AFRICA — Zambia nears end of ZCCM privatization — Kafue Consortium snaps up Nchanga-Nkana copper-cobalt complex

Zambia has undergone a remarkable economic transformation during the last few years, as large parts of its economic engine, state-owned Zambia Consolidated Copper Mines, have been broken off and sold to mining companies from around the globe.

Since 1992, the country has been engaged in Africa’s largest and quickest privatization program. Industries that have been, or will be, privatized include mining, telecommunications, chemicals, manufacturing, railways, forestry, power generation, financial services, water treatment, tourism, agriculture and publishing.

Today’s free-market fervor is in stark contrast to the economic policies of past decades. Following independence from Britain in 1964, Zambia, led by Kenneth Kaunda, began nationalizing all industrial sectors, including the copper mining industry in 1973. By 1975, the state controlled 80% of the economy.

In 1982, the same year that Zambia became a one-party state, the two state-owned copper mining companies, Nchanga Consolidated Copper Mines and Roan Consolidated Mines, were merged to form Zambia Consolidated Copper Mines (ZCCM).

By the mid-1980s, Zambia’s socialist experiment was losing credibility with Zambians and international creditors, including the International Monetary Fund (IMF), which pressured Zambia to restructure its ailing economy in order to qualify for international loans. The country needed the funds to cushion the tandem blows of dropping copper-export earnings and mounting import bills.

By the late 1980s, the Zambian economy was in dire straits. The state-owned companies were draining hundreds of millions of dollars from the national treasury, inflation and the budget deficit were high, and the foreign debt load was one of the highest in the world. Production in industrial sectors had fallen as a result of the failure to reinvest in equipment.

In 1991, a year after opposition parties were legalized, Kaunda lost power to the reformist Movement for Multiparty Democracy (MMD), headed by Frederick Chiluba. Privatization became a centrepiece of the new government’s plan to revive the stagnant economy.

During the 1990s, Zambia has become one of the most economically liberal countries in Africa. The MMD government has taken numerous steps to improve the economy, including: repealing all exchange-control regulations; eliminating subsidies and price controls; liberalizing interest and exchange rates; reducing corporate and individual taxes; introducing high capital allowances; allowing remittance of profits to foreign shareholders; creating a Securities and Exchange Commission to regulate the Lusaka Stock Exchange, which was opened in 1994; and espousing the concept of private ownership.

The government intends to privatize all 275 state-owned enterprises, with the process expected to be completed by the end of the year. Between 1993 and 1997, more than 220 companies were privatized; seventy of those companies were sold to foreigners. The first companies to be sold were smaller, thus reducing the risk of costly mistakes. Current estimates put the government’s role in the economy at only 30%.

The privatization program is being managed by the Zambia Privatisation Agency (ZPA), which was created in 1992 with the assistance of the World Bank, US AID, Britain’s Overseas Development Agency and the German aid agency, GTZ.

The ZPA is headed by Chief Executive Valentine Chitalu, a Zambian who previously worked in London and Lusaka as an investment banker and accountant. Members of ZPA’s board of directors are chiefly from the private sector, and are assisted by a team of Zambian and expatriate (mostly U.S.) technocrats.

The privatization of state-owned enterprises has been made possible by the ZPA through trade sales, competitive bids, management/employee buyouts and public flotations. Often, the government has retained a minority interest in a company, to be floated later on the Lusaka Stock Exchange.

In 1997, the government began unbundling and privatizing the assets of its crown jewel, ZCCM, in which it holds a 60.3% interest. The importance of ZCCM to Zambia cannot be overemphasized: the country earns 90% of its foreign exchange from its mining industry, which is dominated by ZCCM.

All told, the sale of ZCCM’s assets could raise upwards of US$2.5 billion for the Zambian government in up-front and committed investment — a figure that approaches the country’s annual gross domestic product.

ZCCM is listed on the London Stock Exchange, with almost 90 million shares outstanding and a market capitalization of about US$400 million. Its debt is estimated at US$800 million, with at least US$200 million of that being short-term liabilities to suppliers. Hence, the funds raised from the privatization will likely be spent repaying the company’s creditors.

The company’s annual copper output has fallen steadily from an average of 700,000 tonnes during the 1970s to 307,000 tonnes in 1996 (Zambia is the world’s seventh-largest copper producer). The country exports copper bars to the U.S., Japan, France, Malaysia, India, Britain, Belgium, Thailand, Italy and Indonesia.

South-African giant Anglo American holds a 27% share of ZCCM, though directors of Anglo who also sit on ZCCM’s board have abstained from voting on motions involving offers or tenders for any part of ZCCM made by Anglo or its subsidiaries.

The first step in the privatization of ZCCM, under a program designed by the London-based merchant bankers N.M. Rothschild & Sons, involved the unbundling of the conglomerate into 10 autonomous packages (designated A to L) for separate sale.

The government, through ZCCM, has been retaining minority holdings in the privatized companies, and is assured of two seats on the board of each company, as well as veto powers. There is also a provision for profit sharing should the price of copper exceed US$1.50 per lb.

The following is a summary of the fate of those ZCCM packages: * Package A — The Nchanga and Nkana copper-cobalt mining and metallurgical complex was recently sold to the Kafue Consortium, which consists of Avmin (a division of South-African mining house Anglo Vaal), Noranda (nor-t), Phelps Dodge (PD-N) and Britain’s Commonwealth Development Corporation.

The complex has been ZCCM’s premier asset, accounting for more than half of its total copper output, producing 171,000 tonnes of finished copper and 4,200 tonnes of finished cobalt during 1996-97. However, the huge Nchanga open-pit mine is expected to run out of ore by the turn of the century.

The terms of the deal were not released, but Reuters quoted industry sources as saying that the government had wanted US$300 million for the two mines.

The consortium offered US$220 million, with a further commitment to spend US$1 billion in Zambia — $750 million on capital expenditure and $250 million on debt assumption and social development.

Kafue beat out bids from the Canadian-South African Metorex consortium, Australia’s Straits Resources, as well as two Indian companies, the Binani Group and Sterlite Industries.

Vancouver-based Colossal Resources (CLPZF-Q) and its 60%-owned affiliate, Qasim Mining Enterprises, secured from ZCCM processing rights for 25 years at Nkana’s slag dump, which is estimated to contain 86,000 tonnes of copper and 56,000 tonnes of cobalt. A dispute over the project was settled out-of-court.

The Chibuluma mine, formerly part of package A, was sold last October, for US$17.5 million, to the Metorex consortium, which consists of South African juniors Metorex and Maranda Mines, Vancouver-based Crew Development (CRU-T) (which owns half of the company Metorex), and South African investment bankers Genbel Securities. ZCCM retained a 15% interest.

Chibuluma contains two deposits. The first, a mine at Chibuluma West, produces about 9,500 tonnes of copper and 200 tonnes of cobalt per year. With proven reserves of 1.5 million tonnes grading 3.63% copper and 0.13% cobalt, the mine is due to close within five years. A second deposit, 12 km away, at Chibuluma South, contains a proven reserve of 6 million tonnes grading 4.35% copper, with a further oxide r
eserve of 2.4 million tonnes grading more than 3% copper.

The consortium has committed US$34 million in capital investment, and estimates it can produce 40,000 tonnes of ore per month. Metorex will serve as project operator.

The consortium is hoping that it can bring Chibuluma South on stream before the closure of Chibuluma West in order to provide continuity in equipment usage and employment.

The consortium will also assume responsibility for the operation of the town of Kalulushi, including a hospital, school, roads, water, sewage and parks.

* Package B — Last June, the Luanshya/Baluba mining and metallurgical complex, which is now called Roan Antelope Mining Corp., was sold to India’s Binani Group for US$35 million, with another US$69.3 million committed as capital expenditures. ZCCM retains a 15% interest.

The two underground mines there produced 48,000 tonnes of copper concentrate and 1,200 tonnes of cobalt concentrate in the fiscal year ended March 31, 1997.

Binani, which has been active as a metals marketer in Zambia since the 1950s, also bought the Kawambwa Tea Estate.

The losing bidders were Sterlite, Straits, Britain’s Reunion Mining, Toronto-based Aur Resources (AUR-T) and Vancouver-based First Quantum Minerals (FM-V), which has sued ZCCM and ZPA over the decision to award the package to Binani.

* Package C — The Mufulira underground copper mine and concentrator has received bids from Aur Resources, Sterlite and the Canadian investment firm Farrell Financial.

Mufulira produced about 52,000 tonnes of copper concentrate in 1995-96.

Remaining underground reserves are estimated at 35 million tonnes grading 3.1% total copper, whereas open-pit reserves stand at 5.2 million tonnes of 2.72% total copper.

* Package D — In November, an 85% share of the Chambishi copper mine and concentrator was sold to Robert Friedland’s Ivanhoe Capital. Again, ZCCM owns 15%.

The mine, which has been mothballed since 1987, has proven reserves, to the 900-metre level, of 33.5 million tonnes grading 2.55% total copper. Within the licence area, and to the west of the main orebody, lies an additional resource of 47 million tonnes grading 2.27% copper. A further 69.7 million tonnes of 2.59% copper and 0.13% cobalt lie to the southeast.

A feasibility study carried out in 1994 by ZCCM indicated that the mine could be reopened and operated at an annual rate of about 2 million tonnes grading 2.25% copper.

Other bidders for Chambishi were Sterlite, Farrell, First Quantum and Aur.

* Package E — An 80% share in the Kansanshi mine, the first ZCCM package to be privatized, was sold in January 1997, to Cyprus Amax Minerals (CYM-N) for US$28 million, to be paid in three stages.

The deal marks a return to Zambia by Cyprus Amax, which was a shareholder of Roan Consolidated Mines before its nationalization.

During the first two years, Cyprus Amax will pay to ZCCM US$3 million and spend a minimum of US$5 million on exploration drilling and a prefeasibility study. Should Cyprus proceed to the second, 30-month stage, it will pay a further US$10 million and commit US$15 million towards exploration and a feasibility study. If Cyprus proceeds to the third stage — actual mining — it will be required to pay another US$15 million and procure the project’s financing.

If the Kansanshi project is developed, ZCCM will retain a 20% interest, of which 15% will be payable from attributable dividends and 5% will be a free carried interest.

Should Cyprus decide not to proceed beyond the first two stages, the asset will revert to ZCCM, and Cyprus must pay half of any shortfall in committed expenditures.

Prior to the beginning of Cyprus’ ongoing exploration program, resources at Kansanshi were pegged at 24.4 million tonnes grading 2.9% copper, with some gold credits. To date, the American copper producer has delineated almost 200 million tonnes grading 1.5% copper, but is still several years away from any decision to put the project into large-scale production.

Underground mining at Kansanshi began in 1905 and continued until 1957, when the mine was flooded. Open-pit mining was then carried out on a large scale between 1977 and 1986.

In mid-January 1998, ZCCM decided to close its remaining small-scale operations at Kansanshi in response to low metal prices. The move put 104 ZCCM employees and 60 contract miners out of work.

Cyprus beat out bids from Anvil Mining and Majestic Resources — both of Australia — as well as First Quantum, a Metorex-Randex-AfriOre consortium, Reunion and Woolwich International Holdings.

* Package F — The Nampundwe pyrite mine received no bidders. The operation produced 240,000 tonnes of “ore” in 1995-96.

* Package G — The Chambishi cobalt plant was awarded to the Kafue Consortium over Binani, First Quantum and a consortium led by oil and gas company Camac International. The plant has a nominal capacity of 2,400 tonnes per year, and produced 1,600 tonnes of finished cobalt in 1995-96.

* Package H — The Ndola precious metals plant, which produces gold, silver and selenium from copper refinery slimes, has only received a bid from First Quantum.

* Package J — ZCCM’s Power Division was renamed Copperbelt Energy Corp. and sold for about US$50 million to the Copperbelt Energy Consortium. That group consists of two British power utilities, National Grid and Midlands Power, and five ZCCM managers, with ZCCM retaining a 20% interest. The losing bidders were Belgium’s Tractebel and South Africa’s Eskom.

The sale, completed in July, is the first-ever privatization of a power utility in southern Africa.

* Package L — The Chingola refractory-ore dumps have been sold to the Kafue Consortium, which beat out Cyprus Amax.

In addition to the sale of the packages, a number of ZCCM-related projects have been spun off to foreign mining companies.

Last February, Anglo American’s 50.6%-owned subsidiary, Zambia Copper Investments, and partner Falconbridge (FL-T) signed a memorandum of understanding to begin a prefeasibility study for the development of the Konkola Deep orebody, Zambia’s richest known copper reserve.

The Anglo-led consortium originally included South Africa’s Gencor and Australia’s Western Copper Mining, both of which withdrew.

The government will retain a 20% interest in Konkola Deep, with the consortium initially funding the government’s share of development costs.

Konkola Deep has proven reserves of 344 million tonnes grading 3.8% copper, with potential for additional discoveries. The deposit is expected to produce 180,000 tonnes of copper per year (increasing Zambia’s copper output by 60%) over a 30-year mine life.

Anglo has said that it will cost between US$700 million and US$800 million to develop the deposit.

In March, Avmin committed to a 50,000-metre exploration drilling program and a prefeasibility study of the adjacent Konkola North copper-cobalt project.

No sum was disclosed.

Based on geological trends that extend to a depth of at least 1,100 metres, potential resources at Konkola North have been pegged at 390 million tonnes grading 2.14% total copper. Drill-indicated resources stand at 30 million tonnes grading 2.49% total copper in the northern portion of the property and 50 million tonnes grading 2.58% total copper in the southern portion.

Should the project go ahead, ZCCM will retain a 15% to 20% stake.

Phelps Dodge also is involved in the development of the Luwana deposit, which holds resources in excess of 1 billion tonnes grading 0.7% copper. The deposit is amenable to open-pit mining.

An 80% interest in the ZCCM contract-mining and drilling subsidiary Mpelembe Drilling is also up for sale. In 1995-96, the Luanshya-based company recorded a modest profit on revenues of US$7.4 million.

South Africa’s Benicon bought an 80% interest in Maamba Collieries, Zambia’s only coal mine, for US$23 million.

As well, foreign mining companies have boosted their presence in Zambia’s brewing industry: Zamanglo, an Anglo American subsidiary, bought a 90% interest in Zambia Breweries for US$7.5 million; Heinrich’s Syndicate, a subsidiary of Britain’s Lonrho, boosted its stake
in National Breweries to 70% for US$1.8 million; and Lonrho bought a 70% share of Northern Breweries for US$9 million.