The mining giant has been facing serious viability challenges due to significant cash flow constraints precipitated by a huge short-term debt.
Underwriters of the transaction — GEM Raintree Investments — represent the interests of Global Emerging Markets (GEM) a US$3,4 billion investment group based in Mauritius and Raintree Mining, an indigenous Zimbabwean mining company focusing on exploration, resource establishment and verification.
In the transaction, RioZim intends to raise US$5 million through a rights issue fully underwritten by GEM Raintree Investments to its existing shareholders by issuing 10 million new shares at a subscription price of US$0,50 on a basis of 33,25 new shares for every 100 ordinary shares held.
A total of US$6,7 million will be raised through a private placement of 13,325 million ordinary shares to GEM Raintree at a subscription price of US$0,50.
The balance of US$45 million will be raised through the issuance of convertible debentures to GEM Raintree which RioZim can draw over a period of five years to fund existing operations, extinguishing the short term debt and funding future capital projects.
The convertible debentures may be drawn at the election of RioZim or placed at the election of GEM Raintree in multiples of US$1 million for 60 months from the date of issue. A 12% coupon will be payable quarterly in arrears.
The investor, GEM Raintree, has an option at any time prior to maturity of the debenture to convert them into ordinary shares at an increasing conversion price of up to US$2,00 per share in the fifth year. If the investor does not exercise their option to convert for equity before maturity, the debentures will be redeemed for cash by RioZim.
Despite the convertible debentures being unsecured, they are tradable in the secondary market. The structure of the convertible debenture allows the company to pay off the company debt through profits without having to further dilute the shareholders.
Scenario analysis of transaction:
1) Following rights issue:
If an existing shareholder follows the rights issue then they face a 33% dilution after the private placement
In the event of full conversion of the debenture, a shareholder who would have followed his rights would face a 70% dilution.
2) Not following rights issue:
If he existing shareholders do not follow the rights offer they stand to be diluted by 33%.
The private placement will cause the dilution to increase to 78% if the existing shareholder would not have followed the rights issue.
In the event of full conversion of the debenture, a shareholder who would have not followed the rights issue will face a 203% dilution in RioZim.
The ability of the company to return to profitability within the five year tenor of the convertible debenture will depend on how quickly they can pay off the vicious short term debt and inject working capital in their mining operations.
With some banks having pushed for judicial management, shareholders in RioZim will have to vote in favour of the proposed transactions for banks owed money to consider the prospects of recovering their funds through the transaction.
Without a concrete deal on the table which shareholders agree to, banks will continue pursuing the judicial management route.