Why First Quantum should take over KCM
12/10/2014 0 Comments
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By Brian Mulenga
KOMKOLA Copper Mines (KCM) is obviously in dire straits, KCM seem to have reached the end of the road and in my opinion should cash in their chips while the going is good, the reasons for these are many and varied but the following things stand out. Some of the issues which have hit KCM hard are:
1. VAT REFUNDS
KCM are owed around US$150 Million in VAT Refunds the constraints this is putting on operations is severe because the VAT refunds are equal to one and a half months revenue.
Imagine going for work and one eighth of your salary is just withheld over a technicality, KCM needs this cash and they need it badly as their business is hemorrhaging cash at the moment.
2. DEBT
KCM have debts of around US$1.6 Billion against assets of US$1.5 Billion a lot of this debt is short term and is in form of liabilities to suppliers etc, KCM are basically not liquid at the moment, Their cash flow situation is dire and their debts are mounting and yet they need to invest heavily to modernise the business.
3. REVENUE and COST TRAP
KCM are in a revenue trap, Copper prices are not going to increase in the foreseeable future in the next 2-3 yeas according to most forecasts.
Cash costs at KCM are however high with Konkola and Nchanga undeground operations both being high cost operations and they have also have had design issues in their refinery with ore blending issues causing lower than expected recoveries.
So they are in a chicken and egg situation, they need to produce more to increase revenue but this will also raise their unit costs as it will mean running their high cost operations flat out.
The cash costs are also very high for KCM because KCM borrowed heavily to bring Konkola Deep online and they are trying to do catch up maintenance and rehabilitation on their rather old existing infrastructure. A catch-22 if there ever was one.
4. LABOUR RELATIONS
Out of all the big mines Mopani, Lumwana, KCM and FQML, KCM definitely have the worst labor relations and generally speaking are considered to be not very good employers.
Massive outsourcing has shifted labor costs to contractors and even the contractors are being squeezed in an effort to reduce costs.
Results poor labor relations, in a bid to cut costs KCM have been grabbing at any means to reduce their high labor costs and have ended up going for quantity over quality and it is the general consensus that the contractors at KCM are generally of a lower standard than at the other big mines and have gotten jobs due to their bidding very low.
The results have been not optimal at all, poor quality work and low productivity.
KCM have also not been able to cut labor costs directly due to the socio-economic impact this would have and the political ramifications, cutting the workforce by a large number is simply not a viable option.
5. KONKOLA DEEP
Scuttlebutt on the mining scene says this is a brilliant project that was executed badly, ZCCM spent millions of dollars designing and preparing for this project but were not able to raise the finances to carry it out for various reasons. KCM took it over and have spent US$900 Million bringing it to fruition however there is a caveat.
In a quest to cut costs, the original ZCCM designs were changed and apparently even these changes were again altered.
The result Konkola Deep, the much touted savior and guarantor of KCM is not producing the volumes of copper ore it was supposed to as the shafts and mine design are not the best due to changes made to save money during the construction and drilling phases of the project.
Unconfirmed reports say another US$100-200 Million may be needed to fix Konkola Deep.
6. THE AGGARAWAL Factor
Some ill-considered remarks at a business functions where the Vedanta Chairman was actually trying to make the point that nothing ventured nothing gained i.e. in business you cannot do anything if you don’t take the risk made him unfortunately the poster boy of the NGOS and other groups that insist the multinationals ripping off Zambia.
This single unfortunate event changed how KCM was viewed by the Zambian public. The PR damage is considered irreparable.
WHAT ARE THE OPTIONS FOR VEDANTA
A. VEDANTA SELLS KCM
Whatever price Vedanta can get for KCM it is highly unlikely it will be as cheap as the U$25 million it paid for it. Considering the PR issues and generally bad press as well as all the operational difficulties, Vedanta would dearly love to get rid of the KCM story.
B. HIGHER COPPER PRICES
Unfortunately this is not likely to happen as the world markets are awash in copper, If it did happen, KCM would break its cost and revenue trap.
C. GOVERNMENT TAKE OVER OR BAILOUT
GRZ taking over KCM would require increasing the National Debt by maybe another US$1 Billion, however the appetite for parasternal adventures in GRZ is very limited, this would be a last resort.
D. VEDANTA CASH INJECTION
Vedanta does have the cash and could possibly do it. They however do have other fish to fry, It is possible Vedanta may shy away not because they do not have the cash but possibly they may not have the technical know-how to pull off a turnaround.
My preferred option is A. Vedanta sells and my preferred buyer is FQML.
FQML have grown with the Zambian economy and their rise in the mining industry has mirrored that of the Zambian economy.
Tightly controlled, well run and familiar faces in the Zambian market KCM would increase FQML production across the group from 450,000 tons to 600,000 at one swoop.
Second it would need only US$300-400 Million to make it right.
Third FQML have the financial muscle to swap the US$1.6 Billion debt KCM has to lower interest rate and longer maturities. Fourth FQML have proved that even in the high cost Zambian environment running a mine cost effectively and efficiently can be done
Fifth- Labor relations can only get better.
Sixth- Smelter FQML can use KCM smelter capacity without tolls and integrate it with its operations I am not a metallurgist and cannot say whether this would solve the current blending problems but FQML have a track record of fixing problematic mines and smelters.
Seventh-Konkola Deep. As I said FQML have a history of fixing mines, it would be fantastic if this great project was turned around and done right.
So there we have it that is why I feel Vedanta should sell KCM and why FQML should buy it. Finally I wish ZCCM-IH would also sell its 20 per cent of KCM on LuSe when this takeover would take place.
Finally us Zambians would get a chance to own a piece of a mine!!!