What's Anglo's angle in Zambia?

Good Friday and welcome to your thought of the day.

I usually conduct research using just the facts - but on a hot August day with not much else going on in the markets, I'm instead inviting you down the rabbit hole. Feel free to click away if you aren't a fan of conspiracy theories.

This article is relevant to Jubilee Metals, and to Arc Minerals, and to Xtract Resources, and to Tertiary Minerals, and to Firering...pretty much anyone in Zambian copper. 

And it's this: what is Anglo's game plan in Zambia?

To set the scene, copper is starting to inch up as workers at BHP's Escondida go on strike - this will be temporary but nevertheless highlights just how precarious global production really is. That supply gap will wake up eventually.

History lesson time

We need to start with a little history; Anglo American began working in Zambia (British colony Northern Rhodesia at the time), in the 1920s through subsidiary the Rhodesian Anglo American Corporation. Post WWII, copper boomed and with it Zambia and Anglo. But it was not to last.

Zambia gained independence in 1964, and a few years years later under the Mulungushi Reforms, the Zambian government began to nationalise the copper mines; Anglo American's operations were hugely affected as the government acquired a majority stake in their mines. 

This culminated in the state-controlled Zambia Consolidated Copper Mines (ZCCM), which took control over the copper mining assets. Anglo American retained some minority interests but largely withdrew from many mining operations.

The major attempted to return in 2000 by taking control of KCM (Konkola) but left two years later due to weak financial returns and a sunken copper price. This 51% stake was purchased from Zambia Copper Investments (the Zambian government) in March 2000 - and by its exit, Anglo had lost $108 million.

It's interesting to consider the circumstances of its exit; Konkola was at the time the country's largest mine, accounting for 67% of exports and essentially the main source of US Dollars. And exit plans dragged on as Zambia demanded $200 million in exit payments.

One former exec of Anglo's Zambian operations, Anderson Mazoka, argued it was leaving because 'Anglo would like to see itself as a first world company rather than a company based in the third world where the risks are high.' But CEO Simon Thompson argued that 'We look at all our investment opportunities on the basis of the investment not on the basis of the geography.'

It then marked a return to the country, 20 years later in 2022, with its Joint Venture with Arc Minerals, chaired by a former senior executive of the major, who so happens to have significant negotiating experience.

But why return to the country now? Put simply, it was Hakainde Hichilema (HH's) 2021 victory, and the associated tax reforms through his United Party for National Development (UPND). Hichilema has a background in business and as an economist - and remains well regarded as the right person to improve Zambia's economy.

For context, during the 1950s copper boom, Zambia was arguably wealthier than most of its neighbours - but the 1960s copper crisis was a disaster.

But this is more than that; HH's victory was a reaffirmation of democracy - alongside a peaceful transfer of power. HH also has a firm anti-corruption reputation, enjoyed huge support among the youth vote, and was welcomed internationally; foreign relations have improved dramatically over the past three years.

There seems to be a cycle; copper booms, investment increases, Zambia increases taxes, copper pricing falls, investment flees, Zambia reduces taxes, copper booms...

But is Anglo returning to Zambia just to explore with Arc?

Yes, the tenure is exceptionally prospective for all sorts of reasons - covered in depth here - but it's unlikely that this is the entire play. Interestingly, through Zambia's licence system, you can see that Anglo has given up several exploratory licences in recent weeks - and I think it's because the company has another, much bigger target.

February 2024’s Mining Indaba gave us some clues, from none other than Anglo American CEO Duncan Wanblad. Domestic Zambian site Business Live reported the CEO as saying that ‘Anglo is interested in returning to Zambia,’ including making acquisitions — noting that the country has taken significant strides — ‘I think Zambia is doing a really good job of making mining investable in that country. It seems to me there is quite a lot of action behind the talk.’

And Reuters reported the CEO as saying:

‘Zambia's mining sector appears to be on track for renewed activity - and that is good for Zambia and African mining. I am pleased that we are progressing with early-stage exploration in Zambia's North-Western Province to identify potential copper and cobalt opportunities.’

It’s also worth noting that Wanblad announced in late April that he is seeking $100 million in funding from the World Bank’s private sector arm, the International Finance Corporation — a record amount which will be solely focused on corporate social responsibility, predominantly in Africa. 

But Anglo also plans to cut capital expenditure by $1.8 billion by 2026 — partially due to a huge writedown in its UK fertiliser project.

Here’s the context: Anglo needs to find something big to shift the story. The company’s revenue basket took a hit last year, including within diamonds and platinum group metals, both of which have suffered significant price slumps. Diamond unit De Beers faces severe challenges from lab-made rocks amid a $1.6 billion write-down in 2023, with adjusted Ebitda at the unit sliding to just $72 million last year down from $1.4 billion in 2022. 

PGM demand keeps falling as EVs take off, and with supply disruptions remaining better than expected, Anglo’s 79% -owned Amplats division is now cutting 3,700 jobs representing 17% of the workforce, and is also potentially closing down the Mortimer smelter.

Anglo’s 2023 full-year underlying earnings were down by almost a third to $9.9 billion.

In May, Anglo announced a radical restructure — it now plans to demerge Amplats and either sell or demerge De Beers, which it has been linked to for well over a century. Wanblad also proposes selling the steelmaking coal assets and selling or even closing down the nickel operations (blame Indonesia), leaving just copper, iron ore and the Woodsmith money pit on the balance sheet.

But even Woodsmith will be delayed. The project still has a $4.8 billion capital cost, but Anglo is cutting capital expenditure to just $200 million in 2025 and nothing in 2026.

I'll say it here: Woodsmith will eventually be written off completely.

Wanblad argues that ‘we expect that a radically simpler business will deliver sustainable incremental value creation through a step change in operational performance and cost reduction. Anglo American’s shareholders will see the full undiluted upside from these extensive changes, with the value of our copper and iron ore assets brought to the fore. These actions represent the most radical changes to Anglo American in decades.’

Anglo plans to increase its copper production to 1 million tonnes per annum by the mid-2030s, and saw copper and nickel production increase by 23% year-over-year in 2023 — driven by a ramp-up at Quellaveco but nevertheless impacted by grade declines in Chile. 

The new focus? Expand copper production through greenfields project development, organic growth and M&A which would be ‘on the cards for a new Anglo.’

The big problem was, and is, that the company has marketed its future as being copper. And yet 2023 saw the major continually cut copper volume predictions. Bank of America analysts have previously argued that Anglo face ‘an uphill battle’ to restore investor trust.

The grand conspiracy

So just where is all this copper coming from?

There is one solution that makes sense; and it's only been possible to fit the pieces together now. 

Anglo wants Konkola back.

But it has to do this delicately and carefully - given the brief two years of ownership and country exit back in 2002.

Copper is back in fashion, Zambian tax has been reformed, and Anglo needs more metal.

The major knows that the mine has the resources it needs to boost copper output. There were rumours in January 2023 that Anglo was looking to get back into Konkola but they died down. Vedanta just made $245.75 million available to pay off small creditors after a five year legal battle. It needs to raise another $1 billion to get the mine back up and running. 

Vedanta can't afford this by itself because it needs to reduce its own debt by $3 billion over the next three years because of investment downgrades.

But perhaps Anglo can. It's cutting capital expenditure by $1.8 billion in the 2023 to 2026 period and will also be cash rich after its divestments.

And Vedanta founder Anil Agarwal was Anglo’s biggest shareholder between 2017-19, leading to speculation he was planning a bid for the whole company. They all know each other well.

Let's rewind to late April - Abu Dhabi firm IRH had recently bought a 51% stake in Mopani Copper Mines in a deal worth $1.1 billion. Reuters reports that it was planning a bid for a stake owned by EMR Capital in Lubambe Copper Mine, which was also for sale. And as Jubilee Metals shareholders will know, IRH is also investing significantly in the copper waste dumps project, in partnership with the growth stock.

Reuters reported that IRH had also offered to buy a majority stake in Konkola; an offer of more than $1 billion for a 51% stake and overall control (at present Vedanta owns 80% and their Zambian partner 20%). 

IRH was only interested in a controlling stake, and Vedanta was not - presumably wanting to keep the assets on its balance sheet. Talks collapsed ostensibly because of 'discrepancies in the valuation.'

A Reuters source argued that Vedanta was only willing to sell an equity stake of circa 30% for almost $2 billion. This is a world-class mine after all.

At the time negotiations opened, Vedanta noted that 'we are engaging with prospective partners for both short-term financing and longer-term equity financing but cannot disclose the names of these partners or investors due to the sensitive stage these discussions have reached.'

I'll bet another one of these potential partners is Anglo.

Here's the history: Vedanta has only regained control after five years - back in May 2019, the former Zambian government seized the copper mines and smelting plant after accusing the company of failing to invest in expanding copper production or pay enough taxes, provisionally liquidating KCM and forcing operations to a near standstill.

Vedanta needs to raise the additional $1 billion over the next five years. Its CEO Chris Griffith notes that this funding is needed to expand underground operations - which holds some of the best copper in the world. Removing groundwater will be an expensive challenge, but only one other company will know the specifics.

Because it's been there before.

On 5 July, Vedanta reported that it had acquired the circa $250 million it needed to pay off the small creditors.

Then on 23 July, Vedanta sent out a call for expressions of interest in the state-owned Times of Zambia newspaper for a partner at Konkola, with a deadline of 31 July. It wants:

• Mine exploration to increase reserves and resources to 21 million metric tons of copper equivalent, from the current 16 million tons.

• To enhance cobalt production to increase output to 6,000 tons per year.

• Operating and maintaining concentrator plants, a smelter, a refinery and a tailings-leach plant.

This might also interest Jubilee, which may be the only operator which can process the low grade copper dumps at Konkola. The two were close to a deal back in 2019 before Vedanta was ejected.

Anglo needs to hugely expand copper production. And it needs to keep capex tight. For perspective, recent Goldman Sachs analysis of seven major copper projects in South America found that the average capital intensity of a project rises by 50% between pre-feasibility-study stage and production. 

And a new copper mine takes more than 20 years to build from discovery, as demonstrated by Anglo’s Quellaveco mine in Peru (which took 30 years).

This is time Anglo does not have. And it's not like new major copper discoveries are just springing out of the ground.

They don't want a new mine. They want a very old mine.

On 1 August (the day after Vedanta's deadline for expressions of interest) Anglo CEO Duncan Wanblad gave an interview in which he noted that 'We will see more joint venture agreements to bring together very big capital-intensive projects...There is a threshold scale that is required to support copper, especially where we are seeing capital intensity increase quite significantly. So scale is important. Having some type of diversification, where you have a little bit of a cash engine as well as a growth engine, will become important.'

And guess who's very strongly rumoured to be making a visit to Zambia in the coming days?

Have a great weekend.

- Charles Archer 16/8/2024