31 January 2013

Zimbabwe: Fear Forces Foreign-Owned Mining Firms to Give-in

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Photo: Saviour Kasukuwere/facebook
Saviour Kasukuwere Zimbabwe minister for Youth Development, Indigenisation and Empowerment.

Mining giants have been forced to comply with the controversial empowerment law as government defies clear warnings of deadly consequences writes Shame Makoshori.

THE four-year growth registered by Zimbabwe's mining industry, the cradle of hope to lift millions of socially excluded peasants out of extreme poverty through the country's empowerment programmes, could encounter headwinds this year as investors reconsider their positions after most influential resource giants have been forced to comply with controversial indigenisation policies.

Zimplats, the country's largest private sector employer, which has expanded its headcount to 9 000 from about 4 000 in four years, succumbed to the empowerment pressures recently, parcelling 51 percent of its shareholding to locals in a cashless transaction that will only be paid through future dividends.

Other mining giants have also been forced to comply with the controversial law as government defies clear warnings of deadly consequences.

Anglo American's Unki Platinum Mines, Rio Tinto's Murowa Diamonds, Mimosa Mining Company and Blanket Mine are among companies that have signed up to transactions giving locals more clout in their operations than the foreign investors who funded their operations.

The general fear since the programme kicked off had been that foreign investors would abandon their plans and deny the mining sector its growth potential.

With giants continuing to put pen to paper on transactions that they would never accept in the normal course of business, the future is not looking good for the mining sector.

Surprisingly, state bureaucrats continue to boast that the industry remains robust and attractive although the truth is that billions of potential investments have skirted this market with implications that are too ghastly to contemplate.

A 2011 report estimated that at least US$4 billion had been lost in three years alone in the mining sector, the first target of the policy.

The mining industry was expected to grow by 17 percent in 2013, with government projecting that it will continue its role as the backbone on which further economic recovery would be anchored.

There has been muted outcry in the manner in which Youth, Indigenisation and Economic Empowerment Minister, Saviour Kasukuwere's controversial empowerment programme has been rolled out, especially the highhanded manner in which he has dealt with companies that have raised issues with his policy, which has retarded job creation in an economy where major employers had been culling headcount.

At least 90 percent are unemployed.

Each of the country's eight State universities has been releasing at least 3 000 graduates in a job-soaked market where finding opportunities is nothing but a miracle.

Technical colleges, polytechnics, teachers' colleges and other tertiary institutions have also been pumping new graduates into the market, but with a sector that has potential to absorb thousands destabilised by the policy, many could reach their 40s without tasting employment.

While proponents of the empowerment programme have angled their argument on nationalism, the effects of the investor fatigue cutting across industries, in a country moving out of a sustained recession, have been deadly, ranging from delinquency, corruption and the failure of mines to achieve their full capacity.

Perhaps the empowerment programme was imperfectly timed; given circumstances where the ruling elite's actions have left the country with no capacity to fund acquisitions in a fashionable way.

And the grandstanding that Zimbabwe has seen from those driving the programme has been nothing but hot air, with little benefits being realised by peasants who have been devastated by economic mismanagement.

Bigwigs are already lining up their pockets.

In one community trust, empowerment leaders have courted the ire of their subjects after reportedly earning US$5 000 in bonuses per seating.

"We have the potential to generate US$8 billion per year from the mining industry but because of the way we have implemented the indigenisation programme, this is unachievable," said Takunda Mugaga, head of research at advisory, Econometer Global Capital.

"The mining industry will continue to lead economic recovery but, unfortunately, at depressed levels. The way we are indigenising is not to get dividends but these are forced takeovers and you will see the consequences this year," Mugaga said, in reference to the Zimplats transaction.

Early this month, Zimplats concluded the non binding term sheet with government, which compels cash-strapped local investors to pay US$971 million.

Beneficiaries in all empowerment deals, who include the National Indigenisation and Economic Empowerment Board and peasants, will pay for their stakes through dividends over at least a decade.

If Zimplats, which is undertaking a US$460 million expansion programme in Zimbabwe, suffers losses or decides to defer dividends that will not only prolong the settlement of the transactions but empowerment entities will spend decades more without tasting dividends.

This is one glaring weakness of the empowerment model that government has failed to acknowledge, which will never change the status quo in mines for many years to come, unless government comes out of the current politicking mode, recompose and act in a businesslike manner.

"Profitability is controlled by management in those mines," said another analyst, who argued that the structure of the transactions was open to manipulation by foreign shareholders.

"They can throw in losses and it will take forever for communities to pay up. These deals don't directly impact (on investment inflows). They won't be a bother. Who knows next year someone else becomes President and implementation of the programmes becomes different. These are the risks that investors are now taking," he said.

While there has been muted resistance by foreign shareholders to ongoing takeovers, in public, there has been a whole lot of window dressing-firm handshakes, smiles and a semblance of contentment.

But in their minds, foreign shareholders are going through extreme torture.

"This agreement underlines our commitment to good corporate citizenship and lays the foundation for the creation of a sustainable Zimbabwean platinum mining company capable of attracting the investment needed to deliver future benefits to our shareholders, the people of Zimbabwe, our employees and the local community," Implats chief executive officer, Terence Goodlace, said when the deal was signed.

Mugaga feels the Implats boss' brave face did not reflect the views of the investment community, but they have no choice.

"You can see that it (Zimplats) complied with a heavy heart," he argued.

"The consequences will be dire. That spirit (forced compliances) must be busted, it is bad. Indigenisation is progressing but it is vulnerable to corrupt tentacles. There has not been a social audit, like what happened with the Community Development Fund. Empowerment is failing to benefit the majority because it is failing to get out of political fiefdom," he said.

At Pretoria Holdings Limited (PHL), which concluded its US$30 million empowerment transaction last year. The company will have the right to repurchase any indigenisation shares to settle any outstanding balance at the end of 10 years - another drawback for locals.

This could expose the empowerment entities to possible manipulation should its South African shareholders want to regain significant control.

The motive of the empowerment programme has been for companies to release development funding to cash-strapped communities through dividends.

But the PHL arrangement, which is a replica of empowerment plans that government has generally accepted, will mean delayed gratification.

Analysts said it could have been logical to allow other Zimbabweans to invest in PHL through the Zimbabwe Stock Exchange and implement policies that would enforce procurement of PHL's inputs and other materials from investment vehicles controlled by communities.

Advisory firm, MMC Capital says, if empowerment polices required foreign-owned institutions to purchase 70 percent of their requirements from local enterprises, there would be significant empowerment benefits accruing to locals.

There has already been some pockets of resistance to the programme in the mining, which could spill into other sectors this year when government rounds up the programme.

A gold mining concern in Gwanda came under pressure from government in November to immediately establish a community share ownership scheme or face unspecified consequences after a traditional chief complained that the mine, owned by Duration Gold, had failed to respond to pleas to comply with the country's empowerment laws.

Vumbachikwe, one of the oldest gold mines in Zimbabwe, had previously clashed with government over provisions of the empowerment law which compels foreign controlled firms to cede at least 51 percent shareholding to locals.

Its white owners had argued that they were Zimbabwean nationals and were not compelled to comply with the indigenisation law, but in June, government angrily reacted to their explanation with Kasukuwere saying he was "fed up with trying to negotiate with Vumbachikwe mine management who seem to think they are still operating in Rhodesia".

The deadlock is still being looked at.

Despite the empowerment blunders, turbulent global prices and the feared investor fatigue, government still feels the mining industry would remain the most active sector, leading economic recovery.

Supporting this growth, it argues, will be the strong external demand for primary commodities, particularly platinum and gold.

According to the Finance Ministry, mineral exports rose by 230 percent over the 2009-2011 period, making the industry the leading export sector.

In 2011, mineral exports accounted for 47 percent of total exports, led by platinum, gold and diamonds, although with friendly policies, this performance could easily improve.

The industry's contribution to the real domestic product also improved from an average 10,2 percent in the 1990s to an average of 16,9 percent between 2009 and 2011, overtaking agriculture, although it was expected to decelerate from a 25 percent growth in 2011 to 10,1 percent in 2012.

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