Last Updated
Thursday 18 December 2014, 14:58 pm.
Mergers and acquisitions in the mining industry: What they mean for Botswana's development

The companies sold or in the process of being sold to Indian, Chinese and US/UK interests were all owned by Australians, Canadians and others but traded on the Botswana Stock Exchange. This means that under Botswana's tax laws any capital gains, i.e. the profits made on these transactions by shareholders, is free of any capital gains tax. So the Botswana Revenue Service gets nothing from the often substantial profits made in these mergers and acquisitions, writes Professor *ROMAN GRYNBERG
By Staff Writer Sat 20 Dec 2014, 01:26 am (GMT +2)
Mmegi Online :: Mergers and acquisitions in the mining industry: What they mean for Botswana's development








Several years ago, a young South African trained Motswana mining official complained bitterly to me about the incomprehensible accents of those Australian mining company representatives presenting at an international mining conference in Gaborone. I replied that if he just waited a decade, I could assure him that the Australian and Canadian  exploration companies which have done such a good job proving up Botswana's mineral resources would disappear from such conferences. Their assets, once proven up, would be sold to larger Indian and Chinese interests who would ultimately be the ones who have both the risk profile and the deep pockets to invest in frontier economies like Botswana. While my Motswana friend may find the Hindi and Mandarin accents equally difficult, given their business models, he would find their approach to mining in Botswana quite familiar.

Coal for India?
There have been three important Merger and Acquisition (M&A) developments in 2012 that are reshaping the mining industry in precisely the way that most observers expect, i.e. towards greater Asian control of the mining sector which has until now been the domain of European and South African firms. The most important development has been the acquisition in early September 2012 of the assets of CIC Energy, the Toronto-based company which was acquired by Jindal (British Virgin Islands), a subsidiary of the Indian giant Jindal Steel and Power, for what was reported to be a sum of about $115 million. Throughout the last decade, CIC had developed a business model that was based on a two-pronged approach. The first was the export of thermal coal to the Asian market from its Mmamabula deposits in the east of the country bordering the South African deposits in the Waterberg Mountains. The second was the development of what was initially meant to be a 3,000 MW thermal power generation plant at the mine head that was planned to supply energy starved South Africa and a small portion being sold locally to BPC. This business plan was logical enough but came up against the constraints of an Eskom in South Africa that was unwilling to move away from its traditional monopoly of thermal power generation and an inability of governments in SADC to move quickly enough to develop an efficient railroad to the coast.

What Jindahl acquired was access to 6 billion tonnes (approx) of relatively high quality coal (including Measured and Indicated resource of 2.4bn tonnes). In its press release, Jindahl said, "The deal will provide Jindahl the opportunity to tap the highly lucrative and power deficient Southern African Development Community (SADC) countries and given the huge resource, will also  provide an opportunity to set up a Coal to Hydrocarbons project." Jindahl has indicated informally that it intends to develop electricity export capacity initially of 300 MW to South Africa. If the company intends to develop a coal to liquids facility, however, it will have to explain where it will get the water from for such a water intensive activity.

But the acquisition of Mmambula by Jindahl is largely about providing the parent company with enough coal for its activities in India. On the occasion of the acquisition of CIC, Jindahl Director and Group CFO, Sushil Maroo, said, "This is another step in the direction of backward integration as the coal assets will give the company self-sufficiency when it comes to dependency on natural resources. This will enable JSPL in becoming a more self-reliant and fuel secure enterprise." Jindahl will of course face the same issue as CIC - how will it export up to 20Mt/annum of relatively high quality coal to the coast? Without the development of a railroad to the coast and a new port in either Namibia, South Africa or Mozambique, there will simply not be the capacity to develop the coal exports, and unless governments in SADC are willing to move quickly, the sale of Mammabula to Jindahl may not be the last time the deposit is sold.

China in Ngamiland?
But the really interesting M & A developments are not in coal but in copper. At present, there is a major hostile takeover bid of Discovery Metal's Boseto copper assets in Ngamiland. Discovery Metal is being aggressively pursued by one of its shareholders, the Cathay Fortune Corporation, which has offered $1.70 for the shares it does not own in the company. Cathay Fortune Corp., founded by Chinese billionaire Yu Yong, is 17 percent higher than Discovery's closing price in October when the bid was initially made.  Cathay Fortune already holds 13.7 percent of Discovery. The takeover would see China Fortune hold 75 percent of Discovery and the Chinese government's development arm, the China Africa Development Fund, holding a further 25 percent. If successful, this would be the first major mining investment by the Chinese government in Botswana and a further step along the road to Asian control of the mining sector.

This acquisition will almost certainly mean that the concentrate from the mine will be shipped to copper-hungry China which imports up to 40 percent of the world's copper. With moves in Indonesia to localise production and ownership, there will be increasing pressure down the value chain to assure supply for Chinese refiners who have very limited copper deposits in the country. In 2010, China produced approximately 4 Mt of refined copper but only mines about 1Mt of copper concentrate.  
In another M&A development, Hana Mining, with potentially very large copper-silver deposits in Ghanzi, has been sold to Cupric Canyon, which is jointly owned by management and Barclays Resources. The Toronto-based company was sold at "C$0.82 in cash for each common share of Hana, representing a premium of approximately 88 percent to the 20-day volume weighted average price of the Hana Shares on the TSX Venture Exchange as of October 23, 2012". The benefit is that with the support of a major player like Barclays, the new developers will be in a position to more expeditiously develop the deposit to production stage and then likely on-sell in much the same way as is happening with Discovery and CIC assets. It is the first acquisition by the two-year old company. 

And for Botswana...?
These new acquisitions raise a whole host of questions. The first is what is in it for Botswana? The acquisition by Jindahl could well be a real possibility to move to export power to South Africa and coal to India. Jindahl has muscle and money. However, the three acquisitions raise some fundamental questions about Botswana's tax laws. The companies sold or in the process of being sold to Indian, Chinese and US/UK interests were all owned by Australians, Canadians and others but traded on the Botswana Stock Exchange. This means that under Botswana's tax laws, any capital gains i.e. the profits made on these transactions by shareholders, is free of any capital gains tax. So the Botswana Revenue Service gets nothing from the often substantial profits made in these mergers and acquisitions This exemption was created to stimulate listing on the stock exchange but the question is whether for the purposes of mining companies this is perhaps too generous and will simply encourage what is called 'flipping' - selling of assets purely for capital gains. Perhaps a slightly less generous allowance of 50 percent of the capital gain, rather than the full 100 percent, would be a reform the government may wish to consider in light of the current fiscal austerity.

The second question, which also relates to another tax issues, is whether Botswana will become an exporter of unprocessed base metals with little or no value addition. Given the business models of Jindahl and what is likely to be export oriented interest of the Cathay Fortune and the Chinese government, the development will be primarily aimed at supplying export markets with unprocessed raw materials. While exporting coal is a positive and welcome development as Botswana cannot possibly use the coal reserves it currently has, exporting unprocessed copper concentrate, which will only increase in price in the coming years, is another matter.

This of course is not the only option for Botswana. The country could choose the far more difficult route and impose royalties or export taxes on unprocessed raw materials that would provide incentives to these firms to process base metals here. This is the approach followed by countries like South Africa and Indonesia to process raw materials locally. It took Botswana 20 years of often-rancorous debate to decide to beneficiate diamonds and this has resulted in the creation of 3,000 jobs in the diamond processing industry. A move towards base metal beneficiation needs careful consideration by government but it is time the old mining model of exporting unprocessed raw materials is finally put to rest.

*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.



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