Zambia vs. Vedanta: Could the government be paving the way for a Chinese buyer?

Zambia vs. Vedanta: Could the government be paving the way for a Chinese buyer?

Story by Deutsche Welle

Zambia’s largest copper mining operation, KCM, has been liquidated. Many are asking now if the country could repossess private mining operations in a bid to shore up financing amid rising debt levels.

Zambia’s economic situation is getting dire. The Zambian Kwacha has fallen six percent against the US dollar this year alone. That makes it one of the world’s worst performing currencies. Last month, rating agency Moody’s downgraded the country’s credit worthiness to junk status. That means there’s a chance of Zambia defaulting on its debt — it owes around $10 billion (€8.88 billion) to foreign creditors, more than 40% of the country’s gross domestic product (GDP). The overall public debt is actually $15 billion — equivalent to 73% of GDP So the recent liquidation of the country’s largest copper mining operation, Konkola Copper Mines (KCM), is being viewed with suspicion. The government alleges that India-based Vedanta Resources, which owns a majority stake of around 80% in KCM, has violated its mining licence and owes money in unpaid taxes.

The insolvency proceedings that led to KCM’s liquidation were started by the state-owned ZCCM Investment Holdings, which only owns a minority stake of around 20% in the company. Vedanta had no lawyers present at the court hearing in which a judge decided to place KCM under the administration of a liquidator.

Miners feel the pinch

Zambia may be trying to shore up its finances. Last week, news agency Bloomberg reported that the government had lined up two potential buyers for KCM. A sale of the country’s largest mining operation “could potentially alleviate short-term debt financing problems that the government has,” says Nick Branson, a Senior Africa Analyst at Verisk Maplecroft. 

“I would say overall, this is all driven by financial consideration on the Zambian government side,” he told DW.

But that isn’t the only reason. Many locals feel they haven’t benefited from rising copper prices on the global market.  That’s why the government announced a sliding royalty tax regime for copper producers in the 2019 national budget. The tax is linked to the global price. That means miners pay more when the industry is performing well. The change was met with widespread criticism by investors and the industry.

“A stepped regime makes for sudden changes when prices cross thresholds, which can be quite unsettling to industry,” says Sokwani Chilembo, Zambia Chamber of Mines CEO.

According to him, mining companies had already been facing challenges. Vedanta says it has invested $3 billion in its Zambian subsidiary but the operation has not been making a profit in recent years. KCM runs one of the wettest copper mines in the world, and pumping water costs money. Power can also be a problem for miners, especially after a recent drought significantly reduced hydroelectric power output. 

With so many challenges, mining operations had been importing copper ore from neighboring Democratic Republic of Congo to supplement shortfalls in production. That allowed them to maximize the refinery and smelting capacities in which they had invested. But that business was basically wiped out when the government introduced an import duty on foreign copper ore, according to Chilembo.

“Very, very limited amounts have some through, and it accounts for quite a significant proportion of what was forecast for the growth,” he says.

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