TETRAD – Mash, Dawn intent on being bedmates?

By Admire Mavolwane

THE mining industry has in the past few days attracted media attention particularly in light of new legislation gazetted on September 3 which effectively paved way for the government to t

ake over operations of the mining companies owned by SMM Holdings Ltd.


This comes after specification of the latter and appointment of an investigator. A couple of weeks ago it was reported that the holding company had been availed concessionary funds so as to improve the cash-flows and working capital requirements of the mines.


Cash-flow problems are still a common feature in corporate Zimbabwe and are by no means unique to SMM.


In fact, in this earnings season very few companies have declared dividends, with one listed mining entity going as far as cancelling the payment of a dividend declared for 2003 and due for payment this year.

While this is not the first time that government has intervened in the operations of corporates, it is the modus operandi which is different and opens a new chapter for the business community.


In the past, government through the central bank introduced a number of indirect subsidies or support prices and concessionary funds to help ensure viability.


In the latest monetary policy review, the central bank increased the gold support price from $71000/gramme to $85000/gramme for small-scale and large-scale miners who opt to receive the proceeds in local currency. This amounts to approximately US$471,18 per troy ounce at the latest auction rate which in essence means a subsidy of US$71 per troy ounce using the current international spot price of approximately US$400/ounce.


Many of the large-scale gold miners were experiencing serious viability problems before this window was opened.


One gold mining company that has benefited from the gold support price and the productive sector financing is RioZim Ltd, formerly Rio Tinto Zimbabwe whose half year to June 30 results we will review this week, together with those of Bindura.


Group turnover was up 624% to $64 billion as the group took advantage of the “subsidised” gold support price from the central bank and higher international nickel and copper prices.


Gold production at Renco Mine was 344 kg, which was 80 kg lower than output produced in the corresponding period last year.


Nickel and copper production from Empress Nickel Refinery of 2 889 tonnes and 3 260 tonnes respectively, was 13% and 24% higher than in 2003.


Operating expenses growth of 719% outpaced that of revenue, resulting in margins losing 12 percentage points to 8%. This saw operating profits increasing by a below inflation rate of 207% to $5 billion.


Cash-flow problems which were exacerbated by the delays in VAT reimbursements of an average $3 billion a month resulted in the company operating in an overdraft position for the greater part of the half. Thus a net interest charge of $2,5 billion was incurred, compared with income of $48 million in the comparative period.


The associate Murowa Diamond Mine weighed in with $190 million in the form of equity accounted earnings. Net operating profits of $1,9 billion were recorded -up a mere 59% on the $1,9 billion realised in the same period last year.


The restructuring of the group which facilitated the divesture of Rio Tinto plc from non diamond mining-related activities and converted the former joint venture Murowa Diamond Mine into an associate, resulted in an accounting gain of $15,5 billion, thus boosting the bottom line to $17,3 billion. This translated to growth of a massive 1 318% on 2003.


Bindura’s financials came out as more palatable reading for shareholders, with gross nickel production increasing from 3 731 tonnes to 5 372 tonnes. Turnover grew by an impressive 1 738% to $213,8 billion, driven mainly by the appreciation in international nickel prices from US$3,73/lb to US$5,77/lb.


A surge in electricity charges, import duties after the introduction of the auction rate and input and transport costs restricted the company to growth in operating profits of just 433% to $91,1 billion as operating margins virtually halved, declining from 99% to 43%.


Like compatriot RioZim, the group also experienced serious cash-flow problems but, in this instance, attributed to an unfavourable exchange rate.

The outcome was an increase in borrowings which in turn led to an interest pay-out of $15,9 billion. Attributable earnings of $66 billion were recorded up 416% on the prior period.


In the outlook, the widening disparity between the exchange rate and inflation remains and the continued use of $824 for a portion of export proceeds also continues to threaten the profitability of both mining groups. In particular, RioZim cites the latter as having prejudiced it of close to $9 billion in revenue.


In corporate news, Dawn Properties and Mash published almost similar-worded cautionary statements that incidentally came out on the same day, advising the investing public of the commencement of negotiations which, if successful, might affect the value of the linked units for Dawn and the asset base for Mash.


Shareholders were urged to exercise caution when dealing in the company’s linked units and shares.


According to the press, the two could be looking at a possible deal.

CFI also published a notice to shareholders advising that following specification of the group, along with other companies linked to the major shareholder and subsequent appointment of an investigator, the group continues to trade normally and continues to meet the ZSE listing requirements.


Negotiations with other parties referred to in previous cautionary statements have been put on hold pending completion of the investigator’s mandate.

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