HomeBusiness DigestRioZim’s meandering road to recovery

RioZim’s meandering road to recovery

The past decade has seen gold producers on the global front recording strong growth in earnings as they enjoyed firming prices.

Report by Kumbirai Makwembere

Closer to home in South Africa, the share price for DRD Gold, for instance, firmed in response to the growth in earnings that company has been enjoying as a result of rising gold prices.

However, the same cannot be said for RioZim. The counter’s value on the stock market has declined by 67% since dollarisation and 89% from its peak.

Rio Zim first traded at US$1,50 on February 24 2009, peaked at US$4,50 on June 30 2009, before hitting a low of US$0,25 on January 31 2012.

Currently, the counter is trading at US$0,50 after rebounding from US$0,40 recorded on February 15 2013, its lowest price for the year.

Ideally, the counter should have remained firm as investors should continue buying into the company hoping to benefit from the rally in bullion prices.

One pattern that can be observed in the company’s share price is it quickly responds to any information filtering into the market. The slump in price from a peak of US$4,50 to a low of US$0,25 was due to the company’s failure to secure funding to recapitalise operations and service its expensive debt.

Furthermore, the then management team was viewed negatively by the market.

The counter finally got support on speculation the company was about to conclude a deal that would see it restructure its debt with banks from short-term to long-term and raise US$11,7 million through a private placement and rights issue.

The latter raised US$5 million while the private placement that roped in GEM Raintree brought in US$6,7 million.

After restructuring the debt and securing the US$11,7 million, RioZim also appointed a new management team which induced a positive sentiment towards the company’s stock.

It looked as if the company was finally on a recovery path. That was until news of a blockade at Renco Mine surfaced the media. Villagers, together with wives of employees at Renco were demanding bonuses and better working conditions for the workers.

This was further compounded by the company’s press release on February 1 2013 confirming these developments.

Management also revealed the blockade by villagers was costing the company approximately US$150 000 per day.

On February 8 the media reported Renco had gone into care and maintenance as the blockade was making it difficult for the company to procure raw materials.

All this worked against the positive sentiment which had emerged in the market that RioZim was finally on a recovery path. News that employees at Empress Nickel Refinery had also joined the strike did not do the company any good either. This saw the counter dropping to US$0,40 on February 15 while bids on previous days were as low as US$0,20.

It is normal for disagreements to arise between management and employees. However, it is the manner in which the dispute is resolved that is of concern. Disrupting company operations does not benefit anyone.

If anything, employees stand to lose more if the company collapses. Labour should negotiate in such a manner that will enable operations to continue.

According to the company’s press statement, Renco employees earn a minimum of 14% more than national emplyoment council guidelines and were also awarded a salary increase in May 2012.

The company’s operation was coming off a low base and workers could have been a bit more understanding and allowed the company time to recover fully for the benefit of everyone. It was a bit early for conditions of employment to quickly improve. A compromise would have made better sense in such a situation.

It is also unfortunate that politicians allegedly took advantage of the situation to gain political mileage. Business and politics do not normally go hand-in-hand.

The interference of politicians will unfortunately not be viewed in good light by potential foreign investors. While government intervention is normal in some disputes, especially those that involve the community, it should be done in a way that does not disturb operations and in accordance with the law.

As a country we should have learnt from events that took place across the Limpopo last year.

Growth in the South African economy slowed down to 1,2% in the third quarter of last year from 3,4% the previous quarter as output from the mining sector tumbled by 0,6%.

Mining is one of the pillars on which growth of the Zimbabwean economy is premised.

Therefore the country cannot afford production in the sector to be disrupted. Also, we can hardly afford to scare investors away from the mining sector, which is in dire need of foreign funding. In this regard, such strikes should not be allowed to drag on for long without a suitable solution emerging.

As things stand, it looks like problems at RioZim might persist a little longer. Management should move in quickly to reassure the market and further comment on developments at the company. What is apparent, however, is that the company is still in need of funding to pay off expensive debt as well as to fund exploration works.

A year down the line, the new shareholder, GEM, is yet to provide the US$45 million convertible debentures it had promised when the private placement was done.

Is it not time for the Securities Exchange Commission of Zimbabwe to make a follow up on the transaction to find out if the new shareholders met their side of the bargain? When the GEM deal was still being negotiated, sentiment in the market was that the group did not have the necessary funds to turn around the company. Could this have been true? Or is it that GEM no longer wants to increase its exposure to Zimbabwe because of sovereign risk?

Another point of concern on Rio Zim is the rumour that the authorities are not happy with the company’s shareholding structure. This, therefore, implies that recapitalisation funds will now be more difficult to get.

All this has resulted in the company failing to take advantage of the firm mineral prices prevailing on the international market. Yet again, Zimbabwe looks to have missed this window of opportunity.

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