Zambia mortgages the future by taking over Glencore’s copper debt

State-owned Zambia Consolidated Copper Mines Limited (ZCCM) this week agreed to take on $1.5 billion in debt and pay $1 nominal to take over a 73% stake in Mopani Copper Mines from the Swiss commodities trader and mining company Glencore.

The agreement adds to the debt of a country which, in November, became the first African country to default during the COVID-19 pandemic. ZCCM will repay the loan by giving Glencore creditors 3% of Mopani’s revenue until 2023, which will then increase to between 10% and 17.5%.

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This is in addition to LIBOR plus 3% quarterly interest and ZCCM’s obligation to pay 33.3% of earnings before interest, taxes, depreciation and amortization (EBITDA), less certain deductions.

Glencore goes retain rights to copper produced at Mopani until the debt is repaid, which Zambia will take between 10 and 17 years, depending on copper prices.

Thus, Glencore retains the advantage if copper production and prices are high. For Zambia, the agreement “owes more to short-term political calculations than to sound long-term economic reasoning”, explains Nick Branson, director of Gondwana Risk in London. “Additional liabilities will only increase gross public debt, which will undermine Zambia’s chances of convincing the IMF that its debt can be put back on a sustainable basis.” This will delay access to concessional loans, he adds.

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President Edgar Lungu “undoubtedly sees the deal as an opportunity to secure votes on the Copperbelt, where the ruling Patriotic Front was born but has seen its support dwindle,” Branson said. “The government will be able to boast that the ‘nationalisation’ of Mopani is both a victory against the supposedly exploitative foreign mining companies and guarantees jobs for Zambian workers.

August Elections

The truth is that Glencore has simply succeeded in offloading the debt of a government who has both eyes fixed on the August elections.

  • Glencore temporarily halted copper mining from Mopani in April 2020, prompting the Zambian government to threaten to suspend Glencore’s mining license.
  • Zambia will now seek a new investor in Mopani and will need around $300 million to complete expansion projects launched by Glencore. The official timetable for this shows how difficult it will be: ZCCM hopes to identify a new investor by the end of this year.

“Zambia has not only added a significant chunk of debt to its already unsustainable public debt burden, but has taken on responsibility for a greater share of the mining workforce it cannot afford” , Irmgard Erasmus, Senior Financial Economist at NKC African Economics in Cape Town. City, writes in a research note. Mines Minister Richard Musukwa said 15,000 jobs were at risk.

“Contrary to the expected behavior of a country seeking IMF support and benefiting from debt service suspension relief from Paris Club creditors, the government’s recent actions speak instead of a blatant courting of the popular vote. before the national election in August”, argues Erasmus.

The IMF was not consulted on the Glencore deal.

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The move paves the way for “a more acrimonious debt restructuring process and increases the likelihood of a prolonged economic contraction,” Erasmus writes. “A more nationalistic approach to production will weigh adversely on efforts to improve the noninterest current account and the structural primary fiscal balance, both critical to putting Zambia on a more sustainable debt path.”

At the end of the line

Zambian politicians will only listen when the electorate sends a message about fiscal sustainability.

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