Tuesday, March 29, 2011

From John Robertson

The Government Gazette Extraordinary published on Friday revises the indigenisation demands being placed on the mining industry. In essence, the changes are that:


(1) The disposal of 51% of the shares in mining companies to indigenous Zimbabweans will apply to all companies with a net asset value of more than one US dollar (US$1)

(2) The disposal of the shares to indigenous Zimbabweans must be completed by September 25 2011

(3) Affected companies must submit indigenisation plans by May 9 2011.

Previously, the indications were that companies with a net asset value of less than US$500 000 were exempt from the indigenisation legislation and that the disposal of the shares had to be accomplished within five years of the publication of the regulations.

The single-page publication is attached. Without referring to the earlier definitions of Indigenous Zimbabwean, this document adopts the phrase “designated entity” to describe the authorised recipients of the shares that companies must relinquish. The former definition, “Any person who, before the 18th of April 1980, was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such persons” is now replaced by these “designated entities”, which include:

(a) the National Indigenisation and Economic Empowerment Fund
(b) the Zimbabwe Mining Development Corporation
(c) any company formed by the Zimbabwe Mining Development Corporation
(d) a statutory wealth fund
(e) an employee share ownership scheme, or trust, or community share ownership scheme

Paragraph three refers to the valuation of asset values having to take into account the State’s sovereign ownership of the minerals, which requirement is clearly an attempt to reduce the amount that will have to be paid for the shares by the designated entities. However, no commitment is imposed on the designated entities to actually pay for the shares by September 25 or even to meet the bill for these by the end of the further three months that “on good cause” might be granted as an extension. Non-payment for what is being purchased would normally be considered very good cause for not parting with the asset, but it appears that government has no intention of offering the mining companies the right to cancel the sale of their shares on such grounds.

However, in most, if not all cases, the creation of shares that can be sold will involve the company in doubling the number of shares in issue and thus halving the nominal value of all existing shares. This is simply because the current shares are the property of the individuals who bought them and these individuals have no obligation to halve their own holdings. The simplest approach for each company might be to hold a special shareholders’ meeting at which they would have to seek the approval of all shareholders for a share split or a one-for-one rights issue. This would have to be accompanied by a request that the existing shareholders do not exercise their rights. The new shares thus created could then be offered to designated entities in exchange for the appropriate payment.

Finding the sums needed to pay for 51% of the mining industry will be quite a challenge. Not many of the mines are listed on the Zimbabwe Stock Exchange, so a market capitalisation calculation on the quoted shares adds up to a very small part of the answer. Allowing for the mines that are already in indigenous hands, half the value of the balance could easily come to more than a billion dollars. Apart from the proposed impractical indigenisation levy, nobody in government has offered a single suggestion on where a sum of that size that might be found, even if a further allowance is made to “account for the State’s sovereign ownership of the mineral”.

In respect of that sovereign ownership value, the State might be forced to accept the practical position that minerals under the ground have no value at all. Finding them, reaching them, extracting them and processing them for sale at prices that exceed all the costs involved is what mining is all about. Burdening the mining companies with huge theoretical costs for yet-to-be realised assets before the process starts is certain to ensure that the minerals remain locked in their buried ore-bodies. It won’t be long before people stop even trying to find them.

The publication of these new regulations is certain to lead to considerable debate and government can be expected to show increasing impatience with companies that appear to the authorities to be trying to undermine the indigenisation process. While the increasing antagonism and inevitable delays in resolving issues will certainly slow the levels of activity in the mining sector, the much more serious longer-term effect of these regulations will be the almost complete arrest of new mining investment inflows.

Even the Chinese investors, who appear to have been assured that the regulations will not apply to them, are likely to continue showing reluctance to commit funds. Part of the reason for this is the fact that the terms and conditions included in each of the Bilateral Investment Promotion and Protection Agreements include clauses that prohibit the Government of Zimbabwe from offering preferential terms to countries with which each BIPPA country might be competing.

I will do my best to keep you up to date with developments.

Kindest regards,

John

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