Future of Zambia’s Konkola Copper Mine at risk

by Developed Africa 7. October 2014 09:00

Operational challenges and low copper prices are endangering the future of the Konkola Copper Mines, a subsidiary of Vedanta resources and one of the world’s largest copper mines. Despite the KCM generating $1.3 billion in revenues last year, it made an after-tax loss of $89 million, due to what Mines, Energy and Water Development Minister Christopher Yaluma has described as “poor management”, along with exposure to $1.6 billion of liabilities. The Zambia Revenue Authorities’ refusal to hand over VAT refunds, combined with high fuel prices, is also placing the mine under financial strain.

The Zambian mining industry consumed over 50% of the country’s total power supply, and a lack of reliable and sufficient power has been cited as a major limiting factor to the industry’s growth. Deteriorating relations between the KCM and suppliers has further highlighted the importance of this. The KCM recently experienced a week-long power supply restriction after a dispute over an unpaid bill of $44 million with Zambian electricity supplier, Copperbelt Energy Corp. The situation was resolved after Zambia’s energy minister warned that were restrictions to be prolonged there were likely to be serious implications for job security, describing the standoff between the two companies as “economic sabotage”.

While the energy supply has since been restored to previous levels through what has been described as an “act of good faith” by CEC officials, there have been knock-on effects that have proven to deteriorate the situation further. Underground work at the Nchanga mine has been suspended due to flooding, thought to be a result of a lack of pumping during the energy restriction. This has caused the loss of almost 500 tonnes of copper, with a value of $3.3 million, and further costs will accrue as water is drained, damage repaired and normal operations resumed.

As the single most important recipient of large foreign direct investment (FDI) in the country, mining is clearly a vital industry to Zambia, especially as it employs 10% of the overall workforce. The proposed expansion of the Konkola Deep Mining Project was expected to treble the KCM’s yearly output of copper ore to 6 million tons, but with demand remaining low and the mine’s financial situation worsening, the future remains uncertain. Minister of Mines, Energy and Water Development, Christopher Yaluma, has said that the government is closely monitoring the situation to minimise the possibility of job losses, which after the recent energy restriction were thought to be likely.

There are several possible scenarios that have been discussed by the government and parent company which could see the fortunes of the struggling mine reversed. Zambian Vice-President has said in a statement:

Our Government’s view is that KCM needs a fresh capital injection. Our experts, consultants and advisors say there is a requirement to put in more money if KCM is to be more viable.”

Dr Scott has said that Vedanta’s response to the government’s suggestion that KCM be recapitalised was to call for government intervention in the form of a financial injection via ZCCM Investment Holding. Alternatively they requested that they be permitted to borrow money from local banks, a move deemed unacceptable by Dr Scott due to its potential to have a negative impact on the agricultural sector, among others.

The government appears confident that with an injection of new capital, the KCM will again become viable. Whether this will come from Vedanta, governmental investment, or another source is yet to be known.

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