Zimbabwe: Riozim Limited - the Beleaguered ZSE Listed Miner

3 November 2022
The Exchange Africa
By Laurence Sithole

Riozim Limited the Zimbabwe based, and Zimbabwe Stock Exchange-listed diversified miner, has more going wrong for it than right.

For a mining company looking at news reports around it, analyst coverage and its financial reports one cannot help but wonder if all is well at one of the oldest ZSE-listed mining companies.

The company has been in the news for poor labour relations with its workers and for poor operational and financial performance and it looks like there is no end in sight for the troubled miner. Investors on the ZSE and in the diversified miner got some reprieve when Bloomberg broke the story that Riozim had bought a diamond miner in Namibia in a move meant to herald the company's foray into the rest of the continent and increase its investment activities in Zimbabwe.

  • RioZim can be reasonably called a beleaguered or troubled company. It is not exactly in financial trouble but its operations have not given shareholders and management of the company much to cheer about.
  • Strangely despite its operational troubles, the ZSE-listed miner announced in a report published by Bloomberg that it had acquired a diamond mining business in Namibia.
  • RioZim has been business with organic growth on its home turf of Zimbabwe. The ZSE listed concern mines gold, diamonds, base metals, and coal. The company has been on an ambitious capital expenditure exercise to improve its operations radically.

The article by Godfrey Marawanyika in Bloomberg reported that Riozim Limited had paid US$ 58 million to purchase the Sperrgebiet diamond mine in Namibia.

This story was a breath of fresh air to the investment community which had grown accustomed to stories around Riozim being largely negative. "The group has been trying to broaden its footprint in the mining industry in Africa and this acquisition was part of the strategy," Tawanda Andrew Chiurayi, RioZim's group company secretary, said in a written response to questions from Bloomberg News.

"We also want to diversify our assets and geographies." The article said. The top brass at Riozim Limited, according to the article, declined to confirm how much the company paid for the mine. Sources close to the transaction, however, gave indications that the transaction was consummated at US$ 58 million.

The Namibian diamond asset is said to hold 2 onshore and 2 offshore licenses within Luderitz's protected diamond zones, according to RioZim's corporate website.

For a reportedly beleaguered company, it seems disingenuous that it can be called troubled when the company has paid nearly US$ 60 million on capital expenditure outside Zimbabwe. Bloomberg also reported that the company had already spent a further US$ 150 million developing and expanding its local operations, predominantly in the production of base metals gold and its local diamond operation at Murowa.

  • The capex program that RioZim has embarked on encompasses the purchase, installation, and commissioning of a plant at its Murowa diamond operation and the installation and commissioning of the BIOX Plant at its iconic Cam & Motor mine.
  • It is perhaps something of a misnomer to report that a diversified mining concern like RioZim could be considered to be troubled given the background of elevated commodity prices.
  • The basket of commodity prices that RioZim produces has been on the increase. Gold has retreated somewhat softly however; its price is trading at significantly high levels.

These details of the company's investment activities were confirmed by Riozim Limited's company secretary Andrew Chiurayi. According to the company executive output, the company's Zimbabwe diamond operation tripled following the acquisition and commissioning of the plant purchased as part of the capital expenditure.

The company like many other Zimbabwean companies that generate foreign exchange like Padenga Holdings Limited lamented the current foreign currency surrender requirements which Riozim Limited called a drag on its operations. The theme of the report by Bloomberg was upbeat however, a look at the company's half-year financial results tells a vastly different story.

The chairman's statement began with an acknowledgement of the positive impact of the country have successfully surmounted the COVID pandemic. Economic activities have fully commenced since the advent of the pandemic.

The statement reads, "Despite the positive strides in the free flow of economic activities, the operating environment remained bedevilled with structural challenges throughout the period, most notably amongst them were acute power shortages, spiralling exchange rates, unreasonable pricing distortions and huge foreign currency inadequacies.

Notwithstanding the various mitigating initiatives put in place by the Group to counteract these challenges, the impact of these factors had a significant negative effect on the operating and financial performance of the Group. Consequently, the Group recorded a net loss for the six-month period."

Where the losses came from

During the 6 months to end June 2022, Riozim Limited reported that its production of gold declined by 30% to 393 kilograms compared to the 564 kilogrammes that it achieved during the same period in 2021.

The reduced output of gold was due to negligible production at its Dalny mine and what the company described as "under capacity utilization" at its Cam and Motor mine. This was the result of the company stopping its One Step operation from paving the way for the resumption of mining activities at the Cam and Motor mine.

  • Why then is ZSE listed RioZim failing to monetize these favourable market conditions and generate optimal cash flows. Diversified miners, world over with portfolios of commodities like RioZim have generated excess cash flows which they have returned to shareholders in the form of share buy-backs, special dividends, and ordinary dividends.
  • RioZim announced through its financial results that its capital expenditures have been financed through loans from its major shareholder. This development will undoubtedly be read by other shareholders and market participants on the ZSE with caution.
  • RioZim's portfolio of assets, which are the mines it operates, are said to be facing a myriad of challenges. The company has had to stop operations at some of its flagship assets for the installation of plant and equipment.

The company generated higher revenues during the first 6 months of 2022 compared to the same period in 2021 despite recording lower production. This came down to the depreciation in value of the Zimbabwe dollar.

The company notes that this seemingly positive development from a financial and accounting standpoint was countered by costs that rose at a rate disproportional to revenues.

A possible cause for this even though it is not mentioned explicitly in the company's financial report is the company is surrenders to the central bank 40 cents of every US$ 1 that it generates in gold sales or export proceeds in return for the equivalent in local currency at the official exchange rate.

This official exchange rate, until recently was significantly lower than the parallel market rate. The rates are slowly converging; however, in the past the surrender requirements meant that generators of foreign exchange would be compelled to sell their foreign exchange at a discount in a country were foreign exchange is scarce.

This problem is compounded by the fact that the company's operating costs are increasingly becoming payable in hard currency as Zimbabwe dollarizes.

Riozim Limited's gold business was characterized by falling output, especially at its Renco mine. The lost production at its mine was the result of low tons milled due to acute power shortages and a labour dispute during the first quarter of the year. The company reported that the labour dispute was resolved amicably.

  • Some of the troubled ZSE-listed miner's assets are said to be embroiled in litigation specifically in its base metals business. One of its gold mines Dalny reportedly produced sub-par yields characterized by markedly low gold ounces.
  • RioZim's performance is in contrast to fellow gold miner Padenga Holdings which used to be listed on the ZSE and migrated to the VFEX. Padenga is making money hand over fist from its mining operations which have overshadowed its initial business which was in crocodile breeding.
  • Presently until RioZim resolves its operational issues, Padenga will be a better investment for investor dollars. RioZim is however, banking on increased yields from its Cam & Motor mine because of the recently commissioned BIOX Plant. Its impact will be seen when the ZSE listed concern reports its full year results.

According to the company, Dalny mine suffers from poor quality grades from its pits and the mining operations had to be suspended during the first 6 months of the year. Dalny mine in the first 6 months of 2022 produced a marginal 8 kilograms of gold compared to 105 kilograms during the first 6 months of 2021.

Cam and Motor mine's pits contain high-grade ores, and the company was in the process of installing and commissioning the BIOX Plant, which successfully took place in April 2022.

Riozim's base metal and chrome businesses are under care and maintenance or litigation. The company's diamond business produced 52% less in carats than it did during the same period in 2021.

The company's associate produced 115 000 carats for the period which was 52% below the 240 000 carats produced in the comparative period. During that period, the mine stopped mining operations and migrated to processing its vast low-grade stockpiled dumps. On the energy front, the company is pioneering 2 projects, namely the 178MW solar project as well as the Sengwa Power Station which has the potential to generate 2,800MW.

The company is installing solar projects at its mines to counter the impact of the rolling power blackouts. What remains are regulatory approvals for the company to go full-scale with the implementation of this project. The company is still in discussions with the government about mutual beneficial arrangement in as far as the implementation of this project is concerned.

Riozim Limited expects to return to profitability before the end of 2022. The company is banking on its newly installed BIOX Plant at its Cam and Motor mine turning around its fortunes.

The company announced that it has spent US$ 110 million on the BIOX Plant and the 500 tph diamond processing plant. Riozim Limited gave away its funding source for the capital expenditure projects it is involved in. The company borrowed much of the funding for its capex program. This explains the company's war chest despite its volatile operating environment and lackluster performance.

RioZim said that, "With a mandatory liquidation of 40% the amount of foreign exchange remaining with the Group has consistently proved insufficient to sustain costs. Production is erratic owing to the lack of foreign currency to buy consumables or carry out repair and maintenance and production plant.

  • The company is also installing solar power at its facilities to avoid losing production from rolling power blackouts that are common place in Zimbabwe.
  • Lastly the ZSE listed company has been in discussions with the government of Zimbabwe over the best way to operate a thermal power station which has been accorded national project status.

The Company has resorted to borrowing from the major shareholder again in foreign currency and contingent plans are being prepared for further borrowings in the short term as and when required." The company paid no dividend to its shareholders during the first 6 months of 2022.

The case for investing in Riozim Limited

According to its corporate website, RioZim was incorporated on August 29, 1956, as Rio Tinto Southern Rhodesia Ltd. It was initially set up to prove and mine the Empress Nickel deposit in Kadoma, the first of Rio Tinto plc's global ventures. Since then, RioZim has engaged in several different ventures, across a wide variety of industries. After 47 years RioZim can look back on a very rich history, characterized by resilience, persistence, and innovation.

From its first days as a small nickel and copper mining company in Kadoma, RioZim has grown into a large, diverse Zimbabwean company that operates across different regions and industries. The company boasts a wide array of operations and is currently involved, both directly and indirectly, in all of Zimbabwe's Minerals including Gold, Nickel, Copper, Cobalt, PGMs, Chrome, Diamonds and Coal, making it the single, largest producer of finished products in Zimbabwe.

An investor considering taking a position in Riozim needs to consider the foregoing analysis. The prospects of the company turning around its operations depends on the newly installed plants and the alternative energy installations being rolled out at its mines.

The company has a balance sheet strong enough to support borrowings running into the hundreds of the millions. Investors should therefore take a hold view on this stock while considering other Zimbabwe-based ZSE-listed gold producers like Padenga Holdings Limited which is making money hand over fist from its mining operations.

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