[miningmx.com] — THE long process involving Zambia Copper Investments’ (ZCI’s) possible sale of its minority stake in the Konkola copper mine to Vedanta is at last moving forward. But any rewards for long-suffering shareholders are still far away, and may not be as great as they had hoped.
At least an arbitrator has now decided the basis on which the 28.4% stake is to be valued, and a still unidentified independent investment bank has begun the valuation. But the initial date for delivering this, of mid-December 2007, has already passed, and a deferment to the middle of this month has been agreed.
The way things have gone, I won’t be surprised if this date isn’t met, either. In any event, when it’s finally delivered, Vedanta will have the right to buy at that price or walk away.
However, as the arbitrator set August 12 2005, the date on which Vedanta exercised its call option, as the valuation date, I doubt that it will walk away. The arbitrator’s decision has in effect given Vedanta a free ride on the past two and a half years of a generally booming copper market, and regardless of the situation at any particular mine, any established copper producer must surely be worth a whole lot more now than it was then.
And until the situation is resolved, ZCI’s income remains at the mercy of Vedanta which, as majority shareholder, can determine Konkola’s dividend policy. True, Konkola has substantial capital needs, but it’s not unknown for a controlling shareholder to exercise this power to embarrass what’s seen as a recalcitrant minority.
While ZCI doesn’t go so far as to openly accuse Vedanta of doing this, its directors do say tartly that Konkola’s dividends are “below the levels that shareholders should expect.’ They plan to “maintain pressure’ on the Konkola board in this respect, as is their duty, but it’s no more than whistling in the wind.
The impact of Konkola’s dividend policy is apparent from ZCI’s interim report for the six months to September. While Konkola’s profit was less than the previous year – the mine is a difficult one to operate, and always has been – it nevertheless contributed attributable income to ZCI of $36.3m.
But only $1.6m was actually received by ZCI by way of dividend, a cover of over 20 times, reminiscent of the bad old days of the Rembrandt group in South Africa.
As ZCI’s so-called “general and administrative expenses’ ran at $3.9m for the six months – a figure I can’t reconcile with the cash flow statement, but let that pass – the company is pretty much living from hand to mouth until either Konkola adopts a more generous dividend policy, or ZCI cashes in on its investment.
For what it’s worth, ZCI’s underlying earnings for the past 12 months are 78c (US) a share, or abut 530c (SA). The market understandably took yesterday’s announcement badly, clipping 370c off the price, to 2010c, in the usual tiny volume. It’s recovered slightly this morning: as I write, the spread is 2105c bid, 2440c offered.
That’s still nearer the 12-month high of 2570c than the low of R14, and at the bid price is a notional price:earnings multiple of almost exactly four. In normal circumstances that would be mouth-watering, but, sadly, little about ZCI is normal.
