24.8 per cent with the Zambian government through ZCCM Investment Holdings having 24.2 per cent, but with this development, Vedanta would now control 75.8 per cent shares of Zambia's largest copper mines. Independent shareholders have protested (on this blog as much as anywhere else) that the price offered for the shares both disadvantages them. The sale also removes any potential benefits to Copperbelt communities that might have flowed from a development scheme built into the structure of ZCI and that was designed to redistribute the benefits of any dividends paid out by KCM. These concerns have dovetailed with an 'economic empowerment' agenda currently making waves in the Zambian political scene as the Government, which has been responsible for the sale of vast numbers of Zambian companies into foreign ownership, seeks to rebalance relations between foreign capital and local investors.

ZCI supports Rothschild's valuation of its KCM shares

This report in The Post yesterday. I reproduce it in full as the issues are complex and I have little to add.

ZAMBIA Copper Investments (ZCI) has supported Rothschild’s valuation of its 28.4 per cent shares in Konkola Copper Mines (KCM), saying it correctly employed the discounted cash flow (DCF) method in determining the option price.

And the board of the ZCI is undertaking an assessment of Zambia Competition Commission (ZCC)’s statement that Vedanta Resources Plc could not buy additional shares in KCM without its authorisation.

In a statement posted on its website after minority shareholders claimed that Rothschild’s valuation of ZCI’s shares meant Vedanta Resources Plc would increase its stake in KCM at a very low price, ZCI stated that the industry standard for valuing producing mining assets was through the use of the discounted cash flow method.

“Rothschild has correctly employed the DCF method in determining the option price. Under the Call Option Deed, ZCI has no legal basis to challenge Rothschild’s valuation,” stated ZCI. “Vedanta now has the right to acquire ZCI’s interest at the Option exercise price and it must make this decision as soon as reasonably practicable after the Option Exercise Price was made known.”

Vedanta Resources Plc’s bid to acquire the 28.4 per cent shares owned by ZCI landed into trouble following its rejection by ZCI shareholders who feel cheated by the “undervalued” offer price of US $213.85 million.

The move faced further trouble from the Competition Commission which said Vedanta needs authorisation before increasing its stake in KCM through its Call-Option Deed with ZCI.

Vedanta currently holds a Call-Option Deed on the 28.4 per cent of KCM still owned by ZCI whereby they agreed that the latter, upon exit, would offer its 28.4 per cent shares in KCM to the former.

On January 17, 2008, independent investment bank N M Rothschild & Sons Limited, pursuant to their appointment by Vedanta and ZCI to establish the price at which Vedanta shall have the option to acquire ZCI's 28.42 per cent interest in KCM submitted their report.

Rothschild, who assessed the value as it stood in August 2005, came up with the figure of US$213.85 million for the 28.4 per cent, thus evaluating 100 per cent of KCM at US$750 million.

Vedanta has the right to accept or refuse to go on with the call, but ZCI cannot refuse to sell. As a result, Vedanta now has a reasonable period within which to accept or reject the valuation price as determined by the bank.

However, from the figure that Rothschild came up with, Vedanta seems to have struck another bargain and may not hesitate to go ahead with the purchase.

According to a submission by Jean-Luc Chaillan, the trouble is that ZCI shareholders feel the shares have been undervalued and Vedanta will buy the shares very cheaply as it did to the 51 per cent shares in KCM, as latest independent evaluations for KCM shares are far more than that of Rothschild.

Vedanta bought 51 per cent of KCM stock in November 2004 for a mere US$48 million. Back then, this sale came under fire from a cross section of Zambian industrialists, unions, political parties and the media, and was described as an outrageous pillaging of Zambian resources.

All the evaluations conducted by various financial audit agencies are way above the Rothschild figure.

For instance, Morgan Stanley & Company International, in a survey about Vedanta dated December 15, 2005, evaluated the 51 per cent of KCM at US$1.321 billion, which makes KCM worth US$2.590 billion, far above the US$750 million proposed by Rothschild.

Other subsequent assessments are even higher.

When the Rothschild evaluation came out, financial analysts Lehman Brothers, immediately concluded that it was a bargain on the part of KCM because KCM was worth at least twice the suggested amount.

The Zambian government could not give its position on the matter, as mines deputy minister Maxwell Mwale said the Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH) which holds some shares in KCM on behalf of the government could comment on the matter.

However, ZCCM-IH general manager Joseph Chikolwa, who could have given government’s position on the matter, was reportedly out of the country to comment.

KCM is owned 51 per cent by Indian Vedanta; 28.4 per cent by ZCI, a legal entity from Bermuda; and 20.6 per cent ZCCM-IH (88 per cent of which is owned by the Zambian government).

ZCI shareholders also argue on dividends that did not accrue to them.

In the statement recently released on its website, ZCI stated that it had in fact received dividends on its shares subsequent to the exercise of the Call Option, although these have not – in the view of ZCI’s board – reflected the levels of free cash flow as determined in accordance with the Shareholders Agreement.

ZCI’s representatives on the board of KCM have strenuously argued for the distribution of higher dividends.

“Our considered view of our legal position is that we have no right to force a further or higher distribution of KCM’s reserves,” ZCI stated. “Rothschild had to value KCM as it perceived KCM’s assets at the Exercise Notice date, August 12, 2005. Rothschild had to ignore any information available after August 2005.

ZCI’s technical consultants made strong representations before the process began to ensure that IMCL considered the right data. IMCL appear to have had some difficulty in compiling the necessary technical data for the DCF model, since little information was available from August 2005.”

ZCI’s share price is the only available market valuation of ZCI and hence of ZCI’s share in KCM, since it is ZCI’s only non-financial asset.

As announced on 7 November 2005, ZCI and Vedanta originally attempted to agree on a list of documentation which would have enabled Rothschild to conduct a “desktop” valuation without the need for a full technical review of the assets.

ZCI and Vedanta were unable to agree on the list of documents, since ZCI felt that Vedanta wanted to include documentation which gave a very pessimistic view of the value of the assets.

Thereafter, terms of reference were agreed instructing Rothschild, with its mining consultants IMCL, to conduct a full technical review of the assets.

“During negotiations on Rothschild’s terms of reference it became apparent that the parties disagreed about the relevant date for the valuation,” ZCI stated.

“ZCI believed that the valuation should be conducted on an up-to-date basis, as at the date of Rothschild’s report, whereas Vedanta believed that the valuation should have been conducted as at the Exercise Notice date.

“The issue of the valuation date was particularly important as copper prices, and analysts’ price forecasts, rose significantly over the period in question.

“The parties then entered a lengthy arbitration process, under the terms of the Call-Option Deed, which was not concluded until July 2007.

“The conclusion of the arbitrator was announced on 25 June 2007. The arbitrator held that the valuation should be carried out as at the Exercise Notice date (i.e. 12 August 2005). There are no grounds for ZCI to appeal that decision.”

ZCI further stated that it remains bound by the terms of the Call-Option Deed, adding: “The Zambia Competition Commission has, however, asserted jurisdiction over the transfer of the shares and stated that its permission is required before completion of the sale can occur. The Board of ZCI is examining this presently.”

ZCC said the execution of the Call-Option Deed between Vedanta and ZCI was subject to authorisation.

ZCC wrote to the two parties advising them of the legal requirements of seeking authorisation from the commission before they could effect the transaction, according to the laws of Zambia.

Section 8 subsection (1) of Cap 417 of the Laws of Zambia states that: “Any persons who in the absence of authority from the commission whether as a principal or agent and whether by himself or his agent, participates in a merger between two or more independent enterprises engaged in manufacturing or distributing substantially similar goods or providing substantially similar services;

a takeover or one or more such enterprises by another enterprise, or by a person who controls another such enterprise shall be guilty of an offence and shall be liable, upon conviction, to a fine not exceeding K10 million or imprisonment not exceeding five years or both.”

Subsection (2) of the same section further states that: “No merger or takeover made in contravention of subsection (1) shall have any legal effect and no rights or obligations imposed on the participating parties by any agreement in respect of the merger or takeover shall be legally enforceable.”

Vedanta Resources Plc has since engaged Lusaka Lawyer Eric Silwamba to start legal proceedings against those objecting its plans to acquire additional shares in KCM.

It is yet to give its position on the matter as a press query had been sent last week.

Competition Commission consider ZCI share sale

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.