[miningmx.com] – A PROPOSAL TO invest in Zimbabwe is enough to clear the boardrooms of all but the biggest mining houses, even among the most adventurous investors.
And although it’s one of the most outrageously difficult countries to operate in – the Fraser Institute ranked Zimbabwe among the five worst jurisdictions for mining investments – there are still a few (non-Chinese) companies that are managing to make a profit.
Zimplats, for example, has sucked up the most regulatory horrors and political bullying and has still managed to increase production and turnover.
It’s an astonishing achievement. The company was last year told it was going to have to hand over 51% of its shares — a total of R8.3bn — to a community trust, an employee-ownership trust, and the National Indigenisation and Economic Empowerment Fund.
Naturally, investors went into a tailspin, and initially at least Impala Platinum (Implats), which owns 87% of Zimplats, called it a “sale’ – a vendor-financed deal in which the recipients would pay for the shares out of the dividends they accrued.
But Zimbabwe president, Robert Mugabe, quickly made them put that idea back in their pockets. No money was going to change hands. The tussle is still going on.
Still, in recent years, Zimplats has returned the highest profit margins in the Implats group thanks partly to its high mechanisation and low cost base.
For the six months to the end of December, the miner pushed up production 58% to 115,200 ounces of platinum and contributed a cracking R246m to Implats’ total headline profit of R860m, up from R73m in the previous comparable period.
Expansion is also on track – the subsidiary’s Phase 2 project at a cost of $460m – should push production to 270,000 oz a year.
Zimbabwe’s mining playground is full of bullies, however. There is no way of knowing who is really in charge or what will happen next.
Peter Major, a mining specialist at Cadiz Corporate Solutions, said that owing to the political regime, and the unpredictably applied legislation, Zimbabwe is a desperately difficult place in which to operate.
It’s hard to tell from one day to the next what percentage of the company you own, Major said. “So many people have gone there with big expectations, really optimistic, and they come back shaking their heads.’
The 2013 Fraser institute’s report quoted an unnamed company president saying of mining in Zimbabwe: ” … unofficial government policy is you will never expatriate profits. Black empowerment and political uncertainty make large or long-term investment impossible; no rights of ownership, no rights to enter required professionals, corruption is high, border restrictions, unstable future.’
Things are dire, but there is a flip side if you are of the glass half full predilection. Major said Zimbabwe’s deposits of gold, diamonds and platinum might not be as rich as ours, but because they are often relatively shallow, they are easier and cheaper to get out of the ground.
It is labour that is one of the real gems in Zimbabwe’s mining story. In general the labour force is well educated, which helps with communication and training. The unions are far less aggressive and destructive than those in South Africa, and they are a lot less expensive.
Still, a senior CEO of a listed gold company who asked not to be named said his company had moved out of Zimbabwe and wouldn’t even look in that direction now.
“It is physically impossible to work there,’ he said. “The rules change every day, there’s no way to tell what will happen next. Investors won’t invest unless it is clear what the rules are.’
BLOOD DIAMONDS
It seems hope of improvement in the regulatory regime any time soon is also waning.
Last year, at a four-day investment show-and-tell in which listed companies shared some good news stories about the corporate landscape, optimism about the semi-nationalisation process gleamed in the distance.
Several insiders said there had been talk in dark corners that business-friendly vice-president Joice Majuru would begin to take an increasingly important position in managing the country.
It was a pipe dream of course. Not only did Mugabe stubbornly hang on to power, it turns out Majuru might be as corrupt as the rest of the cabinet is alleged to be.
In a comprehensively damning report on corruption in Zimbabwe, Ken Yamamoto, a researcher on Africa based in Tokyo, noted that in 2009 Mujuru had tried to sell the directors of Firstar Europe, a global trader in raw materials, $90m worth of gold (3,700kg) and $15m worth of “blood diamonds’, believed to have come from the Democratic Republic of Congo. When they declined the offer she reportedly threatened them.
Yamamoto said she and her late husband were also repeatedly named during the “looting frenzy’ of diamonds from the Chiadzwa area. She even had her own claim referred to “chitutu chaMai Mujuru’ or Mai Mujuru’s heap. Grace Mugabe also had one.
Gold has a special place in the skeletal Zimbabwe coffers.
Zimbabwe – for now – demands 7% revenue from producers and the export of unrefined gold has been banned.
Ian Saunders, the long-suffering CEO of gold miner New Dawn (and chairman of the Zimbabwe Chamber of Mines committee on gold producers), delisted his company from the Toronto Stock Exchange to rein-in costs and moved his operations to the Cayman Islands at the end of the year.
Saunders was unavailable for comment but Bruce Williamson, head of resources at southern Africa-focused asset managers, Imara Africa, said prior to this Saunders had closed his 100% owned Dalny mine and let go of around 900 workers.
Williamson said part of the reason was that he couldn’t get the indigenisation agreement signed off with the resource authorities for more than two years, and as a result didn’t get the investment he needed to make the mine profitable.
In January Saunders had warned that the state’s Draconian demands were forcing gold miners into a corner.
Williamson said Imara had very little cash left in Zimbabwe. “The place is in a crisis,’ he said. “It’s a crazy, crazy situation,’ he added.
He agreed, however, things had to change soon, “probably within the next five years’. At some point Mugabe must die, and there would be a change in leadership.
If things weren’t improved, the lack of jobs and food would force the country into another pre-2009 collapse and then there would follow a recovery. But all bets were off.
Williamson said the theft of the Marange diamond fields from AIM-listed African Consolidated Resources (ACR) in 2006 had helped buoy state coffers – the country would be in a worse state had they played fair.
The Marange Diamond fields are believed to be some of the most prolific in the world. In 2006, ACR had taken over from De Beers in the area and was readying trial mining operations when the Zimbabwe Mining Development Corporation snatched it out from under them.
This despite ACR winning a court case allowing them to continue mining. But by 2010, the Zimbabwean courts had capitulated and ruled against ACR who had tried to block the government from being allowed to sell diamonds from the disputed fields.
And yet Craig Hutton the former CEO of ACR said he had been looking at opportunities in Zimbabwe since 2008. “It’s my country of choice,’ he said.
While he admitted Zimbabwe was a “complicated’ place to operate Hutton said the mining potential was enormous because of the country’s incredible mineral endowment.
He said that while it was difficult to navigate the regulatory environment, unlike a country such as the DRC, for example, “Zimbabwe actually has a mining code and operating courts’.
His glass is clearly more than half full: “You have to take on the issues,’ he said, “but when you actually get around a table with the guys, they are actually pretty pragmatic.’
