Euromoney Zimbabwe Investment Conference 2012

The second annual Euromoney Zimbabwe Investment Conference was held in Harare on 21 and 22 March. The first morning of the conference was taken up by speeches from Ministers. The Minister of Finance, Hon Tendai Biti, announced that Government had finalised a debt retirement/settlement strategy for presentation to international creditors. He also announced that Government is looking for an investor/technical partner for Air Zimbabwe. Government wishes to retain a 26% shareholding in the airline but will allow a technical partner to take a majority shareholding.

The Minister of State Enterprises and Parastatals, Hon Gorden Moyo, said that Government is moving ahead with plans for the commercialisation and/or privatision of state enterprises and parastatals. Public/private partnerships are open for discussion and, according to the Minister, a policy framework is in place.

Minister Biti addressed the thorny issue of indigenisation and said that a 51% majority shareholding by indigenous Zimbabweans in businesses is stated in the Act to be an objective. He described it as an aspiration. It is a general message and is not cast in stone. He made it clear that, in his opinion, there is no question of indigenising foreign-owned banks. He also emphasised that Government will not unilaterally seize or take over any foreign investment.

The Minister for Economic Planning and Investment Promotion, Hon Tapiwa Mashakada, placed emphasis on Zimbabwe’s economic growth rate, which is targeted in the Government’s Medium Term Plan to average 7% per annum over the next 5 years. He referred to Zimbabwe’s diversified economy, its undervalued assets and its strategic geographic location. Government’s target is to raise annual investment levels from the current level of 4% of GDP to over 25% by 2015.

Key areas of discussion during the conference included the financial sector, financing investment and the need for investment in Zimbabwe’s infrastructure. Topics covered included the need for development of a market for bonds in Zimbabwe, the creations of links between the Zimbabwe Stock Exchange and regional and international markets and exchanges, and the involvement of development financial institutions in financing infrastructure development in Zimbabwe. For example, the Development Bank of South Africa is currently involved in providing finance for the development of the road from Mutare to Plumtree through Harare and is looking at the financial requirements for the Beit Bridge-Chirundu highway (the Northern Corridor).

The general impression given at the Conference was that there is an increasing level of interest among international investors in investment opportunities in Zimbabwe. Zimbabwe is increasingly seen as both a viable long-term investment destination and a key part of the southern Africa region. However, emphasis was still placed on investors’ needs for policy consistency and predictability, about which concerns remain for Zimbabwe. Although they were not specifically mentioned – in fact the topics almost seemed to be avoided – investors clearly retain concerns about indigenisation rhetoric and political uncertainty in Zimbabwe, particularly with regard to forthcoming elections.

Business and Economic News Snippets

It was announced last week that the Commercial Farmers Union (CFU) and the Bankers’ Association of Zimbabwe (BAZ) are working on a financing arrangement involving the use of real estate as collateral in order to obtain long-term financing from international investors for the country’s productive sector. The arrangement, according to the BAZ, would involve the creation of a cluster that would pool together real estate assets held by the banking sector as security against loans they have made to customers. However country risk needs to be underwritten.

New Dawn, a mining company quoted on the Toronto Stock Exchange which has several gold mining subsidiaries in Zimbabwe, has announced that it is working with indigenous investors to sell them 36% of its equity as part of its indigenisation plan. An additional 15% will be transferred to an employee share ownership scheme. New Dawn intends to use the additional capital to increase its annual level of gold production in Zimbabwe to 100 000 ounces by December 2014.

A World Bank report has said that the development of coalbed methane gas in the Lupane area of north-west Zimbabwe has the potential to increase the country’s energy generation capacity, provided enabling policies are put in place to attract investors. The project is seen as a good candidate for a public-private partnership and could start generating revenues early from an initial relatively low-level and low-risk investment.

ZABG Bank, a small and struggling commercial bank, is to be restructured and renamed Minerals and Miners Bank, with a 30% shareholding in the bank being taken by the Zimbabwe Mining Development Corporation, a parastatal, and 49% being taken by South Africa-based investors.

Tobacco prices on the auction floors in Harare are higher than last year, due to a reduction on global production. The Minister of Finance, Hon Tendai Biti, has estimated that tobacco sales this year should reach US$ 300 million.

Zimplats – What Exactly Happened?

Last Tuesday was the deadline set by the Indigenisation Minister, Hon Saviour Kasukuwere, for Impala Platinum to agree to hand over 29,5% of its shares in Zimplats to the National Indigenisation and Economic Empowerment Board (NIEEB) in terms of Zimbabwe’s indigenisation legislation. But what exactly did happen? It is interesting to follow local press coverage of the issue over the last week.

On Tuesday 13 March NewsDay reported that Implats was expected to cede a 29,5% stake in Zimplats to the Government. The report repeated the Minister’s insistence that Government would not pay for the shares and that Government wuld not hesitate to nationalise those companies that do not comply with the law.

The following day the paper carried a brief report that Minister Kasukuwere and Implats had issued a joint statement that the new Zimplats indigenisation plan presented to the minister meets the minimum requirements of the Act and is acceptable in principle to the Government of Zimbabwe. Other reports mentioned that the plan made provision for 10% of the shares to be held by a community trust, 10% by employees and 31% would be transferred to the NIEEB. However the shares for the NIEEB would have to be paid for and a technical committee would be established to work out the details of the share transfer, including the valuation of the shares.

Press commentary in Zimbabwe, up to today, has suggested that Implats has merely handed over the shares. However matters became clearer on Friday 16 March with a report in the Daily News that the 31% shareholding would be made available to the NIEEB for a cash purchase, but only after Zimplats has been compensated for reserves containing 51 million ounces of platinum it returned to the Zimbabwe Government in 2006 in exchange for empowerment credits. At the time these reserves were valued at US$ 153 million. Based on Zimplats market capitalisation the total cost to the Zimbabwe Government would be in the region of US$ 500 million.

NewsDay on the same day quoted the CEO of Implats, David Brown, as saying “If they don’t come up with the cash the stake will not be transferred.” It quoted the 31% shareholding as being worth US$ 372 million on current market capitalisation of Zimplats.

The following day, NewsDay carried a report in which it was stated that the Bilateral Investment Protection and Promotion Agreement (BIPPA) between Zimbabwe and South Africa would require the Zimbabwe Government to pay fair value for the shares, and that fair value, taking into account the net present value of the Zimplats Phase 2 expansion, planned future investment and the value of existing platinum reserves, would be well in excess of their market value.

The conclusion in the press is that the Zimbabwe Government will have to pay somewhere in excess of US$ 500 million for the offered shareholding in Zimplats. Two things are clear – Implats is not simply going to hand over a major stake in Zimplats, and will never do so, and the Zimbabwe Government is not likely to have either the ability or the desire to pay the equivalent of some 5 – 6% of GDP simply to take control of one platinum mine.

This matter may be some way from a final conclusion. The Minister may yet return to the fray and demand some other financial arrangement for payment for the shares. But in the meantime he has agreed to the above arrangement. It may be significant that in the past few days his focus has moved from the mining sector to talking about indigenisation of foreign-owned banks in Zimbabwe, a matter on which he is strongly opposed by the both the Minister of Finance and the Governor of the Reserve Bank. And Implats remains firmly in control of Zimplats.

High Noon at Zimplats

Tuesday is the deadline that the Indigenisation Minister, Hon Saviour Kasukuwere, has given Impala Platinum in South Africa to surrender 29,5% of the shares in Zimplats. On 7 March the minister claimed that Impala had made an “irrevocable offer” to hand over the shares, but this was subsequently denied by Impala. Seeing as the minister has also said that the Zimbabwe Government will not pay for the shares, it would seem unlikely that Impala would just hand over some US$ 300 million worth of shares simply at the minister’s demand.

The Impala Platinum board of directors was due to meet on 9 March to discuss the matter. No comment has been forthcoming.

Zimplats indigenisation plan has been reported to be to give a 10% shareholding to local communities, 5% to a staff share trust, 6,5% to the proposed Sovereign Wealth Fund and the balance of 29,5% – making a total of 51% – to be retained as empowerment credits in terms of an agreement made with the Zimbabwe Government in 2006, by which Zimplats released to the Government US$ 153 million of platinum reserves for which it had mining claims. This has been rejected by the minister who has said that the 2006 agreement is not considered to be binding in this case.

The minister has threatened to use “enforcement measures” if Impala does not comply with the demand to cede the shares. This is the big question – what enforcement measures will the minister use? He does not have any powers under the indigenisation legislation to effectively nationalise the company. One possibility could be to use the same legislation under which the Zimbabwe Government some years ago took over the shareholding of Shabanie Mashaba Mines from a Zimbabwean businessman, Mutumwa Mawere. I do not have the details to hand, but I recall that the grounds on which the Government took over SMM were that Mr Mawere was alleged to have illegally externalised a large sum of money and to have engaged in corrupt practices.

Where the minister may face some difficulty is that press reports are suggesting that he and the Minister of Mines, Hon Obert Mpofu, differ over his actions against Zimplats. Also to bear in mind are the statements I have previously mentioned made by the South African Department of Trade and Industry that Impala’s interests in Zimplats are protected by a Bilateral Investment Protection and Promotion Agreement between the two countries. Minister Kasukuwere is rather on his own in this matter but that does not necessarily mean that he will back down from this confrontation. It seems unlikely that Impala will either. Let us see what happens on Tuesday.

Looking for Investors in South Africa

While Minister Kasukuwere has maintained his pressure on the platinum mines, other members of the Zimbabwe Government have been taking part in a two-day Zimbabwe Investment and Trade Conference in Gauteng province in South Africa aimed at attracting foreign direct investment from South Africa into Zimbabwe. The theme of the conference was “Invest in Zimbabwe, Invest in a Resource-Rich and Growing Economy”. The Prime Minister, Hon Morgan Tsvangirai, did refer to “wild political jingosim and unmitigated cowboy attitudes” as having never been a “proper substitute for a true investment and empowerment plan for the people.” He said that there is a need for a “delicate balance between investment promotion and the need to empower people.”

The South African Ambassador to Zimbabwe, Vuvi Mavimbela, expressed his conviction that many bridges of interaction and engagement should be built between South Africa and Zimbabwe.

The investment conference appears to have had some positive results. Apart from ARM’s announcement of its interest in the platinum mining sector in Zimbabwe, there has also been an announcement of possible interest by investors in the re-opening of the currently closed tin mine at Kamativi in north-west Zimbabwe as well as other mines in the vicinity. Kamativi closed in 1994 due to viability problems arising from depressed world market prices for tin. Potential investors are also reported to have expressed interest in taking over ZABG Bank, a small and troubled bank in Zimbabwe, and using it to focus on financing mining activities. A revolving fund of R 500 million pledged by South Africa for business finance in Zimbabwe is also in the process of being put into operation. This is related to the Bilateral Investment Promotion and Protection Agreement (BIPPA) between the two countries.

More on Indigenisation and the Mining Sector

The Minister for Indigenisation, Hon Saviour Kasukuwere, has continued to apply pressure on the platinum mining sector to indigenise their operations in Zimbabwe. He has demanded that Impala Platinum (Implats) shiould surrender to the Zimbabwe Government its shareholding in Mimosa Mining, where it is in joint ownership with Aquarius Platinum, another South African mining company. He has also demanded that Implats should transfer 29,5% of its shareholding in Zimplats to the National Indigenisation and Economic Empowerment Fund within 14 days. Failure to do so would result in “enforcement mechanisms” being activated. He has also written to Anglo-American Platinum in South Africa requiring it to conform with indigenisation requirements for its Unki Mine in Zimbabwe as a matter of urgency.

As I have said before, the indigenisation legislation in Zimbabwe does not in fact give the Minister any power to seize shareholdings or withdraw operating licences for failure by a foreign-owned company to submit an acceptable indigenisation plan or to comply with demands such as those being made. This is becoming a very high-stakes game of poker, with one question being, is the Minister bluffing or will he resort to unilateral action that could be challenged in international courts?

At last, however, it seems that the South African Government is taking a direct interest in what are direct threats against major South African companies. The Director-General of the South African Department of Trade and Industry, Lionel October, said last week that the country’s Department of International Relations and Co-operation is involved in negotiations with the Zimbabwe Government to ensure that South African investments in Zimbabwe are protected in terms of a Bilateral Trade and Investment Treaty between the two countries that was ratified last year. He said that “The bilateral agreement is law. That is sacrosanct and we have been given the undertaking that it will be upheld.”

What happens next remains to be seen. Is it significant (or merely bold) that another South African company, African Rainbow Minerals (ARM), which is controlled by South African entrepreneur Patrice Motsepe, has announced its intention to look into possible investments in the platinum mining sector in Zimbabwe?

Zimbabwe Monthly Economic Review – Feb 2012

The African Development Bank has published its Monthly Economic Review for Zimbabwe for February 2012. As usual the link to the full review is available on this site. Highlights of the review are as follows:

Increasing exports of diamonds to India from Zimbabwe have caused a decline since November 2011 of about 25% in the price of rough diamonds.

As I have mentioned in previous posts, the level of total banking sector deposits has continued to rise slowly. According to the AfDB review, 57,4% of deposits are demand deposits, 33,0% are savings and short-term deposits and 9,6% are long-term deposits. The review comments that “this composition of bank deposits in unfavourable for long-term investment given the asset liability mismatch.” The overall loan-to-deposit ratio in the banking sector in December 2011 was 87,4%. Given that some banks will be more conservative in their lending and that there is also a risk of non-performing loans, it seems clear that there must be a number of banks in Zimbabwe which are over-extending their loan book and are therefore at severe risk.

Revenue collection in 2011 by Government reached US$ 2,92 million, with Value Added Tax at US$ 911,7 million being the largest contributor to gross revenue. Total expenditures for the year were estimated to be US$ 2,89 billion.

The Zimbabwe Stock Exchange continues to be affected by political and economic uncertainty. The Mining Index dropped to 70,09 at the end of January 2012, its lowest level since 2009. In early 2011 it reached levels close to 250 before starting a steady decline in March, co-inciding with the announcements on indigenisation of the mining sector. The Industrial Index closed at 138,52 at the end of January, the lowest level since August 2010. However turnover value recorded its highest level since July 2009, with 383,2 million shares traded during January, with a value of US$ 55,8 million.

The Banking Sector Under Pressure

The banking sector has experienced serious liquidity constraints over the past two months. One result has been delays in processing payments for customers, adding to perennial cash flow problems experienced by many businesses. There are a number of reasons for these constraints, including a high percentage of non-performing loans in some banks, high loan-to-deposit ratios, under-capitalisation on the part of smaller banks and funds being held by banks offshore in nostro accounts. Policy measures to address the situation have been announced by the Minister of Finance, the Reserve Bank of Zimbabwe and the Bankers’ Association of Zimbabwe. However one under-lying problem remains the large number of weak banks in Zimbabwe.

There are 19 registered commercial banks in Zimbabwe, 3 merchant banks – one of which is presently under curatorship – and 1 savings bank. Of the 19 commercial banks 7 have a majority foreign ownership. At least 6 of the commercial banks are considered to be at risk of insolvency, while at the other end of the scale, the 6 biggest commercial banks hold over 70% of deposits in the banking sector.

At the beginning of this month total banking sector deposits were US$ 3,45 billion while total loans were US$ 2,78 billion. It has been estimated that in the stronger banks the percentage of non-performing loans is around 5%. In the weaker banks it will be considerably higher. The Reserve Bank of Zimbabwe has not been filling the role of lender of last resort. A Lender of Last Resort Fund has now been established by the government, with US$ 30 million. The Reserve Bank Governor, Dr Gideon Gono, estimates that an amount of US$ 150 million is needed for this purpose. The Reserve Bank is setting up a Special Purpose Vehicle (SPV) for the purpose of mobilising finance for the Lender of Last Resort Fund.

Business and Economic News Snippets

Telecel Zimbabwe has announced plans to invest more than US$ 70 million in the expansion of its cellular telephone network in the country. Telecel is the country’s second-largest cellular network operator and is a subsidiary of Orascom Telecom Holdings, which owns a number of African cellular telephone companies.

While Telecel is expanding, the state-owned cellular network operator, Net One, is continuing negotiations with the South African group MTN regarding MTN’s bid to acquire Net One. The negotiations are reported to have become bogged down in issues related to indigenisation, evaluation and strategic considerations and alleged demands for a bribe from a Zimbabwean cabinet minister. Net One needs to increase its capitalisation in order to expand its operations and needs a foreign partner for this purpose.

West Group, a group involved primarily in retail activities, is investigating the possibility of using methane generated by rotting rubbish at city rubbish dumps for electricity generation. The group has said that it has an investor committed to the project, which could generate up to 10 MW of electricity. West Group is also involved in the development of a major shopping mall near Borrowdale, a suburban area north of Harare, and has announced its intention to list on the Zimbabwe Stock Exchange through an IPO within the next 14 months.

The Government has announced plans to develop a new convention centre at Victoria Falls, approximately 6 km south of the town.

The Tobacco Industry Marketing Board estimates that Zimbabwe will export 140 million kg of tobacco this year. However this figure is almost certainly over-stated. TIMB’s estimates are usually high and a figure of 110 – 120 million kg is probably more realistic.

Emirates has started flying into Harare. The service links Harare with Dubai.

Afrasia Bank Ltd, a Mauritian banking group, has taken a 35% shareholding in Kingdom Financial Holdings, which will provide much-needed capital to Kingdom Bank. ABL’s CEO, Mr James Benoit, has described the acquisition as forming a core part of the group’s expansion into the region.

The Minister of Economic Planning and Investment Promotion, Hon Tapiwa Mashakada, has announced that the Zimbabwe Investment Authority approved projects worth US$ 6,6 billion in 2011. As has been said before, however, there is a large gap between project approvals and actual investment of money. Projects in the mining sector were worth US$ 3,68 billion and in tourism US$ 1,58 billion. Manufacturing projects were valued at US$ 670 million.

The Government has announced plans to raise US$ 50 million for infrastructure rehabilitation through the issuance of Infrastructure Development Bonds through the Infrastructre Development Bank of Zimbabwe. The bonds will have a 5 year tenor and a coupon of 10% per annum. While the concept cannot be faulted, rehabilitation of Zimbabwe’s infrastructure will require far more than US$ 50 billion. The African Development Bank said in a report last year that US$ 14,2 billion is required for this purpose in the next 10 years. This is just a start.

Developments in the Mining Sector

The Government recently announced vastly increased fees for the mining sector. Application fees for prospectors for platinum claims, for example, have been increased from US$ 200 to US$ 500 000. The fee for registration of diamond claims has been increased from US$ 1 million to US$ 5 million. Government has said that the increases have been introduced to curb speculative activity in the mining sector. Not surprisingly small-scale miners have objected strongly as they see it as a way of getting them out of the mining industry in favour of major mining houses. Economists have warned that the new fees will also be a disincentive to large-scale mining concerns and will affect the cash flows and profitability of existing mining enterprises.

Caledonia Mining Corporation has announced plans to increase production at its Blanket Mine and to develop several nearby satellite mining projects. It has also announced plans to sell a 51% shareholding in Blanket Mine to indigenous partners, including the National Indigenisation and Economic Empowerment Fund, management and employees and a local community trust. The transactional value is reported to be US$ 30 million.

A Canadian mining company with dormant interests in Zimbabwe, Conquest Resources, has transferred control of those interests to a UK company, Mayfair Mining and Minerals, in exchange for a significant shareholding in that company, with the intention that Mayfair will reactivate those interests, which include the companies Africa Gold and Baobab Minerals.

A fourth company, Diamond Mining Corporation, has been certified by the Government to sell diamonds it has been mining in the Chiadzwa alluvial diamond fields. Diamond Mining Corporation is a joint venture between the Zimbabwe Mining Development Corporation and a Dubai-based company, Pure Diamond.

It has been reported that the Ministry of Indigenisation intends to take over and warehouse a 51% shareholding in Falcon Gold, a subsidiary of New Dawn Mining. The Ministry has alleged that the group attempted to circumvent the indigenisation process by transferring claims to a newly registered subsidiary without authority. While it is the case that the indigenisation legislation requires all share transactions carried out by non-indigenous companies to be approved by the Ministry, and there are penalties for non-compliance with the law, there is due process to be followed and it can be argued that Government does not have the power to simply take over a majority shareholding in a company that does not comply with the law. Whether this is a case of over-zealous behaviour on the part of the Ministry or inexact reporting by the local press remains to be seen, but this is a further example of how the indigenisation policy will deter foreign investors.