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Friday, 1 August 2014

The State of Konkola Copper Mines

Editor's note: an important ministerial statement was issued recently by Mines Minister Chris Yaluma on Konkola Copper Mines PLC. It seemed to contain rather interesting statements against President Sata’s threat to nationalise against KCM.
Konkola copper mines plc (KCM) has of late come under increasing public debate and media attention following the attempt by the company to lay off 1,529 employees. This is in addition to the media report of 15th May, 2014 in which Mr Anil Agarwal, Chairman of Vedanta Resources limited was quoted as having said that he is making US$500 million from KCM, a mine he bought for a song (US$25 million) and not the asking price of US$400 million.

KCM is currently the second largest copper producing company in Zambia and Government through ZCCM Investment Holdings has twenty (20) percent shares. KCM provides approximately seven thousand eight hundred and four (7,804) direct jobs and nine thousand five hundred and forty nine (9,549) jobs through contractors.

Following the announcement by KCM in September 2013 to retrench 1,529 employees, Government appointed a technical audit committee comprising experts in mineral resources management, mineral processing, governance, labour issues, mine engineering, business administration, and all of them competent and qualified nationals.

The task of the team was to audit the operations to enable the government have a proper understanding of the performance of the company across the entire value chain, which included; exploration, mining, processing (concentrating and smelting), marketing and sales.
Contrary to the assertion by KCM that the proposed retrenchments were necessitated by the planned mechanisation of mining methods, the audit established that there was no plan linking the two. The problem was the mismanagement of the business. The following were some of the findings:

(1) Threat of insolvency. As at 30th September 2013, KCM’s total liabilities of US$1.567 billion exceeded the current assets by US$123 million. As a consequence, KCM was unable to meet its obligations as they fell due. the liabilities included bank loans, local and foreign suppliers and contractors, ZCCM-IH copper and cobalt price participation, deferred taxes, and outstanding bank guarantees to cover environmental liabilities for its mining operations.

(2) High turnover of CEO and high exodus of skilled Zambian professional. KCM had parallel management structures where the chief executive officer dealt with an advisory council board on one hand and management on the other hand.

(3) Non-compliance on the commitment to bring in foreign direct investment. Vedanta Resources Plc has up to date not complied with its commitment to inject US$397 million into KCM as foreign direct investment. Instead, funds generated within KCM which in a normal operation would be used for operations were diverted to finance capital projects. as a result, current operations were starved of the necessary maintenance funds. From the time Vedanta Resources acquired KCM, US$2.8 billion composed of internally generated funds and bank loans was injected in capital projects which included the Konkola Deep Mining Project (KDMP), concentrator expansion at Konkola mine, and the new concentrator and smelter at Nchanga mine.

(4) Lack of investment to develop new ore sources and provide adequate and sustainable feed for the efficient and cost effective running of the processing facilities. The commissioning of kdmp has been delayed by seven years mainly due to design changes. this has not only resulted in the increased cost of sinking of the shaft and development of the ore sources but also the loss of four million tonnes of ore anticipated per annum in the past five years.

(5) Failure to adopt cost-effective means of production. The subcontracting of all mining activities by KCM resulted in high cost of doing business rendering the company almost insolvent. In addition, due to dependence on contractors, KCM could not purchase or maintain its own equipment. Consequently any pull-out of a contractor meant suspension of mining activities. Lack of a strategic survival business plan in spite of the financial crisis the company was faced with.

In view of these findings, the audit team recommended that government should not take over KCM as doing so would mean nationalisation which would be against government policy of having a private-sector driven economy. This could also have a negative impact on the investment environment in Zambia. Government should ensure Vedanta injects the required funds into KCM to avoid liquidation and consequent job losses.

Following the submission of the audit report, government engaged Vedanta resources plc shareholders to find means and ways of steering the company out of the desperate situation. Through this dialogue, a business plan to improve performance at KCM was developed and agreed upon by both parties. The plan includes the following:

(1) Increasing production from 132,318 tonnes of finished copper in 2013 to 178,994 tonnes by 2017. To achieve this, the company committed to inject US$250 million into production and US$30 million into smelter operations to improve the flow of concentrates.

(2) Commitment by Vedanta to provide a bank guarantee of US$400 million towards the outstanding loans that KCM had on its books.

(3) Settlement of the overdue credit balance owed to its suppliers and contractors amounting to US$111 million. Re-starting production at the closed open pits by procuring its own equipment.

The intervention of government in KCM secured the jobs of our people. KCM gave an undertaking and commitment that there would be no redundancies as a result of the implementation of the business plan.

Government is committed to ensuring that KCM meets its obligations of recapitalising the mine, pay off its debts to lenders; suppliers and contractors including concentrate suppliers. So far, the commitment to settle the overdue credit balance owed to its suppliers and contractors amounting to US$111, the amount of US$52m has been paid.

Government is also monitoring KCM performance through quarterly progress reports to ensure implementation of the business plan to the latter. Through the quarterly reports and random checks, we will be able to pick up any undertaking by the company that is not in the best interest of the nation.

With regards to media reports on Vedanta Chairman, Mr. Anil Agarwal’s statement, a forensic audit initiated by the Vice President is underway through Zambia Revenue Authority (ZRA) under the Ministry of Finance.

Instead of rushing to resolve the issues surrounding KCM through nationalisation, government has decided to engage KCM to ensure that operations are turned around for the company to become viable once again.

Government policy on mining still remains that of encouraging the development of a private sector- led mining industry where the role of government is to create an enabling environment for investment that creates mutual benefits for the country and the investor.

Therefore, reacting to the issues at KCM by nationalising would be sending wrong signals to potential investors that the policy environment in Zambia is unstable, which may make the investment environment less favourable.

In conclusion, the government values the investment by the private sector in the Zambian mining industry and economy at large. Investors are important in the developmental process of the country and as such we will endeavour to dialogue to resolve any issues affecting businesses. However, government shall penalise any fraudulent mining company to prevent loss of the much-needed revenue and save jobs.

Government will be undertaking regular audits at all the mines to ensure compliance and avoid the recurrence of the situation as at KCM.

(Source: National Assembly, July 2014)

QUESTION:


Are you satisfied with government's position on KCM? What would you like it to do differently?

4 comments:



  1. The State of Konkola Copper Mines

    Editor's note: an important ministerial statement was issued recently by Mines Minister Chris Yaluma on Konkola Copper Mines PLC. It seemed to contain rather interesting statements against President Sata’s threat to nationalise against KCM.


    It also contains various contradictions. And, it sees things from the point of view of foreign mining companies, not the Zambian state or economy, which even the Ministry of the Mines is supposed to represent.

    In other words, it rewards corruption, and gives a free hand to the mining companies to break whatever law they want without consequence.

    Konkola copper mines plc (KCM) has of late come under increasing public debate and media attention following the attempt by the company to lay off 1,529 employees.

    Which would undermine the whole justification for having foreign owned mines forwarded by the MMD in the past - 'they'll bring jobs', while externalising billions a year.

    This is in addition to the media report of 15th May, 2014 in which Mr Anil Agarwal, Chairman of Vedanta Resources limited was quoted as having said that he is making US$500 million from KCM, a mine he bought for a song (US$25 million) and not the asking price of US$400 million.

    Which is criminal in so many ways. Not only is it an admission that he has been evading taxes (through transfer pricing - no 'arms length' principle here), it also shows that he has knowingly let KCM's debt build up, undoubtedly so he can declare bankruptcy as soon as the price of copper takes a dive, leaving suppliers and the Zambian state with the mess to clean up.

    He also probably paid a bribe so he wouldn't have to be the first $400 million purchase price.

    KCM is currently the second largest copper producing company in Zambia and Government through ZCCM Investment Holdings has twenty (20) percent shares.

    Not a peep from that corrupt bunch. You would think that they have a problem with losing out from dividend payments over $500 million a year in profits. With a 50% dividend payout, KCM should be receiving $250 million a year, just from KCM.

    And yet, they don't object. Again, foreign ownership and the international financial system facillitates corruption.

    ReplyDelete
  2. KCM provides approximately seven thousand eight hundred and four (7,804) direct jobs and nine thousand five hundred and forty nine (9,549) jobs through contractors.

    How many jobs can be created from $500 million a year, or even $250 million a year? Even $250 million, over 7804 employees, is $32034,- per employee. If they just paid $32034,- out as payments and created no other jobs with it, at $6,000 a year ($500 per month), they could provide livelyhoods for 5x as many families.

    Mining is not a cost efficient way of creating jobs.

    Government appointed a technical audit committee
    ...

    Contrary to the assertion by KCM that the proposed retrenchments were necessitated by the planned mechanisation of mining methods, the audit established that there was no plan linking the two.


    And so it has been established that they lied about that too. For financial gain.

    And this is the company we should take at their word for future promises that they will behave well?

    Again, hiding behind 'a positive investment climate' as an excuse not to prosecute lawbreaking is corruption itself.

    The problem was the mismanagement of the business.

    The problem is corruption. Mismanagement sounds as if they just didn't know what they were doing and were making mistakes. Mismanagement could be incompetence, this is just corruption and greed.

    In view of these findings, the audit team recommended that government should not take over KCM as doing so would mean nationalisation which would be against government policy of having a private-sector driven economy.

    And apparently it is not against government policies to have outright crooks and frauds in charge of the biggest mining companies.

    How can corruption not be bad for the 'investment climate' in Zambia? How does this work for the suppliers, who have been supplying to an absolute crook, against which the government won't take action?

    How does that help Zambia's investment climate? Unless of course the only thing that effects the investment climate is nationalisation.

    How does it not negatively affect Zambia's investment climate, where children are not in school, where they can train to become future employees in the mining sector, so the mines won't have to import workers from abroad? A well trained workforce and great schools as well as infrastructure are attractors of business too.

    This could also have a negative impact on the investment environment in Zambia.

    Investors might flee if they have to pay taxes, pay their suppliers, and honestly declare their profits so they can be taxed on them.

    Again, this is Minister Yaluma bending over backwards to accomodate the foreign owned mining companies, not the Zambian people or economy.

    ReplyDelete
  3. Government should ensure Vedanta injects the required funds into KCM to avoid liquidation and consequent job losses.

    And how are they going to do that? Without 'negatively affecting the investment climate in Zambia'? Are they going to pay KCM's suppliers from the Eurobond?

    Following the submission of the audit report, government engaged Vedanta resources plc shareholders to find means and ways of steering the company out of the desperate situation. Through this dialogue, a business plan to improve performance at KCM was developed and agreed upon by both parties. The plan includes the following:

    (1) Increasing production from 132,318 tonnes of finished copper in 2013 to 178,994 tonnes by 2017. To achieve this, the company committed to inject US$250 million into production and US$30 million into smelter operations to improve the flow of concentrates.


    And I'm sure they will really declare profits on that increased output too.

    (2) Commitment by Vedanta to provide a bank guarantee of US$400 million towards the outstanding loans that KCM had on its books.

    Commitment? Commitments from a proven liar and crook. And where is this $400 million going to come from, when they 'aren't making a profit'? Or is that supposed to come out of the Eurobonds too?

    (3) Settlement of the overdue credit balance owed to its suppliers and contractors amounting to US$111 million. Re-starting production at the closed open pits by procuring its own equipment.

    More 'commitments' from KCM.

    The intervention of government in KCM secured the jobs of our people. KCM gave an undertaking and commitment that there would be no redundancies as a result of the implementation of the business plan.

    More 'commitments' and 'undertakings' from crooks.

    ReplyDelete
  4. Government is committed to ensuring that KCM meets its obligations of recapitalising the mine, pay off its debts to lenders; suppliers and contractors including concentrate suppliers.

    I thought they weren't making a profit? Where is that money supposed to come from?

    So far, the commitment to settle the overdue credit balance owed to its suppliers and contractors amounting to US$111, the amount of US$52m has been paid.

    So they're already welching on that. $52 million is 10% of the $500 million that Anil Agarawal claims to drag out of KCM every year. And that is just to pay his own suppliers.

    With regards to media reports on Vedanta Chairman, Mr. Anil Agarwal’s statement, a forensic audit initiated by the Vice President is underway through Zambia Revenue Authority (ZRA) under the Ministry of Finance.

    Instead of rushing to resolve the issues surrounding KCM through nationalisation, government has decided to engage KCM to ensure that operations are turned around for the company to become viable once again.

    'Rushsing' to resolve? KCM was bought 9 years ago, and has been externalising $500 million a year since.

    Who cares whether the company 'becomes viable once again'? They have shown that they are crooks.

    I also think that Minister Yaluma has shown that he is as corrupt as his predecessors.

    Government policy on mining still remains that of encouraging the development of a private sector- led mining industry where the role of government is to create an enabling environment for investment that creates mutual benefits for the country and the investor.

    Whatever the IMF/Rothschild says.

    Therefore, reacting to the issues at KCM by nationalising would be sending wrong signals to potential investors that the policy environment in Zambia is unstable, which may make the investment environment less favourable.

    Yes, the policy environment in Zambia is so stable, that if you are caught with your hand in the cookie jar, the ministry of the mines will help you stay out of jail, and keep the company, so you can do the same thing over and over again.

    They are in the business of protecting the big criminals, because they pay them a little bribe.


    QUESTION:

    Are you satisfied with government's position on KCM? What would you like it to do differently?


    Answer - no way. What would I do differently? Nationalize KCM. Sue Anil Agarwal all the way to India and Switzerland, and get the money back. Put Anil Agarwal on Interpol's wanted list. Send out private investigators/Xe to arrest him whereever he is on the planet. Approach the Indian government to help them confiscate his property, so the Zambian state doesn't have to cough up the debt he left behind, and will leave behind when the price of copper falls, and he declares KCM to be bankrupt.

    I would sue the IMF/World Bank for $20 billion to $40 billion, for the disastrous nature of their advice, forcing the state to privatise the copper mines just before the biggest bull market in copper prices in living memory.

    And you know what - making sure everyone is subject to the rule of law would do much more to improve the investment climate in Zambia, than letting crooks run free, in the name of 'non-state intervention'.

    Question: If someone is caught with a pound of weed, can he stay out of jail by giving a 'commitment' to the judge that he won't do so again?

    ReplyDelete

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