Mining sector: Recapitalisation the way forward

FOR close to a decade economic growth in Zimbabwe has been on a downward trajectory. Economic activity was suppressed up to 2008 due to hyperinflation and the negative effects of being isolated from the family of nations. The multiple currency system, which came after the formation of an inclusive government in 2009, revived the economy and also brought price stability.

Recently, Finance minister Tendai Biti was on record saying that he now expects the economy to grow by 8% in 2010 from the previous target of 5,4%.  This revision was necessitated by the “rebound” in agriculture as evidenced by the sale of a more than anticipated quantity of tobacco this past season.

Another sector which is expected to contribute immensely to the attainment of that robust economic growth is mining. This year the sector is projected to grow by 31% driven by strong growth in gold and platinum production. However, the interim financial results recently published by listed mining firms tend to paint a contrasting picture. Three out of the four listed mining companies released depressing sets of results with only Hwange managing to record a profit. Bindura remains under care and maintenance while Falgold has got only one operational mine. Rio Zim, on the other hand, is battling to recapitalise its operations with profits being wiped off by high finance costs.

Interim results for Bindura for the six months to 30 June were below par with gross turnover amounting to US$17,9 million. The sale of nickel contributed US$4,3 millionwhie US$9,2 million came from the sale of leach alloy, toll treatment fees contributed US$4,2 million while by-products were sold at a total of US$0,14 million.  Even sadder is the story from Falgold. Similar to Bindura, Falgold was barely operational as shown by total revenue amounting to a mere US$254 697.  Both firms recorded losses for the period, with Bindura losing US$5,7 million while Falgold lost US$1,75 million.

Problems for Falgold date back to 2008 when Fidelity Printers failed to honour its obligation for the gold delivered to them.  This forced them to divert funds initially set aside for capital expenditure into working capital. The firm hopes the new major shareholder, New Dawn, which acquired the 88,7% shareholding of Central African Gold in Falgold mid June this year will revive the operations of the company.  New Dawn, which is a Toronto listed mining company, is said to have the capabilities to access new capital and is expected to bring mining expertise into the company.

Rio Zim was a slightly different story, although it was also in a loss position.  Production levels for the firm improved slightly over the first half of 2010 although gold production was disrupted by power cuts.  There was also a notable increase in nickel and copper production by 91,5% from June last year.  In addition, the 22% associate company, Murowa diamonds, recorded a 28,3% increase in diamond production on prior year. Group revenue amounted to US$29,9 million, but the company went on to lose US$6,2 million because of high costs of servicing its debt.

Last year the company solicited and got approval from shareholders to offer 10% shareholding to a foreign investor in a private placement transaction. It later emerged that the company could not find a suitable equity partner. As an alternative plan the group publicly advised that it was going to do a rights issue aimed at raising US$40 million.  That option has taken long to materialise as most of the existing shareholders will unlikely be able to follow their rights. To salvage the probable under subscription, RioZim seeks to court a cash rich underwriter to take up unsubscribed shares. With the quantity of money in consideration the underwriter is likely to come from offshore and better still has to be someone with the technical knowledge of mining.

Hwange Colliery benefited from the recapitalisation exercise which helped them ramp up coal production and subsequently achieve high coal sales. Coal sales went up 198% in the process realising revenue of US$45,2 million. Net profit for the period was US$4,5 million. Further recapitalisation of the operation is in progress and management hopes to secure longer term capital to enhance production.

However, cynicism over the indigenisation policy is slowing down foreign investment. The recent revisions to the policy have not been successful to change the negative investor perception. Players in industry often say that the delay in finalising the amendments to the Mines and Minerals Act also add to the uncertainty in the sector at a time when several investors apparently stand ready to bring capital into the country.

The projected strong growth in the sector is largely coming from the few investors who were brave enough to invest in the difficult times of hyperinflation. A case in point is the platinum producers Zimplats and recently Unki who have been investing heavily even when it did not make sense to do so. Zimplats, for instance, is enjoying huge success in their operation. Had the environment been good for investors to an extent where many had invested and continue to do so, the mining sector would have been pumping as we speak. No mine would still be in care and maintenance and the country would be raking in millions, moreso now that commodity prices are firm.

 

By Linda Tsarwe

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