By Bruce Mwewa
Some questions as a matter of public interest on the proposed ZCCM IH transaction:
First Quantum Minerals (FQM) and Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH) have agreed to convert the latter’s dividend rights to a 3.1% revenue royalty. This means that ZCCM IH will no longer receive its share of dividends from the profits made by Kansanshi Mining Plc (KMP). Instead, they will be paid 3.1% of what KMP will make in Sales Revenue in a year.
The general legal and corporate practice of giving back to shareholders is that when a company makes a profit, it may decide to distribute or give part of that profit to shareholders according to the number of shares held in that company. Now the trick part of this practice is that whether to pay a dividend or not, depends on two things:
1. The company must make profit after covering all its costs or expenditure and taxes. Dividends are, thus, paid from this net profit. In particular, Section 159 of the Companies Act, 2017 strictly only allows a company to distribute dividends to shareholders from profits made or accumulated from the business of the company.
2. Secondly payment of dividends is subject to the Company’s Dividend policy. In this case the FQM Financial and Dividend Policy is such that dividends payment is ranked after planned capital spending. Further, declaration of dividends remains at the discretion of the Board, meaning Directors may decide whether to declare a dividend or not. In addition, FQM dividend policy is also performance based with a minimum Annual Base Dividend of C$0.10 per share, comprising of biannual dividends of C$0.05 per share.
On this score, The Revenue Royalty arrangement looks to be a good deal on face value. ZCCM-IH will not have to wait for Kansanshi to make profits and the Board to decide whether or not they should declare dividends. Instead, ZCCM IH is guaranteed of future income streams as long as the Kansanshi is generating production sales. However, to reach a reasonable conclusion on whether this is the best deal or not, one needs to interrogate the details of the transaction.
The Transaction Announcement by ZCCM IH indicates that the rights attached to the shares in Kansanshi Mining Plc will be changed. In this regard, ZCCM IH will cease to treat its shareholding in the Mine as equity stake but as a Financial Asset.
Question 1: With this transaction, what is the nature of ZCCM-IH stake in Kansanshi? From the details so far, it appears ZCCM-IH will swap its share ownership in the Mine with another financial Instrument. But what is this Instrument? A debt? Preferential Shares? Or Share Warrantees?
What is clear from the scanty details made available is that, ZCCM-IH will no longer have ordinary shares in the Mining Company. As such they will lose the power to participate in the financial and operating decisions of the that Mining Company. This is the reason ZCCM-IH is proposing to derecognize its shareholding as an investment in associate and recognise it as a financial asset. The Announcement by FQM spells out this aspect that ZCCM IH presence on the Board will be to ensure visibility and transparency in respect of KMP’s future operations. Very interesting.
Question 2: Was a valuation done to determine the current value of KMP? If so, how much is the value of KMP? If not, on what basis is ZCCM-IH 20% equity stake in KMP being “sold” , exchanged or realised, if you like for a 3.1% Revenue Royalty?
In M & A, it is a normal practice to carry out a company valuation exercise to determine the fair value of the asset being sold or bought. It assists the parties to the transaction to negotiate from an informed position.
Question 3: Does this deal guarantee ZCCM-IH of assured level of production or minimum revenue that KMP must generate per year? This question is very important to safeguard the future income for ZCCM IH. Otherwise KMP may decide to scale down production or reduce its annual sales. The Cautionary Statement issued by FQM on the transaction puts a disclaimer that this agreement is not based on historical facts, but contain forward-looking statements, information and assumptions which may change subject to unknown future factors. This points to the uncertain nature of the proposed transaction and its ability to guarantee a realised absolute value of the 3.1% Revenue Royalty.
This transaction seems to be a streaming and royalty financing kind of arrangement. These are newly reengineered sort of sources of finance peculiar to the mining industry. They are financing contracts where mining companies sell future production or revenues in return for an up-front cash payment. Unlike debt financing, Royalty Financing arrangement are structured such that the mining company is under no obligation to make royalty payments unless it is producing and generating revenue. This aspect needs to be addressed and clarified.
Question 4: What is ZCCM IH offering in return for this Royalty? Share sale? The Statement by ZCCM IH states that the economic value of the 20% equity stake in KMP will be realised through the VAT refunds.
This takes me to Question 5: Was VAT refunds a sweetener or motivating factor for this transaction? And if the transaction will be realised through VAT refunds, does it mean KMP will be given preferential treatment in processing the refunds? What will happen to other mining companies who are owed VAT refunds? Will the cannon of taxation on equity and fair treatment of all taxpayers be set aside?
The cautionary statement by ZCCM IH also states that the aggregated amount of the VAT refund is: US$442 million and ZMW433 million. To the contrary, the FQM Global and Consolidated Financial Statements shows that as at 31st December 2021, Kansanshi Mining PLC was owed a cumulative amount of US$284million, spanning from 2014 following the instigation of VAT Rule 18 provisions.
Question 6: Where is ZCCM IH getting the US$ 442 million and ZMW 433 million figures? How has this figure grown by more than US$158 million in a year? How possible? What is the rationale for covering only VAT receivable balances and omitting other receivables (debt or money owed by customers) from the transaction?
ZCCM IH claims KMP will make a dividend declaration of US$975million to which they will receive US$195million in proportion to the shareholding of 20%. This is brilliant but sounds too good to be true. As I earlier indicated, dividends are by law and corporate practice declared and paid out of the profits generated by the company. My review of the FQM consolidated financial statements show that in 2021, Kansanshi Mining Plc posted a gross profit of US$969million and US$464million in 2020. Now, this profit is before KMP covers all its operating costs, loan interest charges and taxes, which by my rough estimate stands at around US$822million. This leaves only US$147million for distribution as dividends and that is if the Board resolves to pay all profits generated as dividends. Highly unlikely.
Question 7: Where is ZCCM IH basing its estimation that KMP will declare US$975 million worth of dividends?