Konkola Copper Mine parts company with Copperbelt Energy
Copperbelt Energy Corporation Plc, Energy, Mining

Barely a fortnight after publishing its 2019-year end financial results which signaled the erosion of value due to impairments caused by its biggest mining customer, Copperbelt Energy Plc (CEC) has announced the end and non-renewal of its power supply contract with Konkola Copper Mine (KCM).

In accordance with Section 11.40 of the Lusaka Securities Exchange Listings Requirements (“LuSE Listings Requirements”), the Board of Directors of Copperbelt Energy Corporation Plc (“CEC” or “the Company”) wishes to inform shareholders and the market that the Power Supply Agreement (“PSA”) between CEC and Konkola Copper Mines Plc (“KCM”) came to an end on 31 March 2020 but was extended, through mutual agreement of the parties, to 31 May 2020. Consequently, effective 1 June 2020, there is no contractual basis upon which CEC can continue to supply electricity to KCM”, read a statement published on SENS issued by CEC’s Company Secretary, Julia C Z Chaila, on 9 June 2020 by order of the company’s Board of Directors.

CEC, whose share price on the Lusaka Securities and Exchange is now trading at its lowest price of 0.96 kwacha per share as at the publishing of this article, has “further advised that KCM has accumulated a USD144.7 million debt to CEC in unpaid power charges representing twelve (12) months of consumption, which remained unresolved at the expiry of the PSA”.

This development marks a worsening commercial situation for the company. Earlier in the year, the company announced the expiration of its 23-year Bulk Supply Agreement with the national utility at the end of March 2020. Fast forward to end of May, the company announced that “effective 1 June 2020 it would discontinue the supply of power to Konkola Copper Mines Plc (KCM) as the power supply agreement (PSA) between CEC and KCM came to an end on 31 March 2020 but was extended through mutual agreement of the parties, up to 31 May 2020”.

CEC provides some insight into what may have transpired during the negotiations between the power company and the mining company. “To agree on the terms to further extend the PSA, CEC and KCM entered negotiations which have since broken down, despite CEC’s best efforts in good faith towards securing a new contract and engaging in comprehensive and cooperative negotiations”.

The debt burden suffered by KCM has been a build-up that saw the mine being placed under liquidation. According to Metalbulletin.com, in an article written by Andrea Hotter and published on June 8, 2020, “the debt owed by KCM to the CEC is a direct consequence of the insufficient investment by Vedanta into KCM, which created a situation where the costs have remained at a higher level compared with the company’s revenue”. As at April 2020,“the tribunal appointed in the arbitration proceedings in the matter of Vedanta versus ZCCH-IH which were commenced by the former, has rejected the application for the withdrawal of the matter as well as the removal of the liquidator, according to a statement from ZCCM-IH”, according to a statement from ZCCM IH.

KCM though is focused on their new future without CEC in the picture. “Further, on 29 May 2020, KCM notified CEC that they had signed a term sheet for power supply with ZESCO Limited (“ZESCO”)”, further read the issued statement. In order to ensure a seamless transition to the new agreement whilst being regulatory compliant, CEC acknowledged that “the Government of the Republic of Zambia issued Statutory Instrument No. 57 of 2020 declaring CEC transmission and distribution infrastructure as “Common Carrier” to enable ZESCO to distribute or wheel power through the CEC infrastructure to supply KCM. Subsequently, on 31 May 2020, the Energy Regulation Board set a wheeling tariff equivalent to about 30% of CEC’s current network tariff”.

With the epilogue of the PSA with KCM eminent, wheeling considerations for use of the CEC network to facilitate power transmission in accordance with the Electricity Act of 2020 were inevitable.

Despite its woes, in 2019 financial year CEC paid a dividend of USD30.875 million compared to USD26.0 million in 2018. The one concern though for Shareholders in the CEC security is that they are now faced with eroding the value of the share price of their stock.  “The combination of these developments, and as the deliberations around the settlement of KCM’s debt and the review of the contractual arrangements in respect of KCM continue, may have a material effect on the price of the Company’s securities and shareholders are advised to expect a more comprehensive announcement to be issued and are hereby advised to exercise caution when dealing in the Company’s securities until further information is published”.

However, if one has been following the CEC and KCM debt debacle closely, they will remember that ZCCM IH, in their 2016 annual report, advised shareholders (under financial performance) that “The reduction in retained earnings was attributed to an increase in the share of losses as a result of operating losses reported by the investee companies mainly: Kansanshi Mining Plc, Konkola Copper Mines Plc, and Copperbelt Energy Corporation Plc”.

The financial risk contagion attributed to KCM under Vedanta stewardship at the time was captured in a statement in the 2016 Annual Report and elaborated how the investment company chose to deal with it. “Subsequent to year-end, ZCCM-IH filed a Claim Form with the English High Court on 6th June 2016 to recover outstanding sums in excess of US$100 million due to it from KCM, pursuant to the terms of the Settlement Agreement entered into in 2013”. The statement further explains that “On 16 December 2016, ZCCM-IH was successful in its application for default judgment. KCM was ordered to pay all sums owed to ZCCM-IH pursuant to the Settlement Agreement (plus associated contractual interest) within thirty (30) days. The total amount to be paid by KCM amounted to approximately US$103 million. KCM was also ordered to reimburse ZCCM-IH 80% of the costs it had incurred in pursuing its claim”.

It has certainly been a “hot mess” and one can only hope that the recent events that have led us to this point in our mining and energy history bare the fruit a “New Future” for both sectors.  

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