The dearth of options available to global investors in government debt may end up working in South Africa’s favour as Moody’s continues to delay action on the country’s last remaining investment-grade rating.
Zimbabwe’s Indigenisation Intrigues
Critics say that Zimbabwe’s indigenisation drive is leading to a drying up of investment, but companies who have complied, like Canada’s Caledonia Mining Corporation, continue to commit money and make profits. Caledonian, however, is a rarity: few international companies, let alone mining houses, have gone through the controversial programme, which gives 51% ownership to locals to boost entrepreneurship and wealth generation.
The indigenisation law and its implementation have gone through many ups and downs since the regulation was first introduced in 2007. Most companies have played for time, and many firms still have not followed through on the indigenisation plans submitted to the government. In the meantime, the government has been shifting the goalposts again and is now allowing mining companies to comply with indigenisation rules by spending money locally rather selling or giving away shares.
Opponents of President Robert Mugabe’s Zimbabwe African National Union-Patriotic Front (ZANU-PF) government said that the programme would just enrich the politically connected elite. Nelson Chamisa of the opposition Movement for Democratic Change, told reporters in 2016, when the government said it was pressing ahead with the programme: “It is basically ZANU-PFisation.”
Those companies that have indigenised have braved the risks of investing in Zimbabwe, which is in a period of extended political and economic uncertainty under 93-year-old Mugabe.
A lucky gamble
In 2012, Caledonia was the first mining company to indigenise, after the government initially vetoed its plans to sell shares to locals and threatened to cancel its operating license for the Blanket gold mine near Gwanda in the south. The company donated a 10% stake to the Gwanda Community Share Ownership Trust and sold the remaining shares to the National Indigenisation and Economic Empowerment Fund (16%), a trust for the management and employees (10%) and a little-known Zimbabwean company called Fremiro Investments (15%) for a total of $30m.
The local investors did not have the money to pay up front, so Caledonia loaned them the money at the London Interbank Rate plus 10%. Since Caledonia is just coming off a period of major investments and the gold price has been relatively low, those investors currently owe the miner more than the face value of their loans.
Caledonia has avoided offering its opinions in public about Zimbabwean government policy, but officials have said that worries about the investment climate have been overblown. At the European Gold Forum, Curtis said: “We’ve a very experienced management team in Zimbabwe, and high quality local partners and a supportive local community. This, combined with our very good workforce, helps us perform well.”
As production levels increase, Caledonia executives are predicting rosier futures. In March, they announced that gold production during the last quarter of 2016 had increased to 13,591oz, achieving a new quarterly production record that represented an 18% increase on the last quarter of 2015. The mine also hit a new annual record under Caledonia’s management in 2016 – producing 50,351 ounces, a 17.6% improvement over 2015.
Blanket’s strong performance in 2016 was due to a $38m investment to improve the mine’s infrastructure in 2015 and 2016. Lower operating costs and a higher gold price also helped. Caledonia projects that its investments will help increase annual production to 80,000oz by 2021.
Caledonia chief executive officer Steve Curtis tells The Africa Report: “The main component of the investment plan is a new shaft, called the central shaft, which is on track to commence production as planned in late 2018. Progress on implementing the investment plan has been good and in 2016 we began to see the benefits […] in the record level of production.”
One case among many
Caledonia and its partners have withstood a tough operating environment. Zimbabwean gold miners are struggling with a liquidity crisis and high unit costs of production averaging $1,170/oz. There are also frequent power shortages, and high power tariffs.
National Indigenisation and Economic Empowerment Board spokesperson Grace Tsvakanyi tells The Africa Report that Blanket mine, as well as companies such as Pretoria Portland Cement and RHA Tungsten, are the success stories on indigenisation and empowerment. She adds: “This effectively dispels the notion that the programme has adversely affected foreign direct investment [FDI]. There could be other factors impinging on FDI because of the harsh economic environment in the global arena.”
The opposition remains unconvinced, saying that Caledonia is just one case among scores of others where companies have dropped their projects or put them on hold. Jacob Mafume, spokesman for the People’s Democratic Party led by former Movement for Democratic Change secretary general Tendai Biti, says: “The issue about indigenisation has never been that locals can’t run companies but that it does not make sense to compel someone who owns 100% of a company to cede 51% of the company for free. That does not work. It prevents investment into the country.”
Oppositionists point to the problems seen in the diamond mining sector, too. Opaque shareholding structures and the military connections of some mining companies that operated in the lucrative diamond fields of Marange, in eastern Zimbabwe, are some of the clearest suggestions that the extractive sector, particularly the diamond sector, has benefited the country’s ruling elite. In 2015 former indigenisation minister Saviour Kasukuwere was investigated by parliament due to questions about the use of funds donated by some diamond miners to the community.
Metallon Gold, Impala Platinum, Anglo American Platinum, Aquarius Platinum, the ASA Group, New Dawn Mining Corporation, Duration Gold and Falgold are part of the long list of mining companies that have submitted their indigenisation plans and are still working to ensure full compliance with the indigenisation law. Their plans are awaiting government approval.
New regulations issued in April 2016 allow existing mines to meet their indigenisation obligations by retaining 75% of their revenue as local content, which essentially means spending their revenue on local procurement of materials and services. Early this May, mining minister Walter Chidhakwa said that given the choice between 51% local ownership and 75% local spending, many companies were keen on the spending option.
From the June 2017 print edition