What happened to Zimplats indigenisation plan?

Zimplats, the country’s largest platinum miner, said six years ago that it intended to list on the Zimbabwe Stock Exchange to widen its ownership base and relieve the pressure of indigenisation.

The chief executive officer at the time, Gregg Sebborn, and Jack Murehwa, who was chief operation officer, told United States ambassador to Zimbabwe Christopher Dell that Zimplats, which was listed on the Australian Stock Exchange, would be listed on the ZSE and its shares would trade interchangeably like those of Old Mutual which was listed on at least five stock exchanges.

The two executives said the move would provide a market-based approach to indigenisation rather than government mandated changes in ownership.

South Africa’s Impala Platinum owned 86 percent of Zimplats.

The company said it had been forced to release 36 percent of its claims to the government the previous year.

Full cable:

Viewing cable 07HARARE172, AMBASSADOR VISITS ZIMBABWE’S PREMIER PLATINUM

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UNCLAS SECTION 01 OF 04 HARARE 000172

SIPDIS

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AF/S FOR S. HILL

NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN

STATE PASS TO USAID FOR M. COPSON AND E.LOKEN

TREASURY FOR J. RALYEA AND T.RAND

COMMERCE FOR BECKY ERKUL

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E.O. 12958: N/A

TAGS: EMIN ECON PGOV ZI

SUBJECT: AMBASSADOR VISITS ZIMBABWE’S PREMIER PLATINUM

OPERATION; DISCUSSES RISK AND REWARD

REF: A. 2006 HARARE 1377

¶B. 2006 HARARE 0629

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Summary

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¶1. (SBU) On February 6, Zimplats executives guided

Ambassador Dell on a day-long tour of the company’s platinum

mining and processing operations in the second largest

platinum deposit in the world. Having made peace,

temporarily at least, with the GOZ under pressure of

expropriation by ceding a third of its claims, the company is

undertaking a major expansion project and investing heavily

in infrastructure. Although the company is in a favorable

position for now, both business and sovereign risk remain

extremely high. Lingering uncertainty over potential

government expropriation, plus deep distortions in the

economy and a looming regional electric power shortage keep

the company’s pace of investment cautious at a time when its

claims, expertise, and high precious metal prices argue for

maximum investment. End Summary

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World’s Second Largest Platinum Deposit

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¶2. (SBU) Zimplats CEO Greg Sebborn and COO Jack Murehwa

guided Ambassador Dell and econoff on a day-long tour of the

company’s mining operations in Ngezi and its processing plant

in Selous, an hour’s drive southwest of Harare. Zimplats’

platinum claims lie in the unique mineral-rich geologic

structure called the Great Dyke, which stretches 515 km

across Zimbabwe passing just to the West of Harare. At its

widest only 12 km across, the Great Dyke contains the world’s

second largest deposit of platinum group metals in four

locations, and significant chromite, magnetite and other ore

minerals.

¶3. (SBU) Owned 86 percent by South Africa’s Impala Platinum

Holdings (Implats) and traded on the Australian Stock

Exchange, Zimplats is by far the largest of Zimbabwe’s three

platinum mining companies. Sebborn told the Ambassador that

the company hoped to list on the Zimbabwe Stock Exchange this

year with shares traded interchangeably, like Old Mutual

shares, on both exchanges. The move would widen the

company’s ownership base and, the executives hoped, further

relieve the pressure to “indigenize” that led the company to

release 36 percent of its claim to the government last year.

It also provides a market-based approach to indigenization

rather than government mandated changes in ownership )

usually imposed by fiat without investment or compensation to

the foreign owners.

——————

Massive Investment

——————

¶4. (SBU) Following the agreement with the GOZ last year, the

HARARE 00000172 002 OF 004

Zimplats Board approved the first US$258 million phase of its

long term expansion plan (Ref B). The investment will shift

production entirely underground, where costs are lower and

the recovery rate higher. Sebborn showed the Ambassador

first hand the highly mechanized operation in which Zimplats

mined and processed 2.16 million tonnes of ore per annum in a

roughly 50:50 split between underground and surface

excavation. He told the Ambassador the company currently

employed 1,900 employees and contractors and was producing

85,000 oz platinum, 71,000 oz palladium, 1,500 tons of

nickel, 1,100 tons of copper, and 11,000 oz gold (all

associated metals) per annum.

¶5. (SBU) The executives showed the Ambassador Zimplats’

extensive investment in infrastructure, which in scale and

scope(if not style)resemble nothing so much as the original

infrastructure build-up needed to explore and develop the

early mining activities in South Africa more than one hundred

years ago: the 77 km highway connecting Ngezi to the Selous

processing plant, built at a cost of US$19 million to handle

the 105 ton haulage trucks that the Ambassador observed

plying the route from mine to plant; a 132kV electric power

line, and plans for a further US$25 million investment to

upgrade the national electric power grid so Zimplats can

import power from Botswana; a fiber optic line and switching

equipment built for TelOne; water purification plants, and a

fresh water reservoir.

¶6. (SBU) The tour included a visit to the town’s new

residential area, where neat one, two and three-bedroom

employee homes are under construction along freshly bulldozed

streets in what had recently been wilderness. Murehwa

lamented the missed opportunity for local manufacturers to

profit from the boom, as the gross overvaluation of the

Zimbabwean dollar compelled Zimplats to import 80 percent of

the building materials rather than purchase them locally at

the official exchange rate of Z$250:USD (the parallel

exchange rate is about Z$10,000:USD). Sebborn noted that the

company had made a significant investment in the local

primary school, which would pay dividends by providing the

company with well-educated workers in the future.

—————————–

Uniquely Favorable Conditions

—————————–

¶7. (SBU) Sebborn said that over the next 16 years, Zimplats

could, under favorable investment conditions, expand annual

platinum production to one million ounces, and invest a

further US$3.25 billion (excluding refineries) in an

integrated production chain of mines, concentrators,

smelters, and later base metals and precious metals refining.

Employment could peak at 12,000 workers including

contractors. Counting family members, rural Ngezi could

swell to a population of 36,000.

¶8. (SBU) Sebborn noted that Zimbabwe’s especially shallow

platinum reserves allowed the company to expand production

quickly from a technical point of view. The new, gently

HARARE 00000172 003 OF 004

sloping Ngezi portal, down which the engineers walked the

Ambassador to the room-and-pillar operation, will reach a

maximum depth of a mere 70 m compared to South Africa’s very

deep platinum mine shafts. Sebborn also explained that

Zimplats’ geologists and technicians had learned to identify

the precious metals in the all-gray rock face, where the

first mining company to try to exploit the deposit in the

1990s had failed.

¶9. (SBU) Also in Zimplats’ favor, the company inherited the

right, negotiated in the first joint venture in which it was

a minority stakeholder, to hold all of its earnings offshore

in US dollar accounts, not “subject to the whim of the

Reserve Bank of Zimbabwe,” in Sebborn’s words. This

arrangement was doubly significant, as Zimplats was financing

its expansion primarily through re-investment of its own

capital, aided by buoyant precious metal prices.

—————————————

But Risks, Constraints on Growth Abound

—————————————

¶10. (SBU) Sebborn said that the company had lingering

concerns that the government might once again use

indigenization as an excuse to try to expropriate more of the

claim. He agreed with the Ambassador that the government was

desperate for hard currency and saw mining as a sector it

could exploit. Sebborn said another factor slowing Zimlats’

expansion was the severe price distortions in the economy,

which unsettled the sector, discouraged investment, and drove

the best trained potential employees to emigrate. (N.B.

Canada’s Fraser Institute has rated Zimbabwe for two years

running the worst place in the world for the mining business.)

¶11. (SBU) In addition, according to Sebborn, Zimplats had a

reliable electric power supply through an agreement with the

Zimbabwe Electric Supply Authority (ZESA) to pay for power in

hard currency. However, its most optimistic expansion plan

foresaw a rise in the company’s power requirement from

slightly under 50 MW today to about 400 MW in 2018/2019. It

was unclear where such a large increase in power could come

from in light of Zimbabwe,s increasingly severe power

shortages.

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Comment

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¶12. (SBU) Zimplats came out of its 2006 wrangle with the GOZ

over ownership of its massive claim, for the time being, in

an enviable position. Its revenue is secure offshore,

precious metal prices are soaring and its product is

traceable and can only be processed to the end stage in a

very few plants around the world – all outside Zimbabwe. It

still has a claim on the vast majority of Zimbabwe’s known

platinum resources and it has kept for itself the easiest,

shallowest part of the deposit to exploit.

¶13. (SBU) It appears that Zimplats has succeeded, for now at

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least, in convincing the GOZ not to kill the golden goose.

At the same time, however, due to the uncertain investment

climate, Zimplats is foregoing more substantial investment.

Moreover, the GOZ’s suspect approach to mining policy is

frightening away other major foreign direct investors at a

time when precious metal prices have rarely been higher and

the government has never needed the revenue more.

DELL

(71 VIEWS)