THE competitiveness and sustainability of Zambia’s mining sector needs to be reviewed and improved to encourage greater investment and increased mineral production, an energy sustainability risk expert has said. Thilasoni Chikwanda, who is also former sector leader for SSA, says there is an opportunity for the government to attract more investment in mining and its supply chain particularly with the recent framing of a local content policy.
“Such policies will be fruitless in a declining and hostile sector. Further growth in the mining and mining goods and services sector can only generate greater taxes and foreign exchange for the economy which will increasingly be needed in the future. These taxes and foreign exchange can only be sustained if mining is a sustainable business,” Chikwanda said.
“A high risk mining environment increases the cost of capital for mining and the hurdles for new investment. This also impacts the overall cost of capital in Zambia as mining risks translate to currency risks, inflations, high cost of credit, etc. Zambian businesses and consumers will suffer the greatest from these risks and it takes a long time for them to recover while mining companies are better placed to hedge and control the pain through various financial instruments available to them on the international markets.”
Chikwanda added that the “highly politicised and complicated legal pursuit” of the insolvency Act on KCM had the potential of bringing the mining business into financial and operational crisis.
“It’s highly probable that Vedanta has started preparing for legal proceeding in a neutral legal jurisdiction particularly in the UK against ZCCM-IH. So the legal stand-off could take a while to resolve during which time the uncertainties around KCM will escalate. If Vedanta were to be successful in such a case in the UK and awarded compensation, the cost and liability to ZCCM-IH/Zambia could be significant e.g. Lapgreen in Zambia and KMT FQM in DRC,” he said.
Chikwanda noted that the mining and management expertise of the provisional liquidator, Milingo Lungu, was untested and had no prior experience in managing a liquidation of such magnitude, creating significant uncertainty about the status of the management in place at KCM and the ability of the liquidator to manage highly technical and complex industrial operations.
“This possesses a high technical and operational risks for one of the country’s most strategic mining assets which produces 20 per cent of the mineral output,” he said.
“This output is at risk and could be a source of liabilities for ZCCM-IH. If impaired and operations collapse, how long will it take to achieve legal and financial closure (including the conclusion of an acquisition)?”
He added that direct and indirect jobs losses were a highly probable risk in the near term should the KCM situation be mismanaged and not settled timely.
” … there are legal, financial, operations and management risks that could trigger job losses though this could be temporary until legal and financial closure (including the concluding an acquisition). KCM is an economy with multiplier effects. A collapse of the KCM economy will be very devastating for families in Chingola, Kitwe, Chililabombwe and Nampundwe,” he said. “This could result in social and political unrest in these towns which could spread as other mining companies streamline operations.”
Chikwanda said Zambia is managing and charging too many risks in the mining sector and not providing enough opportunities, and proposed that KCM – ZCCM-IH could consider pursuing its objective under business rescue proceeding as opposed to liquidation.
“Under business rescue, qualified people can be contracted to run operations. Accountants can be employed to audit KCM from inception, establish how much genuine profits were made and pay all dividends which were not paid, pay all creditors etc and if illegalities are found, then resort to the liquidation route,” stated Chikwanda.
“At least if this is done, everybody will have been paid and Zambia remains with an intact asset.”