🔒 Premium from the FT – Zambia sees Western investors as way out of self-inflicted economic disaster

Our partnership with the London Financial Times has delivered another winner for you today in the article below from the FT’s Joseph Cotterill. It’s an in-depth analysis of how Zambia’s business-friendly president HH Hichilema (elected in 2021) is fashioning the turnaround for an economy destroyed by socialist ideology.

The riches-to-rags story is well documented in Michael Cardo’s superb biography of Harry Oppenheimer. It reminds us how independent Zambia’s founding president Kenneth Kuanda applied Soviet-learned ideology to turn one of Africa’s jewels into one of the world’s poorest nations.

In the four years after Zambia’s independence in 1964, Anglo American’s highly productive copper mining operation paid 65% of its gross profits to the state via royalties and taxation. In 1969, the Zambian government forcefully acquired 51% of Anglo Zambia, with full-scale nationalisation following in 1974.

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Cardo writes: “It turned out to be a catastrophe. Nationalisationsapped the mines’ profitability and dragged the country from copper-bottomed prosperity into worst-case penury.” In the past half-century, Zambia’s GDP per capita has halved in inflation-adjusted terms (from $2 250 to $1 137).

Kuanda and his Soviet mentors wielded an economic wrecking ball of gargantuan proportions. No wonder Anthea Jeffery keeps warning us about the ANC’s similarly aligned National Democratic Revolution. Today’s cartoon, drawing on Rob Hersov’s keynote at BizNews@10, suggests SA Big Business keeps believing the unbelievable.    

Sterkte

Alec


Zambia’s plan to dig its way out of debt with a copper revival – seeking investors

By Joseph Cotterill in Chililabombwe, Zambia for The Financial Times

In July, the search to find the world’s next top-tier copper reserve led a Silicon Valley start-up to the doorstep of a faded mining powerhouse.

Late one morning, hard-hatted dignitaries watched keenly as a drill rig bit deep into rock in Chililabombwe, a town in Copperbelt province just inside Zambia’s border with the Democratic Republic of Congo. The $150mn exploration by KoBold Metals promises the ultimate pay dirt: a bounty of high-quality, in-demand metal and, with it, a nation’s economic resurrection.

“This is what it’s all about,” says Alex Matthews, Zambia country manager for KoBold, pointing to mineral samples taken from the Mingomba deposit. The California-based start-up provides AI technology to better guide placement of the drills, which cost $1mn per go. “There are very few people in the world who have the support to do something like this,” he adds.

The support comes from some of the world’s most powerful venture capitalists including Breakthrough Energy Ventures, backed by Bill Gates and Jeff Bezos, and Andreessen Horowitz. It is one example of the cash flowing from outside the traditional world of mining to address a looming shortfall of copper, one of the most important raw materials for the global energy transition. This demand could see Zambia’s ambition to revive the Copperbelt after falling on hard times pay off.

While copper remains Zambia’s biggest export, taxpayer and growth driver, most output today comes from mines in its North-Western province and not the neighbouring Copperbelt, the industry’s once-beating heart.

After sovereign default in 2020, botched mine nationalisations and a drying up of investment in pits under his predecessor Edgar Lungu, President Hakainde Hichilema is on a mission to more than triple Zambia’s copper production from about 800,000 tonnes a year to over 3mn by 2032.

The goal is epic. Meeting it would mean surpassing the current output of the DRC, Africa’s largest copper producer and Zambia’s neighbour to the north, which is catching up to Peru, the second-biggest producer behind Chile.

To even come close, Hichilema, a businessman who was elected in 2021, needs to attract deep pockets for new exploration but also investors with the appetite to turn around old underground mines that have faced high power costs to sustain. “Every tonne counts,” he said in March.

The other thing that matters is geography. Zambia shares the same high-class copper endowment as the DRC, but its copper must travel 1,800km or more, largely by truck, to ports such as Namibia’s Walvis Bay or Dar es Salaam. It does, however, enjoy far more political stability in comparison.

“Globally, everyone knows the geology of the Central African Copperbelt is very attractive,” says Mfikeyi Makayi, chief executive of KoBold in Zambia and the first Zambian woman to run a mineral explorer. While Makayi prefers to think of the landlocked country as “land-linked” to eight neighbours, she believes the Copperbelt was hobbled by “decisions not to upgrade our infrastructure to get to market”.

Hichilema’s government has lofty goals to address this even while talks to finish the restructuring of its $13bn external debt are still ongoing. It is backing a regional railway connection to Angola’s Lobito port that could slash journey times from the Copperbelt. Additionally, it has stabilised mining taxes, which constantly changed under the last government, and signed a deal to set up a cross-border economic zone with the DRC to add more value to their copper by putting it in locally made electric car batteries.

Before then, Hichilema has to reverse his predecessor’s biggest mistake: the costly state takeovers of the Copperbelt’s largest mines, Konkola and Mopani, between 2019 and 2021. Mopani posted a $300mn loss last year, after Glencore sold a majority stake to ZCCM-IH, Zambia’s state mining investor, for $1.5bn in 2021.

“The soul of Zambia is right here in the Copperbelt. It anchors our economy,” says Jito Kayumba, a Zambian venture capitalist turned special adviser to Hichilema who helped bring KoBold’s drilling to the country. “We really feel duty-bound to ensure that this entire region is turned around.”

Audacity of hope

In the early years of independence from Britain after 1964, Zambia produced more than a tenth of the world’s copper.

After nationalising the industry in the 1970s in order to fund development, Kenneth Kaunda, Zambia’s founding father and its first president, declared that its citizens were “born with a copper spoon in our mouths”.

The move paid for nation-building ventures that define Zambia to this day, such as the Tazara railway line to Tanzania, the hydropower that is the country’s primary energy source and the education of future generations of mine engineers.

By the 1980s, that birthright was spent. Global copper prices tumbled. ZCCM, as the manager of mines, could not finance investment. Kaunda’s one-party regime crumbled in 1990, not least due to resistance from unions and voters in the Copperbelt. The mine privatisations that followed were slow to turn around the disrepair and came with what are now seen as one-sided tax breaks. Exploration died off.

“Those were not good deals,” says Twivwe Siwale, a former Zambian tax official who is now head of tax for growth at the International Growth Centre think-tank. “And I think we have learnt our lessons from that.”

To secure a return to its mining heyday, Zambia must get its house in order. What makes the government’s mission to triple its copper production all the more audacious is the debt crisis it is only just leaving behind. 

Zambia became the first African country to default on its foreign debt since the beginning of the pandemic. The country recently secured relief from official creditors that will extend repayments into the 2040s for bad loans that enabled a borrowing binge in the past decade, including Chinese debts. 

But in a sign of Beijing’s reluctance to accept deep losses, payments could reset as soon as 2026 if the IMF judges Zambia can carry more debt at that point. External debts will be just below 60 per cent of GDP then, versus around 70 per cent this year, according to the fund’s forecasts. A deal in the works with private creditors is considered likely to include similar terms.

Perhaps in a sign of the Copperbelt nostalgia that still lingers, Theresa Mulenga, a 52-year-old homemaker, is confident Zambia can meet its deadline. “Twenty years is a lot of time to pay back,” Mulenga says, as she travels from Ndola, the Copperbelt’s capital, to Kitwe, the country’s second-biggest city. “And maybe we’ll have finished paying in 10 years, who knows? We have a lot of minerals here,” she adds.

Further up the road in Chingola, home of the Konkola Copper Mines (KCM), Daniel, a pit worker, is far less sure about meeting Hichilema’s goal. The Copperbelt’s current financial straits is having an adverse effect on working conditions. “If we are motivated, we can reach those figures,” Daniel says, declining to give his real name out of fear of jeopardising his already precarious and low-paid contract, a reflection of the financial turmoil at KCM since Lungu’s government seized it from Indian miner Vedanta in 2019. “At the moment, we are demotivated.”

“The extent of cost reduction is even affecting things like PPE [personal protective equipment],” he adds. “It’s very hard even to find a gumboot or even an overall. There’s also a lack of spare [parts]. They used to wash down surfaces, now they don’t do that. The standards have gone down.”

Other KCM workers from drill operators to traffic controllers tell similar stories. “We do a lot of jobs and we are getting peanuts . . . We work eight hours on just a bread bun — not even tea or sugar,” one says. A bus full of contractors on their way home from pits say their monthly pay of around 1,500 to 2,000 kwacha ($80 to $105) is not enough to live on.

KCM, which gave no response to the claims made by workers, is being prepared for new investment, after talks with Vedanta and settlement of unpaid power debts owed to a Copperbelt supplier. But its hollowing out reflects a theme in the region’s history, one that carries a warning about how long it can take to reboot a mining industry.

“Historically, Zambia hasn’t really benefited as much from previous commodity cycle booms as it could have,” Siwale says. In the last cycle that started in the early 2000s, growth rates were high, she adds, “but it didn’t translate into changes in poverty rates and inequality actually went up.”

Successive Zambian governments, she adds, have focused on taxation as a means to spread value from copper mines to the population, which is now close to 20mn.

If a new boom is on its way, the state also needs non-tax benefits, such as “side-stream” support from mines for roads and parallel projects, Siwale argues, but “it’s not such an easy thing to do”.

Environmental anxieties

If Zambian copper is to make a much larger contribution to the world’s shift to clean energy, potential investors must first confront what has been a very dirty business.

In the Copperbelt town of Mufulira, Mopani Copper Mines operates not only the province’s deepest mine shaft — over 1,500m — but it also processes copper from across the country. Sibanye-Stillwater, the South African miner, China’s Zijin Mining, and other groups have taken an interest in these operations, even though Mopani needs $450mn in sustaining and expansion capital in the next few years.

Unfortunately, resident Margaret Waya, 48, can also see, and smell, the smelter’s activity from her home in the settlement of Kankoyo, a few hundred metres from the sprawling chemical works.

Waya says the site emits hazardous fumes that are eating away her tin roof, stinging her eyes — and could be doing far worse to her lungs and those of her neighbours. “I am in pain because of acid,” she adds. “Every time they are producing copper, as long as that plant is running, acid mist is generated.”

Emissions have been produced for decades. Glencore, Mopani’s previous owner, said in a sustainable development report published in 2019 that it invested in smelter upgrades in 2014 and 2019 to cut emissions. Glencore also said it regularly held community meetings when it was owner.

Residents say there has been little improvement but now live with even worse anxiety. Every now and then, underground mine blasting turns one of Kankoyo’s houses to rubble. “We complain to the government, we complain to the mine. Last time we complained to Mopani, they said they pay taxes to the government, so it is the government’s responsibility to solve the problem,” Waya says, gesturing at the growing cracks in the walls of her house. “If I had money, I’d have moved a long time ago.”

Kayumba, the presidential adviser, says that Hichilema has heard the concerns and is taking action. His government is bolstering Zambia’s environmental management agency and also setting up a commission for better, decentralised monitoring of safety standards. “These are matters that . . . are being followed up on,” Kayumba adds.

Activists in Mufulira say that the solution comes down to money: the cost of relocating Kankoyo’s residents. The programme should be funded by any new Mopani investor and would be a “win-win situation” to keep operations going, argues Crimson Chilimelime, assistant executive director of Green and Justice, an environmental NGO based in the area.

But while there may be disquiet, Kankoyo is not a simple story of community versus a miner but a tale of fates entwined. Those who are fed up, says Chilimelime, are the same people who are beneficiaries of jobs and other opportunities tied to Mopani. One resident, for example, who gives a tour of Kankoyo’s crumbling homes must later report for work in the underground complex that threatens them.

If the mine gets investment to support new mining, Chilimelime says, those living in Kankoyo “will be the happiest people”.

“These mines are viable, and they can be profitable,” Chilimelime adds. “The deeper you go, the better the quality of the copper.”

Competitive advantages

The quality of the copper is one big reason why Hichilema’s call to restore the Copperbelt has listeners, and increasingly, doers.

An indicator of quality can be seen in grades of copper and how much is extracted per ore tonne, which affects everything from the cost of extraction to the carbon footprint of mining and exposure to volatile global prices.

The North-Western mines that took over the bulk of Zambia’s output move many tonnes, but they also work on relatively low grades. At First Quantum’s Kansanshi, greenlit for a billion-dollar expansion under Hichilema, it is below 1 per cent, in line with the global average as copper mines all over the world face challenges with grades.

Mingomba, where KoBold has partnered with state-owned miner ZCCM-IH to employ its geoscience expertise, is estimated to have about 250mn tonnes of ore, with a grade averaging 3.6 per cent, relatively high by industry standards.

It will take many years and much more capital to turn Mingomba’s deposit into a mine, but in terms of security of supply, “we will need to find high-quality deposits that can produce through cycles,” says Josh Goldman, KoBold’s co-founder and president. “That’s why we are here.” Zambia has good rocks, he adds. The bonus is that it also has good laws and highly skilled people.

It is these strengths that some hope will help attract interest in even the oldest part of the industrial Copperbelt. On the outskirts of Ndola near the Congolese border, the trucks that hurtle down back roads to use Zambia’s infrastructure is evidence of what the International Growth Centre has called the “governance dividend”.

While many of the Copperbelt’s historic mines are now submerged, nearby territory is likely to still harbour high grades, says one worker with knowledge of the area. “There’s plenty of land here,” the person says. “Congo has very high grades but the Congo government is something else.”

Zambia’s past is feeding its future copper production ambition another way. A concentrator in Ndola, owned by processing firm Jubilee Metals Group, is ramping up and recovering copper from the region’s old dumps, which has a lighter carbon footprint than mining.

“Zambia through its history had central large mines, which means that the waste is centralised,” says Leon Coetzer, Jubilee’s chief executive, explaining why this puts the country at an advantage.

But reliability, he adds, will probably be the deciding factor in Zambia’s bid for a copper revival: “The world has a way of favouring jurisdictions where supply is stable, reliable and consistent.”

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