Indian Mining Giant, Vedanta Resources is in trouble and could end up forced to wind their Zambian copper operations under some very challenging circumstances. Zambia is struggling financially as a country and has set its sights on the mining industry in a bid to resuscitate its ailing financial pockets.
As history repeats itself again, whenever political muscles are flexed against investment ones, the former always win albeit at the expense of the general populace or workforce. This has been the situation in Zimbabwe, Tanzania, DRC, South Africa and now in Zambia as the current standoff between Vedanta and the Zambian government took again another turn, a typical textbook one which has brought the promising company to its knees.
Events have taken a turn for worse which have seen Vedanta taking a stance to seek international arbitration over the problems associated with its Zambian operation’s. The company owns and operate Konkola Copper Mines (KCM) and, has been in in trouble with the Zambian government, a volatile situation that has led to the later it appointing a provisional liquidator to run its troubled Zambian ) business. On May 21, the Zambian state owned ZCCM Investment Holdings (ZCCM-IH) which owns a 20.1% stake in the Konkola Copper Mines KCM) obtained a court interdict for the winding up of operations and the appointment of a provisional liquidator to initiate liquidation processes, a move that will have serious ramifications on the supply of copper globally as well as its price. The Zambian government through ZCCM-IH cites fairness and equity as the grounds with which they would require the Vedanta to wind up the operation. However, Vedanta argues that this is a misuse of corporate laws in Zambia given the dispute resolution mechanism in place,
Vedanta CEO Srinivasan Venkatakrishnan said, “While Vedanta intends to fully defend its legal rights, we remain open to dialogue. We hope to meet with the Zambian government in the near future to discuss a mutually agreeable solution to the current situation as well as the broader challenges faced by KCM. The sooner we resolve the uncertainty around the business, the sooner we can return it to a sustainable footing.”
Zambian President, Edgar Lungu proposes a separation between the state entity, ZCCM-IH and Vedanta as echoed by his sentiments that, “ the country would divorce itself from certain investors,” during his May 17 2019 visit to the Copperbelt, These comments came on the back of possible operational closures by foreign-owned mining companies, including Vedanta. This follows “huge breaches in environmental and financial regulations”, according to the Minister of Mines, Richard Musukwa, allegations that are being heard by the England Supreme Court and the government has further indicated that Vedanta misrepresented its expansion plans and has also been paying to little tax. There has been a decline in economic conditions nationally and the only viable relief for the government is from the mining companies through tax increases.
Government officials have been quick to stress that this does not amount to the nationalization of the Copper mining company’s assets, but comparisons have been made with the last time the Zambian state took control of its copper sector in 1969. What followed were years of structural decline due to systemic under-investment ad poor management, situations that led to the Zambian government selling the assets to Vedanta in the first place.
Concerns that have been raised by Vedanta include the ZCCM-IH petition for winding-up of KCM under the Corporate Insolvency Act deals with a broad range of issues relating to KCM not all related to the solvency of the business, ZCCM-IH is not a major creditor of KCM, Zambian courts issuing the provisional liquidation order ex-parte, that is, without Vedanta, the majority shareholder, being present and able to present its case, the powers granted to the provisional liquidator by the Lusaka High Court most closely resemble those that would be granted to a liquidator on the final winding up of a business.
The intervention appeared to have been triggered by KCM’s decision to reduce output at its Nchanga operations. “The move on Vedanta should send a strong signal to other mining companies”, according to Joseph Chewe, President of the Mine Workers Union of Zambia. Glencore which operates the Mopani copper mine seems the next target as it has intentions to close off 2 shafts at the mine citing reserves depletion, but the Minister of Mines indicated that Glenore should hand over the mine to contractors should it decide to continue with its plan.
KCM has been struggling and Vedanta has had to appoint a substantive CEO only for the copper operations in Zambia, splitting the heavy load that Vedanta Zinc International CEO, Deshnee Naidoo was having running both the copper and zinc operations. Vedanta reported an operating loss of $95 million on its Zambian operations in the half year to September 2018. Its cost of production in the period was around US $6,700/ tonne excluding royalties. Including the new higher royalty payments, the figure was around US$7,800/tonne. The current copper price on the London Metal Exchange is hovering at around US $5,900/tonne.
This just shows how a raft change in policies by the Zambian government will squeeze livelihood out of the operating mines and push them towards unsustainable operating costs. KCM was not able to maintain profitability even before the tax reviews, how much more operational stress the new reviewed tax system will have on the viability of the operation. The impact of the new tax has already caused production drop amongst all copper production companies in Zambia. The Chamber of Mines has warned that the country’s copper output could fall by as much as 100,000 tonnes this year because operators “cannot afford to continue producing as before.”
“I see a lot of mining companies looking to exit Zambia, despite there being huge potential to develop downstream industries. Zambia has potential similar to Chile, to develop copper as well as other industries,” said Anil Agarwal, the Vendata Resources Group Chairman. Though he did not highlight further on the companies willing to jump ship, it is known that a 1.5% increase in mineral royalties imposed by the country last year had compressed the margins of his company as well as those of key competitors like First Quantum Minerals and Glencore. He indicated that his company was ready to further invest in KCM to take production to 400,000 tons and creating 10,000 jobs.
Vedanta describes itself as a “loyal investor” having sunk at least US$ 3 Billion since taking over the company which led to employment tripling u to 13000 workers. The company argues that they have contributed immensely to the soci0-ecoomic development of the country with US$1.3 Billion having contributed so far to the national fiscus and US$200 million on social development which includes hospitals, serving more than 60,000 people per year and schools that support over 2000 students. Recently, the company has had restrictions and duty on concentrates imposed, a move that Vedanta indicated has hampered the proper running of it operations. In addition, the government owes the company more than US$180 million in Value Added Tax (VAT) returns.
In an effort to ease tension, the company executives were unable to visit unable to visit its KCM operation and engage with local management, another major setback to efforts to ease tensions .
Legal proceedings have been adjourned until yesterday June 4, 2019. Shares of Vedanta’s India-listed arm Vedanta Ltd ended 2.1% lower on Friday.