Mopani Copper Mines Plc – Understanding the key terms of the deal

The deal that we had all been waiting for was finally announced by the Board of ZCCM Investments Holdings Plc (“ZCCM-IH”) that they had finally selected an equity partner for Mopani. However, this deal seems to have raised more questions and criticism on the Government of the Republic of Zambia (“GRZ”) and as opposed to kick starting a new era of development on the Copperbelt province of Zambia and contribute to the much-needed forex inflows into the Zambian economy to stabilise the stubborn and volatile foreign exchange rate (“FX rate”).

• Many have asked whether the deal was money’s worth?
• The other question that others have asked is why there was no transfer of actual cash to ZCCM-IH/GRZ for the acquisition by IRH of the 51% equity stake in Mopani Copper Mines Plc (“Mopani”)?

We must be alive to the fact that this was a complex deal owing to the legal and political battle that ensued after ZCCM-IH took over the mining operations and the huge existing debt and other liabilities that Mopani owed to Glencore which kept on accruing in interests and penalties for non-payment as the days went by. The analysis below will attempt to answer these very important questions.

As per the announcement issued by Stock brokers Zambia Limited (dated and issued on 22 December 2023), it was announced that the Board of Directors of ZCCM-IH had selected International Resources Holding RSC Limited (“IRH”) as their preferred Strategic Equity Partner for Mopani. The key features of the Transaction are set out below.

IRH committed to invest a total of US$1.1 billion to finance Mopani’s capital development plans, provide working capital and restructure the existing Glencore liabilities. The total consideration is US$1.1 billion split between equity and debt in the following proportion:

• US$620 million in new equity;
• US$300 million as a shareholder loan by way of novation of part of the debt owed to Glencore (the former shareholders;
• Up to US$100 million for settlement of the Glencore procured letters of credit;
• Up to US$80 million in shareholder loans, if required.

US$620 million Equity Investment into Mopani

IRH, through its wholly owned subsidiary, Delta Mining Limited (“Delta”), are meant to provide an equity investment of US$620 million through the subscription of new shares in Mopani. Delta would thus subscribe for 7,181,633 shares, ?issued at $86.33 a share which was the subscription Price. What this means that is this was treated as a primary transaction? and not secondary transaction. In Finance, a primary transaction involves the issue of new shares by a company for the first time and therefore, the double entry for this transaction would be to pay cash directly to Mopani and the other entry would sit as equity on the Mopani balance sheet/statement of financial position. This explains why there was no transfer of actual cash to ZCCH-IH/GRZ. If there was no issue of new shares and the exchange was only between ZCCH-IH (which held 100% of the issued shares in Mopani at the time of the transaction), this was going to be treated as secondary transaction and the cash/funds would have been transferred to ZCCH-IH/GRZ as the exchange/transfer of shares was only going to take place between two shareholders.

The shares issued to IRH constitute 51% holding of the entire issued share capital of Mopani, with the balance of 49% being held by ZCCM-IH. The point to note here is that IRH are the majority ?shareholders and will have the most votes/final say on matters involving the strategic direction of business.

The equity investment will be used to undertake capital projects, and to stabilise the working capital position of the business. However, it is imperative to note that the US$620 equity investment will not all be paid at once. This will be paid in tranches/phases in line with the Project Development Plan for Mopani. As you may understand, capital projects take long to complete, therefore, this would take a couple of years, but the Minister of Mines indicated when he appeared on a program on Diamond TV that this might be achieved ?by 2027.

US$400 million of loans to Mopani? (Glencore and Mopani debt Capital Restructuring)

IRH will provide a further US$400 million in shareholder loans by way of novation of the Glencore debt. Well, what is a novation??A novation refers to the process of substituting an existing contract with a replacement contract, where the contracting parties reach a consensus. One of the contracting parties in the original contract is replaced by an entirely new party that assumes the rights and obligations of the original party. Often Banks use novation to transfer loans or other debts to different lenders. This typically involves cancelling the contract and creating a new one with the exact terms and conditions of the old one. We understand that as part of the overall restructuring of Mopani’s balance sheet, an agreement was reached between IRH, ZCCM-IH and Glencore to restructure US$1.5 billion of debt owed to Glencore ?that resulted when ZCCM-IH acquired 100% of Mopani in 2021, as well as up to US$100 million of the letter of credit support that had been provided to Mopani by Glencore since ZCCM-IH’s acquisition. Approximately US$400 million was used as part of the consideration to settle the original Glencore Debt of US$1.5 billion plus interest and the Glencore Senior procured letters of credit.? What this simply means is that IRH paid off the loans/debt owed to Glencore on behalf of Mopani? in full as part of this deal. It is my understanding that since the US$400 million investment was by way of a shareholder loan and not equity, Mopani now owes IRH $400m?..a question for the Minister of Mines is to inform the Nation of the terms of this shareholder loan and if there is any moratorium or if interest payments have commenced already?

IRH will also, subject to certain conditions precedent, make available additional shareholder loans, if required, to support Mopani’s working capital and short-term liquidity requirements.

Furthermore, the executive management of MCM will be retained and will be supplemented by industry experts from IRH with the relevant skills and expertise to complete Mopani’s capital projects and turnaround its operational performance and increase production output from its current estimated levels of below 70,000 metric tonnes to over 250,000 metric tonnes in the next few years.

A new Board of Directors, reflective of the revised shareholding structure i.e., 51% and 49% to IRH and ZCCH - IH respectively would be constituted. This means that IRH are the majority ?shareholders and will have the most votes/final say on matters involving the strategic direction of business.

In conclusion, in my view, from an investment and moral point of view and considering the economic situation of the country, taking into account the significant drop in copper production and exports since ZCCM-IH took over the operations of Mopani which has had an impact on the FX rate/foreign reserves, the huge debt liabilities that Mopani owed to Glencore which kept on accruing in interests and penalties for non-payment as the days went by, and the political and legal battle that ensued after ZCCM-IH took over the mine, the deal is one that all well meaningful Zambians should welcome as it breathes new life into Zambian economy. I would like to think the GRZ team searched their souls and had to make? a moral investment decision that would better the lives of the citizens of Zambia.