zambia weekly wrap - february 8 edition

Thursday’s T/bill auction undersubscribed by 53%

The Government raised K422.9 million out of a targeted K900 million at the third Treasury bill (T/bill) auction of 2015. The auction was under-subscribed by 53% with the 364 day T/bill receiving the highest amount of bids:

The 364 day yields spiked by 3.7% from the previous auction to reach a 6-month high of 21.4%. Depreciation of the Kwacha in the first half of 2014 has had a large part to do with the rise in T/bill yields. The central bank also implemented a number of defensive and liquidity-draining moves to help the Kwacha stabilise. Yields showed signs of normalising after August 2014 (as the Kwacha stabilised and strengthened) but quickly spiked into the 20s after President Sata’s death (which led to weakening of the Kwacha with patches of central bank intervention). Yield have remained high after last month’s elections.

The Government will be financing part of the national budget with K3.8 billion of domestic borrowing. Higher yields make domestic borrowing more expensive which puts extra pressure on national coffers. The Government can’t control a market which right now thinks the Kwacha should be trading at around K6.5 - 6.7 against the dollar (probably on lower global copper prices). What they can control is their financial performance by tightening internal controls (which they have been doing), cutting areas of waste, improving operations of the Zambia Revenue Authority (ZRA) and possibly a cut in wages of top tier Government officials. This will improve their financial latitude as well as their global image (more importantly the investor perception of it) which could lead to lower T/bill yields (and strengthening of currency).

New mining tax regime is here to stay – Minister of Finance

Finance Minister Alexander Chikwanda has maintained that the new mining tax regime is final. Speaking when he commissioned the ZRA Mokambo Border housing project in Mufulira this afternoon, Mr.Chikwanda says the new mineral royalty based tax regime has intrinsic value of simplicity. Mr Chikwanda says government is committed to maintaining the employment levels in the mining sector and ensure that copper export volumes do not decline and not least for all mines to stay afloat. Click to read more.

Mineral royalties are forecasted to finance 12.7% of the 2015 National budget so “re-negotiation” or “scrapping” of the new regime was always a longshot regardless of who became president last month. The Government has noted that only two of the major miners have been paying corporate income tax (Pay-as-you-earn doesn’t count because it’s the workers paying it!) consistently with the rest claiming that they’ve been losing money. For such a large industry to not be a significant contributor to national coffers is unacceptable – seeing as the mines are finite and irreparably destroy and pollute the environment in which they operate in.

All the major mines are owned by foreign entities and they are allowed (as part of their investment deal) to easily externalise their profits. Zambians need to become owners in the industry and now might be the right time to do so. With global copper prices falling and increased Government scrutiny, non-traditional copper miners like Barrick and Vedanta could be looking to exit their Zambian assets. There is enough Zambian talent and expertise to run at least a couple of the major mines (if they were to be sold). But, let’s also not forget that mining is CAPEX heavy and any owner would need an enormous amount of funds and access to debt at reasonable interest rates. It is quite telling that no Zambian has ever owned a major copper mine in the 50 years of the country’s existence. Are there any takers out there who can make some of these mines an offer they cannot refuse?

Mealie meal prices remain high despite fuel price cuts

THE Millers Association of Zambia (MAZ) president Allan Sakala has said mealie-meal prices will only come down once transporters reduced transportation costs. Last month, the Government through the Energy Regulation Board (ERB) reduced the pump prices of petroleum products by K2.29 for petrol and K2.59 for diesel representing 23.13 and 28.22 per cent.  Mr Sakala said it was only fair that transporters adjusted their prices downwards to allow the millers to also work on a reduction in prices but that if there was no reduction in transportation costs then the prices of the commodity would remain the same. Click to read more.

The solution to high mealie meal prices lies with the consumer – if the prices are continuously high, they should buy potatoes, rice or cassava instead! This is the only thing that can be done to put pressure on millers and the rest of their supply chain to reduce prices in light of the recent significant reduction of fuel prices – look at what happened with Zambian Breweries (LUSE: ZAMBREW) as an example. Mealie meal is NOT the only food available out there and millers will cease to have the kind of pricing power they currently have as soon as the average Zambian realises this. Until that changes, millers (together with their supply chain) will be the sole beneficiaries of fuel price reductions when it comes to mealie meal.

Airtel Zambia has a new Managing Director

Charity Lumpa has requested to leave her post (via early retirement) as Managing Director (MD) of Airtel Zambia (LUSE: ATEL) in order to pursue other personal interests. She will be replaced by Peter Correia effective March 1 2015. Mr. Correia will be joining from Liquid Telecommunications Group where he was MD of South African Operations as Group Director of Operations for the entire company.

This will be the third MD appointed over last 5 years. Something is clearly not going right within Airtel Zambia operations. They were toppled from their long-held position as number one mobile service provider (by subscribers) by MTN last year. They should be releasing their 2014 annual report soon. Can Correia turn things around?

Change in expatriate work permit application process

The Minister of Home Affairs has directed that expatriates looking to work in Zambia will now have to apply for permits through the company they are looking to work for from their respective country of residence. Once the permit has been issued, the expatriate can then travel to Zambia to start work.

Key Data

LME 3-month Copper sellers price closed at $5,666 per MT.