Zim's mining bond vs its bad boy reputation

Published: 02 November 2013

Zimbabwe is increasingly pinning its hopes on its mining industry to beef up the government coffers. The government is keen to tap into the sector's huge potential - it holds the second largest platinum reserves globally and its diamond fields are also reportedly ranked among the top five diamond reserves in the world.

But mining needs support to get over the constraints of high production costs, excessive fees, and falling commodity prices. So the government is planning to issue it's first bond aimed at financing the mining sector. Will it be able to convince investors to participate?

The government and the mining sector hardly have the best of reputations when it comes to debt. The Reserve Bank's defaulted on repayment of bonds in 2010, and the year before it failed to pay miners for gold deliveries.

Although the economy has performed much better since then, Zimbabwe will have to work hard to shake that reputation when it come to marketing its international bond to investors.

A Harare-based economist who declined to be named said: "You have to make sure that any fears surrounding the government's character and capacity to pay have to be sorted out. Government is already regarded as a bad boy, that they can't pay back the money. It depends on how it is structured. When you borrow you must show capacity to pay back within the required time."

Zimbabwe may also have to take a hard look at some of its policies that are a put-off for investors, such as the indigenisation programme, which forces foreign firms in the country to cede more than half of their shares to local black-owned financial entities.

Independent analyst John Robertson says: "Some people here have fanciful notions of megabucks-worth of buried riches that they think could support issues of government bonds. I have had no success in arguing that the minerals down there are of no value whatever until they are located, reached, extracted and processed into something that can be sold. Those are the steps involved in mining, and the business of mining requires the money at the beginning of the process.

"Promises that the money will materialise at the end of the process will have absolutely no leverage in the bond market. The kind of people who invest in such projects are wired differently - they are venture capitalists and they might easily spend a fortune prospecting and drilling and taking huge chances, but none of them even move from square one if they even suspect that their claims will be confiscated or any other property rights will be violated."

Separately, it is now understood that the government wants to review deals signed under its controversial indigenisation programme. This is a significant change, given that Robert Mugabe has always stood firm on the policy and and ruled out any back-tracking, even though it is blamed for causing much uncertainty and capital flight in mining and other sectors.

Platinum miner Zimplats, which struck a $971m indigenisation deal that later became mired in controversy, announced on Thursday:

Following the installation of a new Government, the company's indigenisation plan will now be reviewed by the new Minister of Indigenisation. These discussions will also include further engagement on the previously announced land acquisition by government.

Does this latest move suggest that the government is willing to rethink indigenisation in return for attracting foreign investment? It's early days. But after years of creating uncertainty for foreign investors and local businesses, the government is a long way from convincing potential bond buyers that it has shaken off that bad boy image.
- Irene Madongo - Financial Times