| Fri 20 Aug 2004, 8:50 | | ZCI - Introduction Of A Strategic Equity Partner |
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ZCI - Introduction Of A Strategic Equity Partner For Konkola Copper Mines Plc
And Further Cautionary Announcement
Zambia Copper Investments Limited
(Registered in Bermuda)
JSE code: ZCI
ISIN: BMG988431240
(`ZCI` or `the company`)
THE INTRODUCTION OF A STRATEGIC EQUITY PARTNER FOR KONKOLA COPPER MINES PLC AND
FURTHER CAUTIONARY ANNOUNCEMENT
1. Introduction
Further to the cautionary announcements published over the period 16 May 2003 to
23 July 2004, Rand Merchant Bank (`RMB`) is authorised to announce that ZCI, the
Government of the Republic of Zambia (`GRZ`), ZCCM Investments Holdings plc
(`ZCCM-IH`), Konkola Copper Mines plc (`KCM`) and Vedanta Resources plc
(`Vedanta`) (collectively, `the Parties`) have reached agreement on the terms of
an investment by Vedanta into KCM (`the Vedanta investment`), subject to the
fulfilment of certain conditions precedent set out in paragraph 4 below
(`conditions precedent`).
2. Background and rationale for the Vedanta investment
Concomitant with the exit of Anglo American plc from ZCI (and indirectly KCM) in
September 2002, the KCM shareholders and GRZ embarked on a process to ensure the
long-term sustainability of KCM. It was agreed that the introduction of a new
strategic equity partner was the most appropriate route to follow to secure the
future of KCM and to address two key issues, namely:
- the provision of technical expertise and management experience; and
- funding support and financial stability for KCM.
The introduction of a new strategic equity partner would therefore address the
management and capital constraints of the business.
A bid process was therefore initiated in October 2002 and bids were received in
February 2003. After due consideration of the bids received, Vedanta was
selected as the preferred bidder by the KCM board and endorsed by GRZ. Vedanta
is an international mining and metals group (`the group`) with zinc, copper and
aluminium operations in India and two copper mines in Australia. It listed on
the London Stock Exchange plc in November 2003 and has a current market
capitalisation of approximately US$1.4 billion. Vedanta holds its interests in
its operations through two subsidiaries, Sterlite Industries (India) Limited
(`Sterlite`) and the Madras Aluminium Company Limited. Sterlite is Vedanta`s
principal subsidiary company and is currently listed on the Bombay Stock
Exchange. Vedanta`s copper operations are owned and operated by Sterlite, which
also holds majority stakes in the group`s zinc business, Hindustan Zinc Limited,
and the group`s principal aluminium business, the Bharat Aluminium Company
Limited. Vedanta has also recently embarked on a major capital expenditure
programme of approximately US$2 billion to significantly expand its operations.
3. Detailed terms of the Vedanta investment and associated arrangements
The key terms of the Vedanta investment that the Parties have agreed to are as
follows:
- the subscription by Vedanta for sufficient new KCM ordinary shares for an
amount of US$25 million such that Vedanta obtains a 51% interest in KCM.
Accordingly, ZCI will reduce its interest in KCM from 58% to 28.4% and ZCCM
IH will reduce its interest in KCM from 42% to 20.6%;
- to enable Vedanta to subscribe for KCM shares, ZCI and ZCCM-IH will waive
their pre-emptive subscription rights. As consideration for this waiver,
ZCI will receive a deferred consideration of US$23.2 million from Vedanta,
payable over a period commencing on the completion date of the Vedanta
investment and ending on 31 December 2008. The schedule of deferred
payments is as follows:
- two million, three hundred and twenty thousand US dollars
(US$2,320,000) on the Completion Date;
- five million, two hundred and twenty thousand US dollars
(US$5,220,000) on 31 December 2005;
- five million, two hundred and twenty thousand US dollars
(US$5,220,000) on 31 December 2006;
- five million, two hundred and twenty thousand US dollars
(US$5,220,000) on 31 December 2007; and
- five million, two hundred and twenty thousand US dollars
(US$5,220,000) on 31 December 2008;
- similarly, while ZCCM-IH will not receive a deferred consideration from
Vedanta, ZCCM-IH will receive, as consideration for their waiver, US$16.8
million by way of a debt cancellation arrangement with GRZ, whereby GRZ
will cancel debt owed by ZCCM-IH to GRZ;
- in the event that the free cash flow (after sustaining and project capital
expenditures) of KCM is negative at any time during a period of nine years
after the completion date of the Vedanta investment, then Vedanta will
guarantee and be responsible for providing or securing the necessary
additional funding required by KCM to immediately fund to the extent of the
negative cash flow up to but not exceeding a cumulative amount of US$220
million (`standby funding commitment`). Should this standby funding
commitment be provided by Vedanta in the form of equity, it will be non-
dilutive to existing shareholders;
- Vedanta will contractually undertake not to exit KCM prior to 1 January
2008. Thereafter if it wishes to exit, Vedanta is required to provide a
twelve month notice period during which time it will provide management to
KCM and it will pay an exit fee equivalent to the following years budgeted
capital expenditure (as adjusted for any over or under spending of capital
expenditure in prior financial periods), with its standby funding
commitment terminating on the exit date;
- Vedanta has agreed that KCM will set aside a portion of its future annual
free cash flow to create a cash reserve so that the shareholders and GRZ
have assurance that as cash is accumulated in the reserve, KCM has
dedicated funds available to fund its environmental and terminal benefit
obligations;
- an undertaking has been given by Vedanta to support a feasibility study on
the extension of the Konkola ore body by no later than 31 December 2006.
Vedanta will contribute US$1million towards the cost of the feasibility
study;
- should the KCM board determine to proceed with further development of the
Konkola ore body, Vedanta will be responsible for securing the debt finance
necessary in accordance with typical market practices for similar projects.
In addition, Vedanta will be required to contribute whatever equity is
required by KCM to secure the debt funding. ZCI and ZCCM-IH will be able
to follow their rights but should they decline to do so, the additional
equity will be contributed by Vedanta on a dilutive basis;
- Vedanta will have a call option in favour of Vedanta over ZCI`s shares in
KCM, exercisable on either a positive development decision on the Konkola
ore body or the achievement by Konkola mine, a division of KCM, of 3
million tonnes per annum (`tpa`) of ore production for four consecutive
quarters. The exercise price will be the prevailing fair market value of
ZCI`s KCM shares as agreed to between ZCI and Vedanta or, failing
agreement, as determined by an independent investment bank;
- if the KCM board determines not to proceed with the further development of
the Konkola ore body, then ZCI and ZCCM-IH will have a call option over
Vedanta`s shares in KCM, exercisable on or after 31 December 2009 at the
prevailing fair market value of such shares. However, if Vedanta can
demonstrate, at any time before the exercise date of the call option, that
an additional five years production for the period from 2013 to 2017, at
175 000 tpa of produced finished copper utilising the existing KCM mining
licence and adjacent areas is achievable, then in those circumstances the
exercise date of the call option will be deferred for a period of five
years, such that it may not be exercised prior to 31 December 2014; and
- GRZ will continue to own one special share in KCM which will allow GRZ to
vote at KCM shareholder meetings under certain circumstances as specified
in the new KCM articles of association and which will become effective on
completion. For example, the consent of GRZ shall be required for any
material change in the nature of the business of KCM.
On the basis of Vedanta becoming the new controlling shareholder of KCM, GRZ has
also agreed the terms of a new development agreement with KCM, which regulates
the legal and fiscal framework under which KCM operates in Zambia. In addition
to providing legislative certainty to KCM for the agreed stability period, the
development agreement also has certain incentives which will benefit KCM if the
KCM board decides to proceed with the further development of the Konkola ore
body.
At present, the board of directors of KCM consists of three ZCI appointed
directors, two ZCCM-IH appointed directors and one GRZ appointed director (with
limited voting rights). On completion of the Vedanta investment, the board of
KCM will be reconstituted and consist of five Vedanta appointed directors, two
ZCI appointed directors, two ZCCM-IH appointed directors and one GRZ appointed
director (with limited voting rights).
4. Conditions precedent
The Vedanta investment is conditional upon the fulfilment of, inter alia, the
following conditions precedent:
- approval of the Vedanta investment by ZCI shareholders by way of an
ordinary resolution requiring the approval of 75% of ZCI shareholders
present or represented by proxy at the meeting;
- approvals by the JSE Securities Exchange South Africa, Paris Bourse and the
South African Reserve Bank of the circular to ZCI shareholders;
- a waiver by the Securities and Exchange Commission of Zambia of the
requirement that Vedanta make an offer to ZCCM-IH and ZCI for their shares
in KCM and the consent thereto by ZCI and ZCCM-IH;
- the consent of certain KCM debt providers to the Vedanta investment;
- the signature of a management agreement for the provision of certain
services by Vedanta to KCM; and
- upon satisfaction of the above conditions precedent, the execution of a new
shareholders agreement governing the relationship between the Parties, the
execution of a new development agreement between KCM and GRZ, the execution
of the call option agreements between Vedanta, ZCI and ZCCM-IH and the
adoption by KCM of new articles of association.
5. Warranties
ZCI, ZCCM-IH and KCM have provided certain warranties to Vedanta normal in a
transaction of this nature.
6. Opinion
RMB has been appointed by ZCI to prepare a fair and reasonable opinion in
respect of the terms and conditions of the Vedanta investment. This opinion,
together with the opinion of the board of directors of ZCI, will be contained in
the circular to shareholders.
The board of directors of ZCCM-IH is of the view that the Vedanta investment is
in the best interests of ZCCM-IH shareholders, who will continue to benefit from
ZCCM-IH`s 20.6% retained interest in KCM, and thus share in the future
development of KCM`s assets.
7. Documentation
A circular, which is subject to the approval of the JSE Securities Exchange
South Africa and the Paris Bourse, giving details of the Vedanta investment and
containing a notice of a general meeting of ZCI shareholders, is being prepared
and will be posted to ZCI shareholders no later than Monday 4 October 2004.
8. Financial effects of the Vedanta investment and further cautionary
announcement
The financial effects of the Vedanta investment are in the process of being
finalised. Full disclosure of the financial effects, including the effect on net
asset value per share, net tangible asset value per share and headline loss per
share, will be published shortly. Accordingly, shareholders are advised to
continue to exercise caution when dealing in the securities of the company until
such time as a further announcement is made containing the financial effects of
the Vedanta investment.
By order of the board
Bermuda
20 August 2004
Sponsor and independent financial Attorneys to ZCI
advisor
RAND MERCHANT BANK (A division of webber Wentzel Bowens
FirstRand Bank Limited)
CORPORATE FINANCE
Legal Adviser to ZCI
Maitland International
Date: 20/08/2004 08:30:07 AM
Produced by the JSE SENS Department
