UPND questions ZCCM on gold and foreigners

Note: This letter was sent to ZCCM-IH in May but ZCCM – IH failed to respond

United Party for National Development
Plot 83A Provident Road
Rhodes Park

The Board and Management
ZCCM Investment Holdings Plc
ZCCM-IH Office Park
Mass Media Complex Area

27 May 2020

Dear Colleagues

Recent developments in Zambia’s Gold Mining Industry

The UPND has taken keen interest in the recent Joint Ventures announced by ZCCM pertaining to gold processing in Zambia, being a Public Interest Entity majority owned by the people of Zambia.

We have taken note of the statement issued by Barnaby Mulenga, the Permanent Secretary of the Ministry of Mines and Mines Development, and ZCCM Non-Executive Director on 24 May 2020 clarifying matters related to the joint ventures, the parties involved, and how Zambia stands to benefit. We also note the statement issued on 25 May 2020 by ZCCM Management. Whilst we appreciate clarifications issued to address public concerns, it is unfortunate that the letters leave the public with more questions than answers.

The UPND has therefore taken the liberty to collate the concerns of the general public, as well as conduct some basic due diligence on the key partners ZCCM has engaged as part of its drive to formalise the gold mining industry in Zambia. Effective due diligence when entering into Joint Ventures is critical, particularly so in this scenario as ZCCM, an upstanding corporate citizen, represents the hopes of many Zambians in ensuring Zambia does not lose out on its Gold resource, as it has with most others.

In the interest of public transparency we ask that you share the Joint Venture agreements between; ZCCM and Karma Mining and Rural Development Limited (KMRD) in relation to the establishment of the Consolidated Gold Company of Zambia (CCGZ); and between CCGZ and Array Metals and Natural Resources Limited (AMNR) for the formation of the yet to be publicly named entity.

Please also help clarify the following pertinent questions:

Due Diligence – Karma Mining and Rural Development Limited
Which expert conducted the due diligence over the Joint Venture partner and what was the outcome of this exercise?
Is ZCCM aware that Sudan appears on the United States of America List of Countries engaging in State Sponsored Terrorism and subject to US sanctions?
Is ZCCM aware that gold mining in Sudan is often used to fund militia and terrorism? What due diligence was performed to ascertain that the new partners were not engaged in these activities?
Is ZCCM aware that financial transactions conducted directly between the Government through ZCCM and Bank of Zambia (BoZ) transacted in USD would move through the US financial system into Sudan and could be a breach of US sanctions and could result in the financing of militia and terrorism? What measures have been taken to prevent this?
Is ZCCM aware that one of the shareholders in Karma Mining is a government Minister in Sudan, and is therefore a Politically Exposed Person? Were there any concerns, while if so, how were these concerns addressed?
Can details of the 20 years of experience in Gold processing be shared?

Due Diligence – Array Metals and Natural Resources Limited
Which expert conducted the due diligence over the Joint Venture partner and what was the outcome of this exercise?
Is ZCCM aware that one of the Ultimate Beneficial Owners of Array Metals, the Dott Services Group in Uganda, has been publicly implicated in alleged financial scandals and allegations of shoddy work on large Government contracts? This resulted in the group being banned from public contracts in Uganda, before a settlement was eventually reached.
Is ZCCM aware that a Senior Executive from Array Metals Group has had business dealings with a UN sanctioned individual and has been an official advisor to the Ugandan Government, therefore being Politically Exposed? Further alleged links to Zambian government officials are noted. What comfort was obtained before engaging?
You state that Array Metals is a Global Mining firm. Please share details of their global experience in mining Gold and processing Gold.
It is noted that Array Metals and Natural Resources LLC, the parent of the Zambian entity, was only registered in August 2018, in Delaware (USA), a known Tax Haven, offering a veil over some of the Ultimate Beneficial Owners. Please confirm who the beneficial owners of this entity are as this would have certainly formed part of the due diligence exercise.

Tender Process
What tender procedures were performed, and what opportunities were given to the public before engaging the two Joint Venture partners? Was the public made aware that ZCCM was seeking partners?
It is clear from your statement that KMRD had not yet set up it’s gold processing facilities in Zambia before the Joint Venture. As per the above question, what alternative partners / applications were sought to evaluate and compare the best experienced and technologically advanced partner for ZCCM?
Did ZCCM consider accessing the local capital markets if Investment Capital was a challenge? The Zambian Public have shown willingness to invest in a gold mining and processing operation, which could have ensured revenues remain in the country. Expertise and technology could have been brought in to educate local miners over the project period.
ZCCM had over K750m ($62m equivalent) in cash / deposits as at 31 March 2019. Did management consider a larger equity holding or going alone with an expert implementation partner?
It is noted in your statement that the Ministry of Mines and Ministry of Commerce provided guidance to KMRD to engage ZCCM for this Joint Venture due to gold being recognised as a strategic asset for Zambia, as pronounced in October 2019. Only then would mineral processing licenses be issued. Was there undue pressure from the Ministries for ZCCM to engage KMRD considering the speed within which this Joint Venture was concluded (announced December 2019), and the fact that KMRD’s investment since 2016 would be lost if ZCCM rejected their approach? Did the Ministries override the independence of the ZCCM Board to require this Joint Venture arrangement?
We also note that Permanent Secretary Ministry of Mines and Mineral Development Barnaby Mulenga acts as guardian for the approval of the Mineral Processing License, and at the same time sits on the Board of ZCCM. This is the same Ministry who advised KMRD that they had to work with ZCCM if they wanted the license. Is this not a conflict of interest, and can you confirm that the PS did declare this conflict and exclude himself from any decisions by the Board of ZCCM?

Confirm the financial and non-financial investment by ZCCM into the Joint Ventures, as well as the equivalent investment by the Joint Venture partners.
Confirm how the ownership structure was arrived at for the two Joint Ventures.
It is stated that ZCCM can either increase or take 100% ownership of CGCZ after 5 years. Is this contingent on anything? What are the profitability forecasts for this company that allow the Sudanese investors to completely earn back their investment plus profit in only 5 years, an extraordinary return. Or is ZCCM expected to pay for this increased holding? If so, what is the cost?

Economic Model
What expertise are the Sudanese and Ugandan investors bringing that ZCCM did not have access to, or were unable to bring in from globally renowned and trusted gold mining jurisdictions such as South Africa, Canada, USA and Australia? What is the real value addition of these partners?
How does the BoZ buying gold from companies that are effectively majority foreign owned help build reserves effectively? If the BoZ buys gold locally from a foreign owned entity, the profits will be used to buy FX for transferring abroad, which defeats the whole purpose.
The current effective shareholding structure leaves a third of Gold processing revenues attributable to ZCCM, but this only forms a fraction of the total production value chain, i.e. the foreign owned Array Metals will sell Gold ore to the Joint Venture entity.
Zambians have already shown the ability to mine gold themselves in many parts of Zambia. What was needed was formalisation of this industry to ensure that operations are performed safely and legally, with majority owned Zambian entities throughout the value chain, benefitting government through tax revenues, and not indirectly funding illegal crime. Is the current foreign controlled processing model really the best economic model for Zambia? What other options were considered?
What is the economic substance of the Joint Venture with Array Metals, versus them being treated as an ordinary customer to CGCZ? Is this also a precondition from the Ministry of Mines to convert the exploration license to an actual mining license?

For your convenience, the UPND has included a matrix as an appendix which forms the basis of our questions and concerns.

The strategic importance of handling Zambia’s Gold resources requires a higher duty of care, with higher levels of scrutiny and due diligence to ensure we protect this national asset. We further take the view that Zambia’s Gold resources must be exploited entirely for the benefit of the Zambian people, whose interest we collectively profess to serve.

We thank you for your assistance in this matter of national importance and trust you will provide adequate responses to the concerns raised in this letter in the interest of transparency.

For, and on behalf of the People of Zambia,

Issued by: United Party for National Development Party Secretariat

Stephen Katuka (Secretary General) – United Party for National Development

Percy Chanda ( Chairperson for Mines) – United Party for National Development

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