Zambia's Outsized Bet on Copper Could Play Into China's Hands
Zambia, which defaulted on payments to bondholders in November, is doubling down on debt with a high-stakes bet that nationalizing one of its biggest copper mines will help rescue its flailing economy.
Once seen as among the most investment-friendly countries in
the region, the landlocked nation in south central Africa is the most extreme
example of a wave of populist governments in mining-dependent countries that
are struggling to pay the bills after borrowing for infrastructure in recent
years. Zambia was the first country on the continent to register a pandemic-era
default on a sovereign debt payment late last year when it missed a $42.5
million interest payment on some of its $3 billion of dollar-denominated bonds.
The country has some $12 billion in external debt, including
$3 billion in international bonds and large loans from Chinese state-owned
lenders. The government hasn't said exactly how much it owes to Chinese lenders
as a whole. Johns Hopkins University's China-Africa Research Initiative estimates
that Zambia has signed some $9.9 billion in loans from China, although not all
of that money has been drawn.
But in January, Zambia's state-owned mining company took on
$1.5 billion in debt to take over a Glencore PLC copper mine, Mopani Copper Mines
PLC, the latest in a string of moves that has remade the country into an
exemplar of resource nationalism.
Zambia is the fourth-riskiest country on consulting firm
Verisk Maplecroft's Resource Nationalism Index, which assesses the risk to
commodity producers from governments seeking greater control over their
country's mineral and energy deposits. Verisk Maplecroft said that the economic
impact of the Covid-19 pandemic has further encouraged government intervention
in the mining sector.
Last year, Zambia began talks with the International
Monetary Fund on an economic program that will form the basis of the nation's
planned debt restructuring. The Washington-based lender said it hopes to reach
a deal with Zambia before elections scheduled for August, but analysts say the
Mopani deal could throw a wrench in the works.
"Taking on another debt of this size at this time is
exactly what you don't want to be doing," said Anne Frühauf, managing
director at communications and advisory firm Teneo Holdings LLC. "This
could well be one of the sticking points in the current negotiations [with the
IMF]."
The Mopani talks began last year, when the government said
it planned to revoke the company's mining license, accusing Mopani of violating
the terms of its operating permit by suspending operations because of the
coronavirus pandemic without giving sufficient notice. Mopani's Australian
chief executive, Nathan Bullock, was briefly detained at Lusaka airport in
Zambia's capital before being released.
Months of talks concluded in January, when Glencore
announced its subsidiary had agreed to sell its underlying 73% stake in Mopani
to state-owned mining investment firm ZCCM Investments Holdings PLC for $1 and
the assumption of $1.5 billion in debt. The Anglo-Swiss commodities company
said the debt would remain owed by Mopani to Glencore group creditors and that
Glencore would retain the right to purchase Mopani's copper production until
the debt is fully repaid.
Under the terms of the deal, ZCCM will repay the debt by
giving Glencore creditors 3% of Mopani's revenue to 2023 -- it then jumps to
between 10% and 17.5% -- in addition to quarterly interest and a third of
earnings before interest, taxes, depreciation and amortization, minus some
deductions.
However, Mopani is currently losing money and its management
says that it needs to raise production to an annual target of 140,000 metric
tons to make the mine profitable.
That requires about $300 million in capital investment for
expansion projects. Mopani produced just over 34,000 metric tons in 2020,
hemorrhaging cash. Richard Musukwa, Zambia's mines and minerals development
minister, says the government is in talks with prospective investors from
Turkey, Canada, China and the U.S., among others.
"The debt burden is officially on [Mopani]'s balance
sheet, but as it is a consistently loss-making entity, it will de facto fall on
the government," said Irmgard Erasmus, a senior economist at South
Africa-based NKC African Economics.
As a result, "it's possible the mine operation may be
used as collateral if we don't get an investment partner soon," an
official at the Zambian finance ministry with direct knowledge of the
transaction said.
In taking over Mopani, the government is betting that
Zambia's economy could be rescued by the sharp rise in copper prices, which are
trading around 10-year highs due to strong Chinese demand for raw materials
that has rebounded since the worst of the pandemic. China accounts for roughly
half of global copper demand.
Government officials publicly claimed the Glencore deal was
necessary to save 15,000 jobs at the Mopani mine in Kitwe, a mining town that
has been battered since a decadelong commodity boom ended in a spectacular 2015
crash. Zambia's population of 18 million people relies on copper for two-thirds
of its export revenue.
Mr. Musukwa didn't respond to requests for comment about the
prospect of China taking over the mine.
"We simply don't have the capacity to run these financially
troubled and technologically complicated mines," said Fred M'membe, the
president of Zambia's opposition Socialist Party. "This decision has
nothing to do with any strategic business formula."
If Zambia fails to make the repayments, analysts and Zambian
officials say, the mine could be exchanged as collateral with China for debt
referral or forgiveness, which would put the strategic state asset into
Beijing's hands. Some U.S. officials have said China is extending huge and
potentially unsustainable debt to African countries to give it greater regional
sway.
China's foreign ministry said that it had signed debt relief
agreements or reached consensus on debt relief with 16 African countries and
stressed it would "never force them to repay debts, let alone take over
any state-owned assets."
In the copper mining heartlands near Zambia's Congolese
border, families are surviving by reducing the number of meals they eat a day,
driving up malnutrition, aid officials say.
Angella Namakawa, who operates a fruit stall in Kitwe, where
the Mopani mine is located, says she can only afford a single meal of nshima, a
sticky porridge made from corn flour, for her family of four each day, after
prices for the country's main staple rose by a third last month.
"I can barely make ends meet because prices of almost
everything keep going up," she said in a phone interview. "Our
currency is becoming useless yet we have to keep paying bills, buying food and
everything else."
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