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EXPLAINER-Zambia's moves on Vedanta, KCM alarm mining industry

Fri 31st May, 2019 1:43pm
By Chris Mfula and Barbara Lewis
    LUSAKA/LONDON, May 31 - Zambia's decision to name a
provisional liquidator to run Vedanta Resources' Konkola Copper
Mines (KCM) business, one of the country's biggest employers,
has rattled international miners concerned about rising resource
nationalism. 
    Vedanta, founded by Indian billionaire Anil Agarwal, is
seeking international arbitration over Zambia's appointment of
the provisional liquidator, it said in a statement on Friday.
 urn:newsml:reuters.com:*:nL5N2301RK
    Ahead of a court hearing in Zambia expected on June 4, which
provides Vedanta with another chance to fight back, here are
some responses to the questions thrown up by the case.
    
    IS VEDANTA A SPECIAL CASE?
    Vedanta Resources, part-owner of the Mumbai-listed Vedanta
group of companies  VDAN.NS , is KCM's majority shareholder,
while Zambian state mining company ZCCM-IH  ZCCM.LZ  holds a
roughly 20 percent stake. 
    The Zambian government says KCM has breached the terms of
its licence. In London, it faces court action from nearly 2,000
villagers who allege their livelihoods have been destroyed by
pollution caused by the company.  urn:newsml:reuters.com:*:nL8N21S2HH
    Analysts say Vedanta and KCM are a case apart, but with
resonance for the other big miners in Zambia - Barrick Gold
 ABX.TO , Glencore  GLEN.L  and First Quantum  FM.TO .
    "It somehow sends some nuanced message to other mining
companies to comply or be doomed," Chibamba Kanyama, an
economist at Zambian consultancy Bridges said.
    Mines Minister Richard Musukwa said it was a signal to other
miners to follow the law.  L8N2364YT 
    
    IS CHINA THE NEXT OWNER OF KCM?
    Zambia has said it is looking for new owners for KCM and
speculation is strong that China, Zambia's biggest creditor, is
the most likely buyer.
    Sources have said China is interested and that there are
other potential buyers. Vedanta says KCM is not for sale.
 L8N2356Q9  
    The president, who stands for re-election in 2021 and whose
party lost a seat in the Copperbelt region in a by-election in
April,  could be wary of local opinion, which is firmly against
more Chinese ownership.
    But the government-appointed liquidator needs to bring in
new money to run KCM, which requires significant investment,
analysts say.
    Vedanta has said it is willing to invest provided the right
framework is in place.  L8N2354W7 
    Western investors are generally wary of spending more in
Zambia when they are struggling to guarantee returns, especially
given the government's apparent determination to increase its
tax take.  urn:newsml:reuters.com:*:nL8N21Q52C   
    "My view is that these assets were very mature and
underinvested after 25 plus years of nationalisation," Grant
Sporre, an associate director at Macquarie, said.
    "By taking over some of the shuttered operations, the
government of Zambia can run these operations for cash, but this
is a short-term strategy because at some point there will be the
requirement for further investment," he said.
    
    HOW IS ZAMBIA TACKLING ITS DEBT BURDEN?
    Consultations are ongoing about a new non-refundable sales
tax to replace value added tax.  urn:newsml:reuters.com:*:nL8N21Q52C
    Zambia will also cancel or delay more approved project loans
to cut its fiscal deficit and rein in debt service payments.
 urn:newsml:reuters.com:*:nL8N23433T
    Some analysts say Vedanta and KCM can negotiate with the
government if they accept they must hand it a greater share of
any earnings.
    
    WHAT CAN THE MINERS DO?
    Vedanta is pushing back with adverts in Zambian newspapers
and social media pages.  urn:newsml:reuters.com:*:nL8N2354W7
    Other miners have begun to retrench. Glencore  GLAN.L  is
closing two shafts, which it says have reached the end of their
economic life.    
    First Quantum has retreated from threats to reduce its
workforce in favour of seeking to negotiate with the government.
    Earlier this year, sources who declined to be named said
First Quantum had sought to buy out state mining firm ZCCM-IH,
which also has a nearly 20 percent stake in its mines dating
back to the privatisation of the late 1990s.  urn:newsml:reuters.com:*:nL5N20039H
    The ZCCM-IH stake in Vedanta allowed Zambia to bring the
liquidation case. 
    
    WHAT DOES THIS MEAN FOR ZAMBIA'S ECONOMY?
    Copper accounts for 12.2% of Zambia's GDP and 70% of its
foreign currency earnings, according to last year's economic
report released by the ministry of finance.
    Ratings authorities and the International Monetary Fund have
issued repeated warnings about the country's lack of liquidity
and mounting debts.
    Many mining operations do not yet pay tax on profits because
they say they are still paying off capital expenditure, and the
government is keen to increase its tax take.
    Vedanta says it has invested $3 billion since 2004 and
contributed $1.3 billion to the national exchequer.
    It also says Zambia owes it more than $180 million in VAT
refunds. Zambia disputes this figure.

 (Reporting by Barbara Lewis; Editing by Jan Harvey)
 ((Barbara.hm.Lewis@thomsonreuters.com; +44 207 542 2932;
Reuters Messaging:
barbara.hm.lewis.thomsonreuters.com@reuters.net))
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