Konkola Copper Mines (KCM) is one of the largest copper mines in the world. Its flagship Konkola Deep Mining Project (KDMP) could be set to expand copper ore output for 2 million to 7.5 million metric tonnes. Last year KCM generated $1.3 billion in revenues (10 percent of Vedanta’s 2013 revenues) but made an after-tax loss of $89 million on operational challenges and lower copper prices.
A recent Government (GRZ) audit revealed that in addition to being poorly managed, KCM was exposed to $1.6 billion of liabilities - which had exceeded assets by $123 million as at September 2013. On top of having those issues, KCM has also been negatively impacted by the Zambia Revenue Authority’s withholding of VAT refunds and is facing increments in electricity tariffs as well as higher fuel prices. In light of all this, it should come as no surprise that they have failed to pay Copperbelt Energy Corporation (CEC) a $44 million bill which has accumulated over time. Are they still a going-concern?
Here are four scenarios that could sort out the mess they are in – along with the likelihood of them happening:
- Government bailout: GRZ could dip into their coffers and help alleviate KCM’s immediate financial problems in form of mezzanine debt or a larger share of KCM. This could help new CEO Steven Din in his quest to turn around the miners fortunes.
Reason: GRZ is financially constrained, favor less ownership in mines and would be negatively viewed by voting public.
- Copper price rebound: If copper prices miraculously increase to over $8,000 per MT, KCM could earn a lot more off their sales which could get them back on track.
Reason: There has been recent news of an oversupply of copper in China, which is the world’s largest consumer of the commodity – a fact which will not change quickly!
- Vedanta bails out KCM: Their parent company could swoop in and inject the capital needed for KCM to get back on track.
Reason: They have the cash (or can get it) and clout to play a major role in helping KCM which brought in 10 percent of revenues in 2013. However, they also have bigger issues to sort out in India where they have the majority of their operations.
- Vedanta sells their stake in KCM (owns just over 79%): The miner was purchased in a fire sale in the early 2000s for around $25 million subsequent to which they claim to have invested over $2 billion to date. There would be a plethora of suitors armed with cash to make an offer that Vedanta could not refuse!
Reason: A sale makes a lot of sense – Oil and Gas as well as Zinc account for the largest portion of Vedanta’s earnings and are better performers than their mining segment. KCM cannot make major cuts in staff without GRZ intervention, costs (staff, fuel, electricity etc) are increasing, copper prices have dropped – they could decide to sell and focus more on their other more profitable business segments!
Could KCM be bailed out by parent company Vedanta or sold to another mining company? It will be interesting to see what happens next in this saga!
Do you see any other more likely scenarios? You can express your views on the comment section below, on our Facebook page or on Twitter.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *