Murowa sale raises stink

THE sale of Murowa Diamonds (Private) Ltd is now mired in controversy after it emerged this week that Rio Tinto Plc — a British-Australian multinational metals and mining giant — did not offer RioZim shareholders pre-emptive rights for the shares in violation of a 2004 agreement between the global mining conglomerate and the local mining entity.

By Chris Muronzi

Rio Tinto converted its 56% stake in RioZim and the 50% JV portion in Murowa into a 78% direct shareholding in Murowa, ceasing to be a shareholder in RioZim.

This comes as it also emerged this week that Rio Tinto did not offer the right of first refusal in its sale of its 78% stake in Murowa and a 50% interest in Sengwa Colliery to RioZim as required by the 2004 agreement between RioZim and Rio Tinto.

In an announcement in June last year, Rio Tinto said it had sold its 78% stake in Murowa to RZ Murowa Holdings Ltd.
RioZim officials, such as chairman Lovemore Chihota, are on record claiming RioZim was owned by indigenous Zimbabweans.

It has, however, emerged that Rio Tinto’s 78% stake in Murowa was actually acquired by RZ Murowa, a British Virgin Islands (BVI) incorporated company, controlled by GEM Holdings.

GEM Holdings is fronted by Harpal Randhawa, who is also the principal behind GEM RioZim Ltd, the largest shareholder in RioZim Limited.

According to the shareholders’ agreement between Rio Tinto and Rio Tinto Zimbabwe Ltd dated July 8 2004, the shareholders of RioZim had pre-emptive rights for the same 78% Murowa Diamonds shareholding which was sold to RZ Murowa. These pre-emptive rights and treatment thereof are spelt out in Clause 3(2)(a-d) of the shareholder’s agreement.

Clause 3(2)(a) of the agreement relating to Murowa Diamonds reads: “No party to this agreement shall and each party to this agreement shall procure that no other member of its group shall, complete any relevant transaction unless such party (in this Clause 3(2), the ‘offeror’) shall first deliver to the parties (in this Clause 3(2), each an ‘offeree’) a notice, to be accompanied by a copy of the signed or executed contract with the third party, offering to transfer to the offeree or such other member or members of its group as it may nominate the relevant securities in question at the same or cash equivalent price (with payment to be in the same or other freely convertible currency) and on the same or equivalent terms and conditions as are set out in the contract with the third party (such notice being the ‘Offeror’s Notice’).”

The agreement also provided for 30 days within which a party that has been offered shares in Murowa could notify the offeror whether they are interested in the equity.

RioZim shareholders were not offered an opportunity to exercise their pre-emptive rights with regards to Rio Tinto’s sale of 78% of Murowa in accordance with the shareholder’s agreement.

“In fact, the first time shareholders heard of this transaction was through a media release of the 26th of June 2015 when the stake had already been sold to RZ Murowa Holdings — a foreign related party,” a shareholder said this week.

RioZim only has a management contract for Murowa, according to Chihota’s statement attached to the group’s full-year results to December 2015 released last month.

Even after the board of directors of RioZim had waived shareholders’ pre-emptive rights in Rio Tinto’s Murowa Diamonds, the deal didn’t comply with the Zimbabwe Stock Exchange (ZSE)’s rules relating to related party transactions and the issuance of cautionary statements when dealing with such material transactions.

RioZim shareholders say that because their board is largely constituted by appointees of GEM RioZim, a related party, the board’s independence and judgment in the treatment of RioZim shareholders’ pre-emptive rights could have been compromised.

The ZSE requires that a circular be sent to shareholders and approval of the shareholders be sought in a general meeting, a condition RioZim did not comply with.

GEM RioZim would not have been allowed to vote in such a meeting as they are related parties.

Investigations show that RioZim issued eight successive cautionary statements between September 2014 and May 2015 on the US$10 million rights issue for the Cam & Motor Mine.

In line with ZSE regulations, cautionary statements were also supposed to be issued for the Murowa transaction, which falls into Category 1 transaction.

Other shareholders say due to the concurrent timing with the Cam & Motor rights issue, they were not given an opportunity to evaluate the Murowa transaction, while being materially diluted by the smaller Cam & Motor transaction.

After the rights issue, GEM RioZim shareholding in RioZim increased from 24,97% to 44,39%, making it the majority shareholder.

RioZim shareholders feel that they were not given the right of first refusal in dealing with their shares in RioZim in line with ZSE rules and suffered prejudice as they considered RioZim’s financial position hopeless and precarious.
“Had the same shareholders been made aware of the Murowa Diamonds transaction, they would have likely followed their rights,” another shareholder said.

It now appears that Randhawa, who is controlling shareholder in GEM, could have conflicted himself given that he had negotiated while putting on a RioZim hat to buy Murowa from Rio Tinto only to acquire the asset for himself through RZ Murowa.

A look at RioZim’s full-year financial statements to December 31 2015 shows that the company is nearly insolvent.
“This is hardly a company with the luxury to waiver its pre-emptive rights in a transaction as lucrative as the acquisition of Murowa Diamonds,” a source said.

“The Rio Tinto Plc disposal of Murowa Diamonds and Sengwa was done on extremely generous terms and this literally presented a silver bullet, a simple and seemingly magical solution to a complicated problem, to save RioZim Limited. RioZim had liabilities amounting to US$110 million as at December 2015. The group’s total assets were US$112 million, while total equity was US$1,6 million.

“We strongly believe the larger shareholders and insiders should not ride roughshod over smaller and minority shareholders. How can the investing public have any trust in Zimbabwe’s capital markets if such ‘cowboy’ and arbitrary transactions are allowed to stand? We also believe that we will suffer irreparable financial losses should this deceit be allowed to stand.”