Jeu 30 Déc 2010 12:50
Floatation of KCM is Gold for Vedanta
Floatation of KCM is Gold for Vedanta - What about the Zambian people?
By Prof Clive Chirwa
Sun 05 Dec. 2010, 04:01 CAT
ALL of us are rejoicing at the announcement by Vedanta Resourses to IPO (Initial Public Offer) or float its ordinary shares to institutional investors in the United Kingdom and other parts of the world excluding the USA, Canada, Australia and Japan before considering listing on Lusaka Stock Exchange. Ministers, mineworkers unions, directors are all pumping up the volume hailing the government for the favourable investment climate in our mining industries because the KCM flotation indicates good investment conditions for the country. Is that the case?
As a tough, prosperous and shrewd capitalist, I was extremely pleased to hear the announcement and I am looking forward to buying the ordinary shares in droves once Vedanta Resources Plc has been granted admission to officially list on London Stock Exchange under a new trading name of Konkola Resources plc.
My question however was simple and plain. What about the ordinary people of Zambia who own the majority of ZCCM-IH plc, what are they getting out of this?
To answer it, I went to dig deep, as I always do before buying any shares, because I have been burnt in the past and as a result lost all what I invested.
For all of us, the reason for investing must be to benefit the company in question as it embarks on a new road to prosperity and in the process makes money.
What I have found concerning the floatation application by Vedanta on KCM raises a number of issues that need rectifying now so that the ordinary people of Zambia who are majority share holders in ZCCM-IH Plc that has 20.6 per cent in KCM do not lose out in the black hole of globalisation by large institutions who will be new shareholders.
This is just my curiosity that is based on my twenty years experience as a share holder of scale in many global companies. If I was the government, I would “Ring Fence “my majority shares in KCM and let Vedanta and all the share holders in Investments Holding (IH) speculate their shares.
Indeed Mr Arawal, the executive chairman told Dow Jones of USA that Vedanta plans only to publicly list 25 per cent of KCM as it wants to maintain a majority stake in KCM. What percentage will ZCCM-IH commit to IPO?
The way I see this unfolding is Vedanta will push the government to float its entire share on LuSE (Lusaka Stock Exchange) and then buy the shares through some offshore formed company.
This formula has been used by many companies operating both in developing and developed countries.
In the end the Vedanta KCM’s 25 per cent share flotation on LSE will generate the needed cash to partly finance the acquisition of 51 per cent of Cairn Energy of India valuated at £3.75 billion.
KCM has been tabled as a guarantee by Vedanta to a consortium of lenders including the Royal Bank of Scotland, Barclays Capital, Citi, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and Standard Chartered for the acquisition of Cairn Energy.
In addition the cash is intended to pay off dividends to all the share holders and pay off KCM’s US$782.2 million net debt as of 30 September 2010.
There is a warning tag that has been tied around KCM’s neck by the financial institutions who scrutinise every IPO. For this floatation, as observed by Fairfax; an innovative international investment bank, the cash costs appear relatively high for large operation and will require economies of scale as a means to reduce this. This should not deter investors as I can see a steep valuation.
Let us now return to ZCCM-IH and see how it will benefit this public company as KCM floats on LSE and LuSE.
The first thing any investor will notice in the application document is that KCM shares are clearly stipulated to be 79.4 per cent and ZCCM-IH is quoted to having currently 20.6 per cent shares in KCM.
But after the listing of 25 per cent of Vedanta’s shares on LSE, ZCCM-IH will no longer have that same share quantity it had in KCM.
Indeed according to Vedanta our government is “expected” to remain a “significant” shareholder. By how much, nobody knows.
This to me is alarming because I have seen the British government lose control of its holdings as the open market is ferocious and it is not for the faint hearted.
I am not saying this will happen to Zambia but we must be alert and cautious.
The UK story has been sad especially in automotive industry where a very big chunk of its manufacturing sector has been lost to foreigners who take the proceeds to their respective countries.
For the Zambian people to be certain of a return from their natural resources mined by KCM, we need to publicly know how much we own in the 20.6 per cent ZCCM-IH partnership and what percentage are we floating and what we are “Ring Fencing”.
In case Vedanta successfully floats 25 per cent on LSE and ZCCM-IH floats 20.6 per cent on LuSE, then the ordinary people of Zambia will lose their share in a big way.
There is nothing to stop Vedanta to buy the 20.6 per cent ZCCM-IH are offering on LuSE since this will be done after the LSE has generated enough capital and hence have some liquidity to acquire the 20.6 per cent and bring the new KR and its subsidiary KR Group back to where they started with 75 per cent shares meaning in reality a total control of 100 per cent ownership.
If this happens it will be a disaster and a dark day for the people of Zambia as will they feel cheated. The beneficiaries will only be the closed quarter of Vedanta. Why am I advancing this hypothesis?
The answer is simple. If you look at the application for IPO submitted to LSE by KCM, there is this complex company emerging from the simple clear business with two shareholders.
KCM will become Konkola Resources Plc (KR). Please note that in the floatation document and prior to admission KCM has presented itself under a name SEVCO 5042 Plc.
Nobody knows why. However, underneath Vedanta will be majority shareholder, while ZCCM-IH will be one of the shareholders if not forced to release its shares to global institutions. KR as a listed public company will have a subsidiary KR Group that owns the mines and the welfare of the employees.
In KR Group there is an offshore trust registered in Bermuda called Zambia Copper Investments with 28 per cent shares of all copper and cobalt produced at KCM and the ZCCM Investments that has the government owning 21 per cent.
On top of this there is yet another company the Copper Development Foundations with a stake of 44 per cent in Zambia Copper Investments. Are you following?
How this complex web of companies is going to be played in order to safeguard the natural resources’ revenue for the people of Zambia is not clear.
There are just too many players. No wonder we see KCM making losses on the balance sheet, while in reality KCM operations make enormous profit and Zambia can rightly afford to tax it accordingly.
Zambia today is not collecting enough monies from it’s natural resources, that is the bottom line. There are people who want to confuse the issues of taxation by coupling variable taxation with windfall tax.
These are two different tax regimes that are used by many developed countries including our competitor Chile who have embedded it in DL 600 Law.
Currently Zambia has a tax regime equivalent to corporation tax of 30 per cent; mineral royalty rate of 3 per cent; and Variable profit tax rate of up to 15 per cent of taxable income that is above 8 per cent of agreed gross revenue (if you pay this your corporation tax comes to 45 per cent).
There is also a penalty for late payment of 15 per cent on interest. In effect on average the gross tax is 48 per cent for Zambia.
If the graduated windfall tax that is payable only when the price of copper goes beyond a certain agreed threshold is implemented, then Zambia can collect today an extra 50 per cent on the gross profit above that agreed profit limit. The windfall tax is like a bonus.
It is not paid every year but only when the copper prices yield a large profit way and above the target.
For Zambia this is essential and must not only be enjoyed by the investors alone. It should be a shared bonus based on a 50/50 basis. What else do you need for fairness? We need it back.
The Chilean experience as brilliantly described in a document by Patricio Meller and Anthony Simpasa is similar to ours.
Way back in 1960s, we started at the same level, but en route we made catastrophic errors that have left us so much behind that we can no longer compare ourselves to Chile.
We can now compare ourselves with China, Peru, Indonesia who produce similar levels of copper output. Chile is King.
However, for comparison in taxation Chile has corporation tax of 35 per cent plus an undisclosed remittance tax hidden inside the DL 600 Law.
Chile can afford to collect this tax because all the copper revenue is suppose to some extent to be collected in Chile.
If investors are not happy with tax regime, they can opt for a tax regime known as Tax 69 which allows investors to pay 42 per cent on remittance of profit for a duration of 10 years.
This invariance may be waived at any time, once only, leaving the investor subject to the common regime applicable at the time of remittance, which is 35 per cent plus the unknown tax in DL 600 Law.
If we compare directly, we see that Zambia has a tax regime calibrated at about 48 per cent and from time to time including windfall tax this comes to about 76 per cent on average, while Chile has about 45 per cent with hidden tax in DL 600 Law and with profit remittance tax this shoots up to 85 per cent that is also paid from time to time when profits are high.
[Another difference is that mining in Chile happens through the government owned parastatal, so the collection of taxes is at least possible, unlike with this foreign ownership nonsense. - MrKK]
Although it is difficult to compare the two countries tax regimes, what is clear is that Chile collects more from copper activities than Zambia. The CODELCO Company works much better for the people of Chile than ZCCM-IH works for Zambians.
Therefore, I am making a call to stand back and see if floatation of the ZCCM-IH shares is really in the interest of the Zambian people. Our current arrangement of listings at LuSE and Euronext is perhaps safer.
As a capitalist with a heart, I want to see the government not float its shares until we see the results of the Vedanta IPO on LSE.
The reason being that the disclaimer that accompanies Vedanta floatation Press release which says in parts that everything has a greater degree of uncertainties that may arise from the behaviour of financial and metals markets; Exchange, fluctuations in interest and or exchange rates and metal prices; from future integration of acquired businesses; and from numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive or regulatory nature.
Let us not rejoice so soon.
God bless you all.
http://maravi.blogspot.com/2010/12/stic ... d-for.html
