A web of lies and deceit — How Gem acquired Murowa

THAT Harpal Randhawa, founder of Global Emerging Markets (Gem), a US$3,4 billion alternative investment group that manages a diverse set of capital vehicles focused on emerging markets, appeared on the local corporate scene at an opportune time is beyond dispute.

Chris Muronzi

An aerial view of Murowa Diamond mine
An aerial view of Murowa Diamond mine

The year was 2012 and the company was slowly being smothered by banks it owed over US$60 million.

Gem had agreed to a term sheet detailing plans to raise US$6,6 million via a private placement between Raintree Investment Consortium and the mining group and a US$45 million convertible debenture by RioZim Ltd to the Raintree Investment Consortium. Conditions for the issuance of debentures were that US$1 million could be drawn down by RioZim in multiples of US$1 million and be placed at the election of the investor.

Gem RioZim Investments, Gem’s local investment vehicle, had done what RioZim management felt was fantastic work with the group’s creditors who had besieged the company over mounting and non-performing loans.

Gem investments had arrived on scene like a hero at an opportune time. In movies, the arrival could be equated to a scene where the hero of the film appears at an unbelievably unexpected time to save the beautiful blonde girl from the hangman’s noose and save the day.

So it was for Randhawa’s Gem.

He had come to the table with guns blazing, telling banks off over their debts and started renegotiating new terms.
This obviously bought RioZim a lot of time with creditors, who would ordinarily have been suffocated by financial institutions the group owed. Some board members agreed to pay Randhawa for the work he was doing through a management contract which was agreed on in July 2012.

Impressed by the work Randhawa had done soon after arriving at RioZim, the board of directors, mandated Randhawa through his Gem RioZim Investments to negotiate with banks.

The management contract caused a lot of divisions on the board. Simba Makoni, a former board member, confirmed there had been discomfort over the management fee on the board.

“As I recall, the management contract was brought to the board by the remuneration committee. Yes, there was discomfort among some directors about aspects of the contract relating to imprecise functions and deliverables, especially vis-a-vis the executive team; reporting and accountability lines, the contract’s duration and the amount of fees payable,” Makoni told the Zimbabwe Independent this week.

Randhawa had acquired 24% of RioZim’s total issued share capital at a discount and quickly got control of management as provided for by the term sheet of 14 and 15 February 2012.

Good Assets

RioZim had good gold in assets, Renco mine and the defunct Cam & Motor Mine.

The group also had a world class asset in the form of Sengwa.

According to RioZim, Sengwa started out as a JV Agreement between Rio Tinto Zimbabwe Ltd and RTZ Mining & Exploration Ltd, signed on April 22 1994 to focus on all activities directed toward ascertaining the existence, location, quality and quantity or commercial value of deposits or products at the Sengwa site. Rio Tinto Plc entered into an agreement to regulate their direct and indirect investments in Sengwa Colliery which culminated in all parties to the agreement — RioZim and Rio Tinto Plc — acquiring a 50% stake in the company.

The Sengwa coal deposit is situated in north-western Zimbabwe, 450km from Harare, with proven ore reserves in excess of 525 million tones. Its resource summary is as follows: 525 metric tonnes (mt) measured; 513mt indicated; 323mt inferred; and 1,336mt resource.

A US$2bn power plant based on a coal resource of 1,3 billion tonnes, capable of generating up to 2 000MW of power, almost as much as Zimbabwe’s total installed capacity, has been on the cards for years.

The proposed project envisages the construction of a number of smaller power plants over the next ten years. In order to achieve this goal, Rio Energy is said to be in the process of bringing in a technical partner to help construct the power station. Management has since indicated it is in talks with potential investors on the project.

RioZim also had an asset in the form of a 22% stake in Murowa Diamonds, a private company in the country.

The company also held pre-emptive and tag-along rights to Rio Tinto’s 78% equity stake in Murowa.

According to an information memorandum obtained by the Independent prepared by Standard Bank of South Africa in November 2012, Rio Tinto had projected the mine life of Murowa to run up to 2016.

“The remaining life of the mine is approximately six years (2017) at the current ore processing rate of up to 0,5mpta. Potential exists for extending mining operations until 2021 through installation of a new plant with processing capacity of 1,5mtpa. If approved, this expansion project (NXP) would mine and process the material defined as reserves above the 550 metres elevation in K1 and K2. Potential also exists to process stockpiled low grade materials after the open pits cease production,” the information memorandum read.

Under the expansion project, processing capacity would have been around 1,5 mtpa.

As at December 2011, Murowa had total reserves from the K1 and K2 pipes of 9,9 million tonnes with an average grade of 0,92 carats per tonne, resources of 9,8 million tonnes with an average grade of 0,13 carats per tonne and mineralised inventory of 20,5 million tonnes with an average grade of 0,21 carats per tonne.

Murowa has two other kimberlitic pipes — K5 and K3. The two pipes have smaller deposits and are currently not being explored. RioTinto had been looking at a US$100 million expansion project known as the MXP project.

The diamond mine also holds a significant mineralised inventory material which could, with further drilling and sampling, become economic to mine, the information memorandum said. Rio Tinto Plc has not conducted exploration on the mine lease since the time of discovery in 1997.

Lost Hope

Although RioZim was in financial problems, hope was not lost. Its new investor had pledged to supply funding through convertible debentures amounting to US$45 million.

To date, no debentures have come through. Randhawa has since then increased his shareholding in RioZim to 44% through questionable transactions that saw him offsetting amounts owed for management fees with equity when the group floated a US$10 million rights issue.

Since taking control of RioZim in 2012, Gem has been charging a 1% fee on turnover. The fees are for “advisory and consultation services rendered by Gem RioZim”, a shareholder in RioZim to the group. The management fees are charged as 1% of group turnover for “running and subsistence” expenses.

The Independent established that a figure of US$2,887 million, which was said to be for refinancing of funds already expended and general purposes in the rights issue circular, was actually funds outstanding to Gem in management consultancy fees.

From the US$2,887 million, Gem was paid US$700 000 for a loan Randhawa’s company had allegedly advanced. This figure equates to 20% of the rights issue shares.

The only shares he could have paid for were 33% of the unsubscribed for shares in the rights issue amounting to US$3,3 million.

In 2011, Rio Tinto Plc was restructuring its diamond business, a move that saw the mining behemoth disposing of some diamond mines.

Standard Bank, which was mandated to find buyers for Murowa, failed to find a buyer for its 78% equity stake in Murowa.

For Rio Tinto, Murowa was a negligible asset on its books given its mine life. The location was also risky given the political problems in the country and President Robert Mugabe’s constant indigenisation threats. According to Rio Tinto’s balance sheet, the group had total assets amounting to US$125bn in FY15 from US$131bn in FY14. The mining giant was sitting on US$12,2bn in FY15 from US$15,8bn in FY14. Rio Tinto is said to have been considering surrendering its Zimbabwe assets to the government.

On the Rio Zim board, debate on the Murowa investment was raging. Others had toyed with exiting Murowa investment on account the dividends were negligible. In fact, Murowa could afford to exit the operation.

In order to extend the life of the mine beyond 2017, US$100 million was needed.

Around the time RioTinto Plc was on the market for Murowa, Mines minister Walter Chidhakwa announced plans to merge all diamond miners, including Rio’s local unit, into one company in which the state would own 50% of the shares as part of its black economic empowerment programme.

“Rio Tinto Plc had always seen the Murowa investment as negligible on their balance sheet. Its life was also something that dissuaded investors. There was talk on the RioZim board about whether selling out of Murowa was not a good idea and so on. Many felt it was not core business for RioZim. But there were just discussions,” a RioZim board member said. Murowa was valued at US$279 million by Deutsche Bank AG in 2013. At that valuation, Rio Tinto could have pocketed as much as US$217 million for its 78% equity while RioZim could have made US$61 million at the same valuation had they tagged along on the deal for their 22%.

Other indigenous Zimbabweans had positioned themselves for the acquisition of Murowa, but were dissuaded by the price tag. By early 2015, Murowa was still on the market.

Then on June 26 last year, Zimbabwe woke up to news that Rio Tinto Plc had disposed of its 78% equity stake in Murowa Diamonds and a 50% equity stake in Sengwa coal to a little-known RZ Murowa Holdings Ltd. But the Rio Tinto statement gave hints who the beneficial shareholder was.

“Rio Tinto has completed the sale of its 78 per cent interest in Murowa Diamonds and 50% interest in Sengwa Colliery Ltd (Sengwa) to RZ Murowa Holdings Limited,” Rio Tinto Plc said in a statement last year.

“RioZim Limited, an independent Zimbabwean mining company listed on the Zimbabwean Stock Exchange (ZSE), already holds a 22% interest in Murowa Diamonds and a 50% interest in Sengwa and will assume the overall management of both entities. Rio Tinto believes that the future of these assets can be best managed by entities with existing interests in Zimbabwe.”

RioTinto Plc did not disclose how much the company been sold to RZ Murowa.

While the wording of the statement suggested that RioZim Ltd was the beneficiary, the company’s only relationship with the mine was as a 22% minority shareholder. A wave of misinformation began almost immidiately. During a tour of the mine two weeks after the deal, RioZim chairman Lovemore Chihota said the company was now in the hands of indigenous Zimbabweans, an apparent reference to Rio Tinto’s statement pointing to Rio Zim shoring up its investment in Murowa.

“We know that when things change, people tend to naturally get worried about the future of the company, but we came to assure you that our work will continue,” Chihota was qouted a saying in a state daily. “You should also not worry yourself that now that the company is owned by indigenous Zimbabweans, it will fail without whites. We will succeed together and as RioZim we want to be proud and say we have succeeded even without whites. This will make our government happy because that is their thrust.”

But investigations would confirm what everyone feared. Gem had spun a yarn and government had sadly bought it.
At the same tour of Murowa in July 2015, Mines Deputy minister Fred Moyo seemed to have been taken by Chihota’s claims.

“We can’t have a big business like this, but with the community having nothing to show for it. As government, we want to see the company succeed as it is now in the hands of indigenous Zimbabweans,” he said.

According to the Indigenisation and Economic Empowerment Act, an indigenous Zimbabwean is defined as “any person who before the 18th of April 1980 was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person”.

Investigations show that the use of RZ Murowa, the same initials for RioZim, seem to have been chosen to give the perception that this was a RioZim company. RZ Murowa is however a British Virgin Island company incorporated by the Gem group. RioTinto’s own statement shows that they believed they had sold.

In retrospect, the mention of RioZim assuming overall management seemed to have been meant to engender the perception that RioZim would actually own the 78% and therefore Murowa would become a 100% subsidiary of RioZim.

RioZim’s full year financial results show that this was not the case. Had the company bought 100% of Murowa, the diamond mining firm would have become a subsidiary and would have to be accounted for fully when the group released its results. The company is still accounted for as an associate.

Although Rio Tinto Plc did not disclose the terms of the sale given that both Rio Tinto Plc and RioZim are listed companies, investigations show that RioZim shareholders were robbed through a devious, calculated and intentional scheme to keep Murowa for a particular shareholder’s benefit.

More lies

After the Independent published a report two months ago on how RioZim shareholders had not been offered pre-emptive rights to Murowa, the mining group splashed thousands of dollars on newspaper adverts, saying the board had waived shareholders’ rights to Murowa and had gotten shareholders nod to waive the rights of other share holders at an annual general meeting.