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
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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