ZCCM IH 2017 Performance
Mining, ZCCM-Investment Holdings Plc

In his maiden letter to shareholders, State Counsel Eric Silwamba (the newly appointed board Chair of ZCCM Investment Holdings) expressed confidence in the management team of Pius Kasolo (CEO) and the group’s prospects going forward. Although new to the role, SC Silwamba takes over an investment group that is at a critical stage in its evolution.

The annual report was presented by the chairman on Friday 29th June at Southern Sun for the year ending March 2017. Despite the time lapse, his letter clearly captured some of the challenges that were faced in circa 2016 to 2017. From a global economic view, for example, he rightly pointed out that the global economy grew by 3.1% which reflected the reality of subdued growth in advanced economies. Furthermore, he identified the fragility of the Sub-Saharan African economy that had faced the brunt of lower than expected demand for commodities. Fortunately for the group, commodity copper have witnessed some improvement in prices or around 5 to 7.5%.

On the Zambian economic front, the SC cited two major factors that gravely impacted the economy. The first was declining copper prices and the second being low water levels. Regarding the former, global geopolitical reasons were responsible for the volatile that was observed post 2016. However, 2017 saw a significant upward trend in the copper price that is still evident in 2018.

 

Regarding the latter, due to the dominance of hydro in the energy portfolio of Zambia, the low water levels led to force majeure that saw the importation of emergency power (expensive power) in order to mitigate the situation. As a result the economy only grew by 3% against the Government’s target of 5%. This inevitably affected the growth prospects for 2017 as growth was expected to be around 3.4%.

In terms of financial performance, we had indicated that Pius Kasolo deserves to smoke a Cuban cigar. Following the K 858 million operating profit loss of 2016, Pius’s team came out in positive territory in 2017 recording group turnover of K 95 million and operating profit of K848 million. Turnover for 2017 was lower by 100 million owing to the low sales recorded for lime and lime products at its Ndola Lime Company.

According to their annual report, “the Group reported a profit before tax of K1,244 million (2016: loss of K 2,865 million). The Group recorded a profit after tax of K 729 million (2016: loss of K 2,912 million). The Group’s share of loss of equity accounted investees’ losses was K 189 million (2016: loss of K 2,210 million)”. Furthermore, the “Group’s retained earnings as at 31 March 2017 were positive at K891 million (2016: K 147 million). The increase in retained earnings is attributed to profit recorded at group level of K 729 million (2016: loss of K 2,912 million). The Company’s retained earnings increased by 740 % to K 731 million (2016: K 87 million) owing to profit recorded at Company level”.

Copper price trend. Source tradeonomics.com

From an audit perspective, four matters were raised by their designated independent auditors. The first was on valuation of investments in associates and financial assets at fair value through profit or loss. The second was on provision for environmental rehabilitation. The third was on impairment of property plant and equipment. Lastly, the fourth was on impairment of investment in associates. This is where one can appreciate the importance of independent auditors such as KPMG or HLB. They interrogate the competence, experience and independence of external experts that a company uses for matters such as these. Furthermore, they look at the methods used by the experts and provide feedback and recommendations on best practices.

A closer look at the audited financials exposed an interesting story. An impairment story. According to the annual report, “during 2017, due to continuing loss making position and operational challenges experienced by the entity, the Group tested the related product line for impairment and recognised an impairment loss of K861 million with respect to Ndola Lime Company Limited’s plant”. The complexity of this was that IAS 36 (international account standard that looks at impairment of assets), requires that an asset is not valued at more than what it can be sold at. Sadly, the management team had not sale agreements or ready market to offload the asset so as to arrive at a fair value. Therefore, the reduction in Assets property plant and equipment was impacted by impairments. In addition, the group has leased plant and equipment (mostly motor vehicles under finance leases) as well as put up Ndola lime Company Limited as security (assets amounting to K75 million) for a  US$ 27.6 million loan from Standard Bank of South Africa.

For investors in ZCCM IH, the latest AGM saw the recommendation by board of a dividend of K0.84 per share. At the epilogue of 2017, the share price on the Lusaka Securities Exchange closed at K38.  This was a reduction of K2 from the previous year owing to the lack of liquidity to spur up trading on the local exchange.

Furthermore, from a strategy front, Pius and his team will be implementing a new Strategic plan hinged on expansion of its investment footprint in various sectors of the economy that will include mining with a focus on industrialization, energy, agriculture, manufacturing, real estate and financial services. They have already gotten the ball rolling with the recapitalization of Ndola Lime. Furthermore, they intend to unlock further generation opportunities at their Maamba Collieries Limited thermal plant.

Just recently, the Financial Post reported that Pan-African explorer Oranto Petroleum is farming into two exploration blocks located onshore in Zambia. These blocks would make Oranto’s first investment in Zambia. Under the agreement, signed recently, Oranto Petroleum will hold a 90 percent stake and ZCCM Investment Holdings will control a 10 percent share, on behalf of the Zambian Government. The company will be required to conduct geological and geophysical studies for first two 2-year sub-periods.

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