HomeBusiness DigestZimasco: The inside story of daring corporate banditry

Zimasco: The inside story of daring corporate banditry

ON one chilly morning in July last year, three men walked into Zimasco’s Harare offices. They wanted to see the man in charge and had a business proposal.

By Chris Muronzi

They had come with a seal of approval from the Ministry of Mines and Mining Development. Then Zimasco Technical and Business Development General Manager Reginald Matshiya entertained the guests at the company’s head office along Samora Machel and had tentative discussions with the would be suitor. The proposal was put on the table.

The gentlemen were representing a South African, they said. Portnex International, Matshiya would later learn, intended to lease Zimasco’s West Plant furnaces. Discussions around leasing the furnaces commenced in earnest with Zimasco considering the deal.

Zimasco, according to insiders, was at the time operating only two East plant furnaces and had closed the three West Plant furnaces in October 2014.

“Portnex was the only company who wanted to lease our furnaces,” Zimasco Provisional Judicial Manager Regis Saruchera told a creditors meeting in the capital this week on Wednesday.

The East plant furnaces had remained open until it was shut down mid-December last year after global ferrochrome prices plunged to a level which rendered production unviable.

Against such a background, Portnex’s offer to lease Zimasco’s West plant was accepted by the company’s shareholder.

It made sense. A 34% drop in global ferrochrome prices experienced in 2011 from US$1,12/lb to a low of US0,74,88/lb in 2015 had also hit revenue. Revenue plunged by 38% from US$194,9 million in 2011 to US$120,7 million in 2015.

The depressed ferrochrome prices also affected capacity utilisation. From a capacity of 100% in 2011, the company started operating at 37% in 2015. Energy costs and overheads remained high despite falling revenues.

Electricity accounts for 29% of the production costs while chrome ores account for 31%.

When the company closed its West plant, the benchmark price for Q1 2016 was forecasted to drop to US82/lb cents.

Owing to persistent losses, the company suffered from an acute shortage of working capital with the gap deteriorating from a positive US$71,3 million in 2011 to a negative US$82,9 million in 2015.

The company had turned to borrowings to finance the business. With high borrowing came a huge finance cost. For instance, the company has paid US$66 million in finance costs.

A ban on raw ore chrome export had also militated against the company in the same period.

In line with the portnex being accepted, Zimasco had re-invested into the plant. According to investigations, a total US$1,5 million was invested in the three furnaces.

Investigations by the Independent show Portnex agreed to reline and refurbish furnace four and offset the cost with its rentals.

As the parties discussed the deal to lease Zimasco’s West plant furnaces, Portnex International was exploring another area of interest. On August 11 2015, Zimasco received a love letter in the form of a letter of intent from Portnex.

The proposal, a takeover bid for Zimbabwe’s largest integrated ferrochrome producer in Zimbabwe with an operational smelting capacity capable of producing 180 000 metric tonnes of high carbon ferrochrome per annum, was considered and rejected.

A letter dated August 11 2015 Portnex International general manager Frikkie Laubschere to Regis Matshiya shows that Portnex was interested in acquiring Zimasco’s assets.

“Over the past five years, the company has developed an industry proven value-in model to optimise the raw material feed and subsequent profitability of various ferro chrome furnaces across the world. In addition, the company has developed a substantial database of available ores and reductants, having access to various sources of chrome ores and reductants globally,” the letter reads.

“To this end, the company has been investigating the feasibility of operating a ferrochrome production facility in Zimbabwe over the past year. Portnex wishes to express its interest to purchase Zimasco (Pvt) Ltd facilities and assets in order to establish itself as a ferrochrome producer. This will serve to unlock the value from its existing chrome ore and the ferrochrome reductants supply and availability from within the group.”

Zimasco shareholders’ Sino Steel declined the takeover bid, but accepted a deal to lease its facilities including the furnaces to Zimasco.

A Memorandum of Understanding was entered into between the chairman and chief executive Li Jinqian and Frikkie Laubscher, the general manager of Portnex International was agreed on and signed.

The agreement was with effect from December 1 2015.

The parties also agreed to a baseline agreement on the state of the assets which essentially guided the companies on the state of the furnaces on December 1 and December 2020 when the contract expires.

On December17 2015, Portnex and Zimasco announced the lease agreement to the world.

Things seemed to be going well for the two parties.

Portnex was heralded as the knight in shining armour that had come to rescue Zimasco in its hour of need.
The agreement between Zimasco and Portnex covered three 18 MVA submerged arc furnaces which are fitted with transformers which are supplied with 33KV of power from ZETDC transformers.

With the ink on the contract barely dry, Portnex commissioned a baseline contamination assessment study under the guise this would enable the Ministry of Mines and Mining Development to comprehend the level of contamination in the environment.

“From the contamination assessment undertaken to enable the Ministry of Mining and Mining Development to comprehend the level of contamination in the environment pertaining to the Sinosteel/Zimasco Kwekwe operations,” reads the executive summary of the report.

This would mark the beginning of problems between the parties.

Quietly, Portnex flew in environmental consultants into the country and started sampling various water sources around the Zimasco plants.

However, Portnex as it would later emerge was playing a totally different ballgame where the means justified the ends.

After completing the baseline contamination assessment study, the report was sent to various influential offices in the country such as the Ministry of Health and the Ministry of Mines.

In no time, the findings of the report detailing shocking revelations of pollution also found their way to the media.

“It is evident that the surface and ground water proved to be toxic and certain elements are present in concentrations which are at alarming levels of transgressing the globally allowable concentrations for these,” the report said.

No report was sent to Zimasco.

Among some of its findings, the report compiled by Ecco Elementum and Enviromental Projects claimed to have unearthed incorrect storm water management, incorrect separation of clean and dirty water, overflowing of dirty water containment, leaching of contaminated water from the non-functioning PCD, incorrect storage and handling of contamination source materials, inability to contain and prevent pollution from entering the natural receiving environment and groundwater and boreholes contamination.

“Both surface and ground water sampled indicated various transgressions of the globally accepted limiting concentrations as per the SANS, ERA and WHO standards. These transgressions will lead to serious health risks and fatal diseases. The area surrounding the Sinosteel/Zimasco operations prior to Portnex becoming operational experience very high and alarming levels of contamination. The sampling layout was conducted in such a manner to be able to pinpoint certain concerning features which will contribute to the environmental degradation on and off site,” the report concluded.

“The samples taken, illustrates that pollution and contamination of water sources increased downstream from the operations. specifically it can be determined that the current operations being carried out on site especially from the Chinese operated slag plants Sinosteel/Zimasco area and the trench carrying the discharge water from their operations contribute to contamination being at very high levels. The PCD at the point furthest downstream is not functioning properly and highly contaminated toxic water is seeping into the receiving environmental surface water systems and into the natural stream, but also into the groundwater.”

Zimasco has dismissed the report as unfounded, inaccurate and malicious. The report was done clandestinely, Zimasco said.

“Of late, there have been some disturbing and defamatory articles in the press which perpetuate the unfounded allegations contained in the Eco Elementum (Pty) Ltd Contamination Assessment Report for The Sinosteel/Zimasco Operations. This report was commissioned without Zimasco’s knowledge by Portnex International (Pty) Ltd, who are leasing Zimasco’s West Plant furnaces; allege that the judicial management process continues to be opposed by Zimasco’s bankers; attempt to discredit the credibility of Zimasco’s turnaround business plan; and question the major shareholder, Sinosteel Corporation’s commitment to the company,” Zimasco said.

“Zimasco first became aware of the Eco Elementum report in an article published in the Sunday Mail on 26th June 2016.”

The site visits and surveys are believed to have been conducted in the month of January and February this year.
After the report was compiled, the report was submitted to the Ministry of Mines and Mining Development in March 2016 bearing Zimasco’s logo, a development Zimasco feels amounted to fraud.

Zimasco says it has neither seen nor verified the contents of the report which carried its logo.

The Independent understands that a meeting held with Portnex officials at the offices of the judicial manager early August, Zimasco expressed its displeasure over the manner the report was compiled and the inaccurate information contained therein, which they felt had been leaked to the press and sensationalised.

A number of newspapers have run stories on the disputed report. “Zimasco disputes the contents of this report for the following reasons. Zimasco was not present to witness whether correct procedures and equipment were utilised for the sampling and preservation of the samples, particularly as samples were obtained in Zimbabwe and tests conducted in South Africa. Since Zimasco was not present it cannot vouch for the integrity of the samples nor confirm the sampling points,” the company said.

“More importantly, the hexavalent chromium analyses were conducted by a laboratory not accredited by SANAS to conduct hexavalent chromium as Cr6+analysis. For the avoidance of doubt, the laboratory, Water Lab(Pty) Ltd contracted by Eco Elementum on behalf of Portnex, did not have the capacity to conduct hexavalent chromium as Cr6+ analysis.”

The company also said Ecco Elementum had not drawn any distinction between allowable limits in process water and drinking water which are different.

“Process water is contained within the plant and there are procedures that are followed to manage the treatment of Cr6+ therein which ensure that there is no contamination outside the plant,” Zimasco said. “In the meantime, Zimasco is actively implementing its turnaround plan, as previously communicated to all stakeholders.”

According to Zimasco, banks consented to the company being placed under provisional judicial management with effect from June 3 2016.

This is contrary to media reports claiming banks and other creditors were unhappy with the decision.

Unbeknown to Zimasco, Portnex International was smitten with the ferrochrome producer and was prepared to do anything to get its hands on the asset.

In line with the company’s plan to acquire a ferrochrome company, Portnex had looked around the Zimbabwean terrain first before settling for Zimasco. Zimbabwe was host to two world class assets in the form of Zimasco and ZimAlloys, a former Anglo American Corporation firm.

ZimAlloys was not as attractive given it has not been operational for a while.

In order to get ZimAlloys up and running again, Portnex would have needed to invest heavily.

It was a cost Portnex did not want to bear.

It was time to get back to the drawing board for the South African company.

Schemes were hatched, whose implementation would show cut throat business instinct, which boarders on corporate banditry.

Portnex, incorporated in 1999, had begun operations in 2004. With offices in Sandton, Johannesburg, South Africa, Zimbabwe and Turkey, Portnex International positions itself as a global reductant-supplier to numerous consumers of a broad spectrum of carbon products.

While Portnex was happy to sign a deal for the leasing of Zimasco’s facilities, evidence suggest that the company did not take the rejection for the takeover of the company very well.

The company has been looking to grow through acquisitions. This was evidenced two years ago when the company in conjunction with London-listed International Ferro Metals (IFM) made an offer to acquire Australia-based Pacific Carbon and Modderriver Minerals’ assets.

IFM and Portnex intended to acquire the assets, comprising six retorts used to produce intermediate or retort coke, through a newly incorporated company in which IFM would hold two-thirds and Portnex the balance.

It would seem that was the turning point for Portnex.

Portnex had already decided the programme of action to take if Sinosteel did not want to sell.

A chain of events were set in motion. At face value, the leaking of the baseline contamination report to the media seemed to have been mischief. But a careful examination suggests this was part of multi-phased programme that would lead to the intended end, controlling Zimasco.

The first was getting banks Zimasco owed such as MBCA, CABS, BancABC, Stanbic and Nedbank to support a business plan the company felt would help revive the company and to reject Zimasco’s plan to be placed under judicial management.

Investigations show that in January and February, banks had been made to believe that Zimasco had no chance of turning around the company.

Portnex in tow

As such, banks rejected a proposal to have the company placed under judicial management on the basis of the Portnex business plan or promise. A banking source this week confirmed they had been approached early this year with a plan to involve the South African company.

Stanbic, BancABC, CABS and Nedbank are some of financial institutions owed around US$34 million.

Zimasco crossed swords with most of the banks after they tried to block its road to judicial management.

Management felt the company would be better protected from creditors under judicial management.

This resulted in banks opposing management’s plans to have the company placed under judicial management.

l To be continued next week.

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