21 February 2013

Zimbabwe: Nyambuya Clears Air On Zimplats Deal


FOLLOWING recent media reports of alleged mishandling of the indigenisation deal of Zimbabwe Platinum Mines between local partners and Impala Platinum Mines, Herald Business (HB) sought clarity from National Indigenisation and Empowerment Board chairman Mr Mike Nyambuya (MN) on how the deal was done.

 Allegations are emerging on the alleged mishandling of the Zimplats deal. Can you tell us what really transpired? Was the deal done in terms of the laws?

Let me start by giving clarity on the term sheet signed between Zimplats and indigenous partners. The term sheet provides for general principles on the Zimplats indigenisation implementation plan and is not legally binding. The terms and conditions therein are not definitive. Neither party therefore is bound by these terms.

Are you saying there will be further negotiations to come up with a binding pact?

NIEEB and Zimplats will begin to engage through their technical legal teams on substantive and binding provisions of the indigenisation agreements. These include issues to do with pre-emptive rights, share subscription, the interest rate of the loan for purchasing the shares among others.

In the meantime, the term sheet must be taken as a guiding document confirming the agreement by Zimplats to comply with the indigenisation laws.

Let me now come back to your first question whether the deal was implemented in terms of the law. Section 3 (1) of the Indigenisation and Empowerment Act 14.33 states that "Government shall through this Act, Regulations or any other measures endeavours that at least 51 percent shares in every public company and in every business operating in the country is owned by indigenous Zimbabweans." From this provision, the General Indigenisation and Economic Empowerment Regulations of 2010 provided for disposal of shares to indigenous Zimbabweans.

The term disposal is clearly defined in the regulations to mean full commercial transaction not expropriation. General Notice (114/2011) governing the indigenisation of mining companies further stipulated that key participating indigenous entities should be employees, NIEEF, communities and the ZMDC. As a result of the above legal provisions, Zimplats had a legal obligation to sell 51 percent. The company accepted this obligation formally in March 2012 through a Memorandum of Understanding in which it undertook to sell the shares to NIEEF, a community trust and an employees trust. This understanding is in the form of a term sheet and awaits substantive legal documents currently being negotiated.

Was the vendor financing the best arrangement to finance the transaction

The term sheet captures the agreements by both parties to dispose and acquire 51 percent shares for a transaction value of US$818 million. In the first instance, the indigenous parties are required by the law to buy the shares from Zimplats for US$818 million, an amount of money they don't have.

Borrowing money also proved impossible. To facilitate the transaction, the shareholders of Zimplats agreed to a funding arrangement whereby the shares will be transferred to the indigenous partners and the purchase price recovered from dividends in future.

This was under the assumption that the company would make profits and be able to declare dividends. The agreement stipulates that the purchase price would be repayable over a period of 10 years by withholding 85 percent of the dividends to be paid every year, assuming that the company makes profits.

This is the notional vendor financing arrangement whose main advantage is that this funding provides an easier and definitive way of concluding a share purchase agreement without the need to look for large sums of money elsewhere.

The shares are therefore self-refinancing. The Ministry of Finance has not been called nor will be called to guarantee or settle this debt. The indigenous partners will also not be called at any time soon or in the future to pay cash for the shares. The only requirement is that the company must perform sufficiently enough to make profits and that dividends must be declared annually.

But what would happen if the company fails to declare dividends. What if the global platinum prices fall such that companies may fail to make money, profits?

We are confident that Zimplats is a profitable entity. However, to guarantee the dividend payout, the substantive legal agreement will provide that a dividend shall be declared annually, thereby entrenching a dividend policy rather than leaving it to discretion of the board. The legal agreement will also warrant that management will generate sufficient profits to enable the loan to be serviced.

Certain quarters believe the vendor financing was not the best option. Some have also queried the interest charged on the loan. What is your response to this?

If we had not taken this route, the transaction would not have sailed through. The cost of vendor financing, which is interest charged on the loans, is subject of negotiations between parties. Finally, the substantive agreement will provide that the indigenous parties can look for alternative finance any time to pay in full for the shares. Also, the period of the loan can be extended beyond 10 years. However, Government, or any agent is free to come up with an alternative.

Is the Zimplats transaction subject of English courts as reported in the media?

There is nothing like that. Clause 28 of the term sheet states that the term sheet is governed and interpreted in accordance with the laws of Zimbabwe.

In addition, Clause 27 of the pact states that any dispute arising out of the term sheet will be arbitrated under UNCITRAL in London. UNCITRAL is the United Nations Commission on Trade Law, considered a reputable and neutral dispute resolution forum between private citizens and member states of the UN and Zimbabwe is a member state of the UN and subject this UNCITRAL by consent.

Clause 9 states that the issues relating to the vendor financing, cession and pledge agreements will be interpreted according to English law. This does not mean that the disputes will be handled in English courts. This is not possible as English courts have no jurisdiction to hear any matter under the term sheet concluded in Harare.

The provision means that the aspects relating to vendor financing and cession and pledge must be interpreted by our local courts using English commercial law principles. Why? This is because the bulk of our commercial law is based on English law. Section 89 of the current Zimbabwe Constitution states that the law to be applied in Zimbabwe shall be the law applicable at the Cape of Good Dutch Law and English law mostly governed mercantile law, which is still the case to date.

Was the appointment of Brainworks as transaction advisor done properly?

Brainworks Capital was formally appointed to provide advisory services in consummating the indigenisation deal with Zimplats. The appointment was formalised through a mandate letter signed with NIEEB on June 8, 2012. The appointment was purely based on merit and experience that Brainworks Capital had shown in consummating deals of this nature in Zimbabwe and also past experience of its team in investment banking. The appointment was to be remunerated on a success fee of 2 percent of the value accruing to NIEEF.

Previously NIEEB had sought the services of the following advisory firms and these were on the same fee structure basis of 2 percent success fee. These were CBZ Bank, MMC Capital, Vunani Capital, Renaissance Financial Holdings and Capvest Capital.

Brainworks commenced work on the Zimplats Indigenisation Transaction on 1 June till mid-January 2013 and made a breakthrough in the negotiations.

How did you value the mineral resource?

Firstly, it is important to note that the indigenisation law does not say that indigenous Zimbabweans are entitled to benefit from the value of the resource in the indigenisation transactions. What indigenisation law says is that an indigenous person must buy into a business, whether in the mining or manufacturing sector.

Issues to do with mineral resources are governed by the Mines and Minerals Act.

This law already vests the resources in the President on behalf of Zimbabweans. Companies that exploit these mineral resources are obliged to pay taxes and royalties in acknowledgement of the sovereign ownership of the resources. As such ownership of minerals and the sale of shares for indigenisation purposes in mining businesses are exclusive and not related; they are separate.

The idea is that the purchase price of shares in a mining business must be determined after subtracting the value of the resource in recognition of the sovereign ownership of the resource. Following this, it was enough for Zimplats to merely ask for US$818 million as price for 51 percent of the shares.

We thought the deal was valued at US$971 million and you are now talking of US$818 million.

The actual purchase price for the 51 percent stake is US$818 million. However, there is US$153 million which was included in relation to the compensation of Zimplats' land that was repossessed by the Government in 2006.

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