Zambia-bars To A Copper BonanzaPublished by MAC on 2006-12-22
Source: Financial Times
Bars to a copper bonanza
By Michael Peel and Rebecca Bream, Financial Times
December 22 2006
The molten copper scatters as it pours into giant egg-cup-shaped collecting vats, dusting the surrounding ground with orange snow. The brightness catches the eye in the otherwise dark, cavernous surroundings of the Nkana smelter, in which pieces of metal and brick lie strewn about the floor.
This may be Zambia's second largest copper smelter, but even its managers admit it needs sprucing up as it approaches its 75th anniversary next year.
"We have still remained an old smelter with old technologies," says Lawrence Akombaetwa, smelter manager. "We [have] quite high operating costs, looking at the benchmarks of our friends elsewhere."
The longevity of the smelter - owned by Konkola Copper Mines, which is controlled by Vedanta Resources, a FTSE-100 mining group - highlights the gamble that metals and mining companies are taking in Zambia and elsewhere. As the copper price has soared on booming sales to China and India, Vedanta has decided it can make money in a country whose metals and mining industry has been beset for years by problems with logistics, underinvestment and pollution.
Now Vedanta faces a classic management challenge: it has no worries about the demand for its product, but plenty of concerns about how it will get that product to market.
The Vedanta story has political as well as commercial significance. The company, which is Indian-owned, took over the assets after UK-listed Anglo-American pulled out in 2002. It now looks like a bellwether for adventurous, well-financed Chinese and Indian companies taking on African extraction projects that western multinationals shun (see below).
Vedanta, founded by the Indian metals magnate Anil Agarwal, produces most of its copper, aluminium and zinc from mines and smelters in India. The company surprised the market in 2004 when it made its first foray into Africa and bought a 51 per cent stake in Konkola, Zambia's largest copper producer.
Output from Konkola's three mines and the Nkana smelter had dwindled over the years because of lack of investment and there had been problems with flooding.
Vedanta knew that it would take lots of work and money to turn Konkola round, but this has been harder than the group expected.
"We are now on the threshold of producing 200,000 tonnes of copper a year from Konkola," Kuldip Kaura, chief executive, said last month. "We were expecting to reach this stage earlier, but a lot more work needed to be done on the plants."
The logic that brought Vedanta to Zambia is neatly demonstrated at the company's Nchanga open pit mine. Francis Temba, manager of the 51-year-old facility - which is now a veritable canyon - says the rise in the copper price brought about a resurrection at a time when surface reserves were growing thinner.
The upturn has made it economically viable to dig for deeper ores that would not have been profitable to mine a few years ago, he says. "This pit should have been closed by 2004 if the price had not changed."
Yet even here there is evidence of the problems inherent in Vedanta's investment. The value of copper may have soared but so have the costs of some of the means of production. Mr Temba says the tyres for the giant 190-tonne dumper trucks that ply the supply roads have risen in price from $24,000 last year to $158,000 this year.
"Because of the boom in the mining industry, the manufacturers are taking advantage of it," he says.
Even more significant are the host of environmental problems that built up in the Zambian copper industry during its long period of state ownership and subsequent privatisation. One foreign diplomat describes the Chingola area, one of the main sites of Vedanta's operations, as an "environmental disaster".
Kabwe, another city in the country's copper belt, is one of the 10 most polluted cities in the world, according to theBlacksmith Institute, an environmental research group.
These legacy problems have already affected Vedanta commercially. In November the company was forced by the government to shut down more than a quarter of its production for almost two weeks after a leak of toxic copper sulphate caused a local river to turn blue. Konkola said the pollution occurred because of an accumulation of silt over many years at a dam that was designed to prevent spillages from the plant.
The company faces further costs related to social welfare problems such as the high HIV infection rate, estimated at 17 per cent among 15-to-49-year-olds nationally and thought to be even higher in mining areas.
Vedanta finances a hospital, distributes free anti-retroviral drugs to more than 500 employees a month at a cost of $500 each and gives out as many as 140,000 condoms a month. Looking at a sheet showing condom distribution statistics, a company official comments wryly: "There is a lot of activity here."
A further gamble for Vedanta relates to Zambia's official mining policy. The government's take from Zambia's copper industry is small even by the controversial standards of many African resource deals. A paper produced by the UK's Department for International Development in June said the country earned just $5m (£2.5m) royalties last year on exports estimated at $1.6bn.
The official take - described by one non-British diplomat as "woeful" - reflects "development agreements" struck when the industry was making losses, DFID says.
Levy Mwanawasa, Zambia's president, has said the government wants to raise mining royalty rates, although officials seem to be approaching the question cautiously.
Back at the sense-bombarding smelter, amid the acid tang of sulphur dioxide and the crackle of cooling water skittering across hot metal, Mr Akombaetwa reflects on Konkola's curious mix of bonanza and big problems. The smelter can operate only at two-thirds of capacity, in part because it is not equipped to cater for ores of the chemical composition that Konkola mines. A new smelter under construction should be able to cope better, he adds.
Asked whether the expensive new smelter will eventually make the troublesome old one obsolete, Mr Akombaetwa smiles in noncommittal reply. "That question," he says, "is not very clear."