Zimasco: Inside the smoke and mirrors corporate raiding game

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A partial view of the Zimasco smelter in Kwekwe.

IN the wake of rejection, Portnex went back to the drawing board. What would follow was an excellent stratagem to engineer a take-over. This time, with the help of the legal system, writes Zimbabwe Independent’s business editor Chris Muronzi in this third installment on the Zimasco inside story.

That way, the company would surreptitiously end up buying the company without kicking up a lot of dust. A smoke and mirrors strategy was adopted.

Portnex’s top man, Neil Wilson, who has been behind securing contracts for the company in Zimbabwe in the last decade, had a brilliant idea.

He would spin a yarn so beautiful, those who heard it would realise the company had a big heart. His story was very simple; we care for the people of Kwekwe and have decided to bring this US$500 million class action against Zimasco never mind our interest to acquire the business.

Plucked out from a movie script, the story had all the attributes of a Hollywood flick.

In the acclaimed film, Erin Brockovich, an almost similar storyline is followed.

The company’s strategy was simple; lead a class action over the baseline contamination report and find victims. With victims in the bag, Niarchos, Portnex’s Zimbabwe trading company, was happy to proceed to the next stage.

Erin Brockovich

The story would follow the Brockovich line. Brockovich, who shot to prominence through a 1993 case against Pacific Gas and Electric (PG&E) Company in the United States, was an American legal clerk and environmental activist, who built a case against PG&E of California in 1993.

Her successful lawsuit was the subject of a 2000 film under the same name starring Julia Roberts. The lawsuit catapulted the real-life Brockovich into a media personality.

In more or less the same way, Brockovich’s case is about alleged contamination of drinking water with hexavalent chromium (chromium VI, Cr-VI or “Cr-6”) in the southern California town of Hinkley. Unlike in the US case where a facility, the Hinkley compressor station, built in 1952 as a part of a natural gas pipeline connecting to the San Francisco Bay Area, used hexavalent chromium in a cooling tower system to fight corrosion, Zimasco does not have a natural gas pipeline.

Unlike Brockovich, the Zimasco story is different. Wilson’s company unlike Brockovich is interested in acquiring Zimasco and has submitted an expression of intrest.

Zimasco has since discredited the report, claiming the tests were not independently verified and were not done by an accredited laboratory.

Against such a background, it seems Wilson was only appointed to enable him to institute the legal proceedings.

Also Niarchos Investments, the company Portnex is trading under in Zimbabwe, seems to be a shelf company with no serious assets to its name.

Could Portnex’s use of the company be strategic?

People close to the developments say this could all be a strategy to insulate itself from possible fallout from the class action.

At law, a company is a legal entity and has limited liability. In other words, although Niarchos is owned by Portnex, it is a separate legal entity. As such, although the company is owned by and is representing Portnex in the class action, when excreta hits the fan, Niarchos will take the fall.

Whatever the outcome of the class action, Portnex will emerge with its reputation unsullied and blame it on Niarchos.
Legal experts say this seems to have been a calculated move.

Sabotage

While Niarchos is enjoying the smoke and mirrors game, things on the operational side have come to a head. Niarchos’ lawyer Vengai Madzima last week accused Zimasco of sabotaging his clients by shorting them of ore feedstock for the smelting plant the company is leasing from the ferrochrome producer as provided for by the agreement, a charge Zimasco dismissed.

A Zimasco spokesperson said Portnex’s accusations were defamatory.

“For Portnex to allege sabotage is defamatory and Zimasco would challenge this company to provide the evidence of the alleged sabotage. Below are the circumstances surrounding the issue of ores for Portnex: Portnex signed a lease agreement with Zimasco for the leasing of furnaces and indicated that they had secured their own sources of ore to run the three furnaces,” Zimasco said.

Madzima added Zimasco had refused to comply with a government directive to give them chrome claims they could mine, saying the company was currently making poor grade ore which is being rejected in the market.

“At the time that the contract was signed, Zimasco had approximately 46 000 hectares of chrome claims in Zimbabwe.

There was enough flexibility for Zimasco to allocate some of these claims to Portnex on tribute. However at the request of government, in February 2016, Zimasco ceded 23 000 hectares to government, thereby remaining with 23 000 hectares which are just enough for Zimasco’s own long-term plans,” Zimasco said. “Zimasco was never instructed to give any claims to Portnex by government as alleged.”

Out of the remaining claims, and in attempting to assist Portnex, Zimasco has identified some claims that can be tributed to Portnex and Portnex has been advised of these claims. Zimasco has even gone further to negotiate removal of small scale miners from the identified claims to enable Portnex to commence mining.”

Zimasco said Portnex was failing to secure feed stocks because it does not pay for supplies from tributors.

“As of 6th September 2016, Portnex still has to pay certain Tributors/Contractors for ores supplied in July 2016,” Zimasco said.

He also said Zimasco had arbitrarily held on to its product. This, he said, was unnecessary arm twisting of his clients.

Zimasco confirmed holding on to Portnex product, but said this was to motivate payment.

“In line with the existing Lien laws of Zimbabwe, Zimasco temporarily held alloy that Zimasco had processed on behalf of Portnex in order to encourage Portnex to pay what was well overdue,” Zimasco said.

“According to the contract, Portnex is supposed to pay the leasing fees and pay for services rendered by Zimasco within the month in which they are invoiced by Zimasco,” Zimasco said. “Since they started operating in February, Portnex has failed to honour these payment terms and in the last four months they have been paying in 55 to 60 days after services have been provided to them by Zimasco. Of the total bill only 25% is the leasing fee with the balance being services that Zimasco would have paid for and provided to Portnex.”

Portnex owes Zimasco almost US$1 million broken down as U$521 000 for July invoice and US$463 000 for August invoice.

The spokesperson said should Portnex require access to ores from Zimasco’s claims, the contract allowed the ferrochrome producer to make claims available on a tribute basis.

Zimasco said the problems are of Portnex’s making.

“Figures captured by Zimasco on ore sales by Tributors/Contractors to third parties indicate a decline in total tonnage being offered to Portnex by our Tributors/contractors. Tributors/contractors are citing alleged poor payment record and unprofessional behaviour by Portnex officials at the smelter. In April/May 2016 when Zimasco was chasing up payment for ores supplied Portnex would allege that they had already paid the money to the Tributors/contractor,” Zimasco said.

“Upon being asked by the Tributors/Contractors about the same payment Portnex would allege that they had made the payment to Zimasco, clearly attempting to put Zimasco and its miners on a collision course.

“In a meeting held in Shurugwi on 12th July 2016 and attended from Portnex by Alpesh Patel, Keith Beck and Denneth Madyira , Portnex was advised by Zimasco’s general manager mining, among other things, that they needed to put in place quality control systems to ensure that they do not end up with poor quality ores at the smelter. It was highlighted to them that relying on a small team of one or two people going around in the dyke procuring ores is insufficient since ores need to be sampled and analysed prior to shipment and loading also has to be supervised.

They were told that this is how Zimasco controls ore quality when it is running its furnaces.”

Enemies all round

While relations between Zimasco and Portnex seem to have soured terribly in the aftermath of the class action, judging by recent developments, Portnex could have made more enemies than friends.

On Thursday last week, Environmental Management Agency (Ema) is said to have ordered Portnex to shut down operations after the company failed to submit an environmental management plan.

Realising they could not enforced the order, Ema asked the Zimbabwe Electricity Supply Authority to switch off the South African firm after Portnex ignored the Ema order to shut down.

Electricity was only restored Wednesday afternoon, sources say.

The tiff between Portnex has its roots in a class action where Ema is also cited as a respondent.

Questions sent to Madzima, a lawyer for Portnex’s local entity, Niarchos Investments (Pvt) Ltd, had not been responded to at the time of going to press.

Ironically, Niarchos is suing Zimasco over environmental pollution and is demanding US$500 million in damages on behalf of a handful of Kwekwe residents.

Zesa on the other hand is said to be unhappy with Portnex after failing to collect its dues.

“Portnex is said to be politically connected, so Zesa has not touched them,” a source said. “They do as they please.

We don’t know who is backing them politically.”

A good asset

China’s Sinosteel Corporation has a world class asset in the form of Zimasco.

China’s leading steel trader, Sinosteel, completed the acquisition of a 100% stake in Zimbabwe Mining and Smelting Company (Zimasco) Holdings, the company that controlled the world’s fifth-largest ferrochrome producer for a reported US$200 million.

Zimbabwe hosts the world’s second-largest reserves of chrome after South Africa.

Zimasco is the biggest integrated ferrochrome producer in Zimbabwe with an operational smelting capacity of producing 180 000 metric tonnes of high carbon ferrochrome per annum and currently accounts for around 1,2% of global ferrochrome output when in full production. Zimasco’s total ferrochrome installed capacity currently stands at 40% of the country’s installed capacity.

The company is to all intents and purposes one of Zimbabwe’s attractive mining assets.

Appetite in Zimasco seemed to have died down until recently.

Diplomatic row looms

Chinese diplomats are watching the development at Zimasco with keen interest. This is because Sinosteel Corporation is a 100% state-owned enterprise under the supervision of the state-owned assets supervision and administration commission of the state council of the Republic of China.

Another shareholder in Zimasco, China Africa Development, is a 100% subsidiary of China Development Bank, which is 100% state-owned.

Against such a background, a diplomatic row between Zimbabwe and China could be looming.

The troubled Southern African country’s new all-weather friend, China, is already miffed by Harare’s decision to boot out Chinese companies from the lucrative Chiadzwa diamond fields early this year.

Mines minister Walter Chidhakwa in February cancelled special grants of companies operating in Chiadzwa under the pretext they had expired. Anjin has since taken government to court, challenging the legality of Chidhakwa’s decision.

Diplomatic sources told the Independent this week relations between Harare and Beijing could become even frostier after Chidhakwa cancelled the company’s Special Grant.

The Zimasco debacle, people in the know say, could further isolate Zimbabwe which is in the process of restoring relations with the international community after years of ostracisation owing to its chaotic seizure of white-owned commercial farms and past elections deemed not to be free and fair, which were charecterised by political violence.

China has made commitments to fund multi-billion US dollar energy and infrastructure deals signed by President Robert Mugabe in 2014 and 2015, but set stringent requirements for supporting the deal, insisting on the bankability of the projects.

This latest episode could be another stumbling block for the troubled country.

Why is Zimasco hot for investors?

Zimasco, which has become the object of Portnex’s affection, has a long history of dispute.

In the mid-1990s, the late general Solomon Mujuru clashed with Vice-President Emmerson Mnangagwa, long-touted as Mugabe’s heir, when the decorated soldier bid to buy into the multi-billion-dollar Zimasco, a chrome mining and smelting concern in Zimbabwe’s Midlands province. It is widely believed that Mujuru and Mnangagwa’s enduring rivalry stemmed from the asset.

The acrimonious fight to control Zimasco saw Mugabe stepping in to manage the fallout, but his intervention did very little to dissuade Mujuru, who eventually got a 17% stake in Zimasco.

In a bid to diffuse the Mujuru and Mnangagwa clash, Mugabe had granted Anglo American Corporation the go-ahead to make an outright purchase of Zimasco amid concerns the entity could not be acquired by individuals.

This was after Mugabe had initially put the brakes on the involvement of Nyika Investments in the chrome and platinum mining company to make room for government to snap up a 50% stake.

The ferrochrome producer was previously owned by American conglomerate Union Carbide and traded under the same name for a time. Zimasco holds title to 891 blocks registered for chrome covering an area of 23 067 hectares. Until December, Zimasco held 46 000 hectares of chrome claims.

This is after the company was forced to release 50% of its chrome ground to the state as part of the government’s plan to invite other players into the sector. These claims are adequate to supply Zimasco’s long-term plan needs.

At full capacity, Zimasco operates eight open pit mines, seven underground mines, runs four chrome ore processing plants in the North dyke and another in the South Dyke. The company has 363 small scale tributors and contactors.

The company intends to take advantage of the lifting of the chrome ore ban and export 20 000 tonnes of chrome per month.

On the smelting side, Zimasco has six chrome smelting plants. Of the six, two are being run by Portnex.

According to information obtained from the judicial manager’s report to creditors, Zimasco reported revenues of US$120 million in the full-year to December (FY15). The company reported US$182 million (FY14), US$159 million (FY13), US$169 million (FY12), and US$194 million (FY11) in revenues.

The company has been making losses since FY12 owing to low ferrochrome prices on the international market.

The company reported a profit of US$2,5 million in FY11. Losses of US$37 million followed in FY12, US$40 million (FY13), US$115 million (FY14) and US$38 million in FY15.

The company has paid US$66 million in finance costs in the five year period to December last year.

Gross profit margins have declined from 25% to 14% in FY14 owing to low ferrochrome prices and low capacity utilisation.

Turnarond specialist

Zimasco Judicial manager Reggie Saruchera has a reputation as a go-getter after rescuing several companies in the country. A few days after being appointed judicial manager, he moved to cut costs at Zimasco in FY14 and renegotiated contracts with various contractors of the ferrochrome producer and saved a few millions in the process.

Saruchera, a reputed turnaround strategist in the market after successfully reviving Cairns and Blue Ribbons, told creditors two weeks ago the business had good fundamentals. At Cairns, he secured an investor, who committed millions to the business and brought in a Tanzanian firm, the Bakhresa Group, to inject US$40 million in the next five years to turn around the fortunes of the milling company.

Saruchera’s to-do list reads as follows: verification of creditors’ claim; securing working capital plan to implement the business plan; implementing a restructuring plan to return the business to viability; and negotiating with shareholders and implementing a scheme of arrangement. Saruchera says he wants to negotiate with Sinosteel Singapore for a compromise settlement and settle US$11 million owed to Sinosteel international within six-and-a-half years.

Good assets

Zimasco has total assets of US$185 million in the form of investment property, property, plant and equipment and investment assets.

It is sitting on US$52 million in inventories and US$22 million in trade receivables. A total US$99 million shareholder loan has been converted to preference shares.

With an annual turnover of US$200 million per annum, the company is a major contributor to the country’s fortunes. Mineral exports contribute 62% to the country’s total foreign currency earnings, further highlighting Zimasco’s importance to Zimbabwe. Zimbabwe made US$2,1 billion from mineral exports in 2015.

Sinosteel has already committed to provide US$5,6 million to kick-start the smelting operation.

A total US$699 million is expected to come from the furnaces. Profit is seen coming in at US$263 million in the next six-and-a-half years. Around US$26 million will be spent in capital expenditure in the same period.

Zimasco, which is currently under judicial management, has pinned its hopes for a turnaround on a business plan which will be implemented from 2016 to 2022.

According to the company’s business plan, its turnaround will largely be driven by running two of its East Plant furnaces to produce high-carbon ferrochrome for export.

Although this is Zimasco’s core business, this is in line with government policy of mineral beneficiation and value addition.

The company is also hoping to recover ferrochrome from the slag dump through the Slag Gravity Separation Plant and reprocessing of the tailings and slimes.

Currently, the company which is sitting on huge slag dumps, has a contractor processing and producing saleable ferrochrome fines at low cost. The company stands to make US$12 million from chrome ore fines dump, US$140 from chrome slag, US$125 million from chrome ore concentrates, US$144 million from ferrochrome slag tailings and another US$20 million from furnace leasing.

Saruchera says Zimasco is a solid business. It is, therefore the considered opinion of the provisional judicial manager that the company be placed under final judicial management.

Under the five-year plan, the company was granted a permit to export chrome ore per annum on August 5 2016. The company aims to utilise its full allowed quota through the export of high-grade concentrates.

The company has a stockpile of chrome fines at its Kwekwe Smelter which will be sold to generate cash as it is already paid for.

This is a way of sweating the company’s idle assets.

Portnex will pay around US$24 million in the next five years to Zimasco for leasing its furnaces.

The following activities which in total will yield turnover in excess of US$1 billion in the six-year period under review.

Liquidation

Portnex envisages the liquidation of Zimasco as a major victory. That way, it would bid for the assets and buy then for a song.

But most creditors will not allow the move.

In the event of liquidation, preferred creditors such as statutory, government and institutions controlled by the state, will get 100% of the dividend. Employees will get 73% of the liquidation proceeds.

Other banks can get their hands badly scorched given their levels of exposure to Zimasco and what can be recovered. Others seem to be well protected.

Cabs and Nedbank seem to be the worst affected as they stand to get 32% of what it is owed in the event of a liquidation. MBCA stands to get 90% of what it is owed.

Besides restoring the chrome ore mining and smelting business to produce ferrochrome for export, Zimasco can develop a much bigger coalbed methane industry. In light of the losses some of the banks stand to make in the event of liquidation, most creditors would want to avoid liquidation at all costs.

Methane

Zimasco is positioned for growth as it can easily diversify from mining into gas exploitation. Through its exploration subsidiary, Shangani Energy Exploration (Pvt) Ltd (SEE), the company holds coalbed methane interests.

SEE acquired five Special Grants (SGs) for the exploration and development of coalbed methane in the Matabeleland North area of Zimbabwe. Applications for the renewal of the Special Grants has been made and the application fees paid.

Before the expiry of the special grants, SEE funded and carried out initial exploratory work. Six core holes were drilled and three pilot wells as well as 1 production well were sunk.

Although initial results indicate the special grants have huge potential, the company needs to carry out technical and commercial aspects of the resource. The project plan is divided into two phases.

The first phase is estimated to require approximately US$50 million, involves drilling to confirm and develop the resource including building a trial 12MW power station, whilst initial test production wells are being evaluated.

The 2nd Phase, requiring approximately US$730 million, involves the drilling of around 1100 wells and constructing a 400MW power station.

Further exploration has been planned to cover the five SGs comprehensively.

Once it comes to fruition, the coalbed methane resource will provide a significant alternative revenue base for Zimasco estimated at US$600 million per annum.

Coalbed methane is used in various applications such as electricity generation, production of ammonia for fertilisers, feedstock for production of diesel and petrochemical industry.

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