Wednesday 20 January 2021

Some initial thoughts on the Mopani Deal

 Yesterday, Minister of Mines Richard Musukwa announced that the Zambian government had decided to fully take-over Mopani Copper Mines (MCM) by purchasing Glencore's and First Quantum Mineral's combined 90% stake in the mine. Prior to this, government's shareholding in the mine was 10%. Specific details on the transaction are still very vague. However, the clearest statement on the deal so far is from Minister Musukwa's speech on the transaction (pdf available here). In this hurriedly written post, I want to recount the main points of the transaction as detailed by the minister and provide some reflections on the same. I hope to write more substantively about this in the coming days when more details are hopefully made available.   

Before engaging with the minister's points, I want to say that I wholeheartedly agree in principle that we as a country need to fully own and run our copper mines. One of the biggest policy mistakes of the last 25 years or so was the decision to privatize the copper industry. In his 2015 Goma Lecture presented in Lusaka, the late economist Thandika Mkandawire estimated that Zambia would have accrued national savings of about $20bn had we never sold the mines. And these savings would have been deployed towards productive investments and large-scale social spending negating the need to borrow from external sources. Selling the mines was a big mistake. 

The three main features of the transaction announced yesterday are the following (this is taken verbatim from the minister's statement): 

1. The $4.8bn loan owed by MCM has been agreed to be reduced to $1.5bn. MCM as an asset was owing loans amounting to $4.8bn from Glencore (Bermuda), Glencore International and Carlisa. 

2. The sale price is $1 

3. The [$1.5bn] loan [mentioned in point 1] is to be repaid through an off-take agreement granted to Glencore International using 10% of the production. That means the loan will be repaid between 10 and 17 years depending on the price of copper. You may wish to know that prior to this transaction Glencore already had an off-take agreement with MCM and this is expected to continue. 

Point 2 is merely academic and so I won't spend time on it. Points 1 and 3 are where the action and the controversy is in my opinion. Let's start with point 1 and then go to point 3. 

On Point 1 

The point basically says that MCM, itself a Glencore entity, had over the years received financing of upto $4.8bn from three Glencore entities (Carlisa is majority-owned by Glencore with minimal shareholding from First Quantum Minerals. From the look of things, Carlisa, based in the British Virgin Islands, was set-up to manage Glencore's and First Quantum's investments in MCM). As part of yesterday's transaction, Glencore (or Carlisa which is really the samething) want the Zambian government to assume this loan which the previous owners have "graciously" written down to $1.5bn. 

There are several issues that are problematic about this. First, is there anyway to prove that this was an actual loan and not a notional one? This is not an easily dismissible question given the overwhelming evidence showing that multinationals, especially those in the extractive sector, often use intra-company loans as an effective mechanism for tax avoidance. 

Second, the $4.8bn was a loan from the parents to the subsidiary. In other words, the parents invested in their child and these investments did not work out. Why should the Zambian people pick up the tab of the parents' misjudged investments? The discussion would be different if the loan had been issued by, say, an independent bank with limited control over MCM. Glencore were fully in-charge of MCM when these loans were being granted. It appears that the investments amounted to nought. Glencore should completely write-off these loans and consider them bad loans.   

Third, the implication of all this is that the actual/effective selling price of the 90% shares in MCM is $1.5bn (the so-called $1 selling price is a distraction). The Financial Times reports that Glencore had in August 2020 valued MCM at $700mn. 90% of $700mn is $630mn and not $1.5bn. We are clearly overpaying (and possibly over over over paying if it turns out that the $4.8bn was a notional loan).  

On Point 3

This point basically says that Glencore wants to guarantee the payment of its loan by guaranteeing for itself 10% of MCM's copper output from now until the $1.5bn loan is repaid. The minister reckons that this arrangement might be in place for about 12 to 17 years depending on the performance of the copper price. All this assumes a healthy outlook for the copper industry over the medium to long-term. But what happens when the copper price plummets below healthy? What will Glencore do? Sell the loan onto Vulture Funds? Repossess Zambian assets? 

These are not unreasonable questions given the well-known history of boom and busts in the commodities markets. (As an aside, the current debt crisis engulfing the African continent is partly the result of rosy commodity price forecasts that were floating around circa 2009/2010).   

Second, between points 1 and 3, point 3 is the vaguest in terms of actual details. What, for example, is the implied interest rate for this loan? We need to know this so that we can compare whether it would have been cheaper to borrow the $1.5bn via another vehicle (bank, capital market, etc...) and immediately pay-off the Glencore loan. I suspect that the implied interest rate on this loan is exorbitantly high. It is even higher if you include the opportunity costs associated with being forced to sell 10% of your copper output for the next 2 decades to a private entity. For instance, MCM would have to turn down some other buyer wanting 100% of its copper at a price offer above the market price. This would be a loss to MCM and the country. 

We really need more details on point 3 given all this. 

Can Zambians Run Mines?

Before concluding I want to deal with the age-old question of whether Zambian's can run the mines. 

As I stated at the outset, I am all for the country owning the mining industry. An objection often raised when I make this point is that Zambians do not have the know-how to run mines. The evidence those arguing this way produce is the performance of copper production under ZCCM in the 30 year period (1970 to 2000) that Zambia had a controlling stake in the entire mining industry (ZCCM which stands for Zambia Consolidated Copper Mines was the conglomerate that ran the mines). For those arguing this way, the relative success of the industry under private hands (since about 2000) is further evidence in their favour. 

As I argued in a piece for Africa Is A Country in 2015, the story of Zambia's copper production is really a story of the copper price. In times when copper prices have been high, so have been production and profitability. In times when prices have been low, so has production and profitability. Specifically in 2015 I wrote

In the decade running up to nationalization (1960 to 1968), real (inflation-adjusted) copper prices increased by 69%. In the three decades after nationalization but before privatization, copper prices performed as follows: a 45% decline in the 70s, a 7% increase in the 80s and a 39% decline in the 90s. Over the entire period 1970 to 1999, the real (inflation-adjusted) price of copper declined by an incredible 70%!...Between 2000 and 2010 [after the mines had been sold to private hands], real (inflation-adjusted) copper prices increased by a whopping 230%! Anybody, be it a state-run entity or private entity, would have responded to this incredible rise in copper prices by producing more [and registering healthy profits].

Our prayer then is that copper prices should be in our favour as we enter this new era of "re-nationalization". Our second prayer is that the Patriotic Front government manages this God-given resource prudently and for the benefit of all Zambians. This is a big prayer given recent corruption scandals that have hit the party.