Zimbabwe independent january 31, 2014 financial matters

Financial Matters Monthly “Stimulating investment in Zimbabwe”

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Zimbabwe equity tops world’s index In 2013 global equity markets continued to see substantial gains which continued the positive trends we saw in 2012. The Zimbabwean equity market had a return of 34.76% which exceeded the world index at 20.25% (an aggregation of global equity markets), Emerging Markets at -4.98%, Emerging African Frontier Markets excluding South Africa (EFM Africa ex-SA) at 14.56% and Emerging African Markets including South Africa (EFM Africa) at -6.44% (see Figure 1).

The positive trends can largely be attributed to the “free cash”/ “hot money” that has been created by the policies of Quantitative Easing (QE) by the major central banks in Europe and by the US Federal Reserve. These policies have had the effect of lowering the yield of bonds relative to equities and in so doing significantly improving the risk premium equities offer.

The effect of this free money may

help to explain the “paradox” of global equity markets over the last two years where their strong performance has not been underpinned by strong global GDP growth. This has meant that one of the biggest questions of 2014 is on how sustainable the equity markets’ performance can be, particularly, in the face of the increasingly likely scenario in which QE continues to recede.

The clearest indication of the profound impact that tapering could have on global equities came after the US Federal Reserve hinted at the tapering of QE measures at the start of May 2013. Global equity markets took a dip because of the large sell-off that ensued after the hint. However, Zimbabwean stocks remained resilient in the face of the sell-off and actually recorded positive gains in May 2013 (see Figure 2). The dip in the Zimbabwean market only came after the national elections

of July 31.

Quite notable in the global equity market performance is the fact that EFM Africa ex-SA outperformed the traditionally safer Emerging Markets. Conventional wisdom would suggest that the concern over the tapering of US QE would lead to a withdrawal of money from the riskiest markets to the relatively safer markets resulting in capital flight away from African Emerging Frontier Markets first, then Emerging Markets, thereafter. However, the relatively strong performance of the African Frontier Markets against the Emerging Markets points to the greater equity risk premium African Frontier Markets currently offer relative to the broader Emerging Markets.

Within those African Frontier Markets Zimbabwe was one of the better performing markets.

However, the performance did

come at a cost - high volatility. The chart below graphically illustrates the level of outperformance of a USD100 invested in both the Zimbabwean market and EFM Africa ex-SA. Despite the Zimbabwean equity market recording double digit growth by year end, our investor would

have had to stomach a mammoth 24.49% drop between August 1 and September 5.The relative risk of holding that USD100 portfolio in Zimbabwe compared to the key members of the EFM Africa ex-SA index is shown in Figure 3.

Regionally we saw that Zimba-

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* G3 All Share Index (Market Cap Weighted)

Figure 1

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FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

Investments From Pg F1 bwe was one of the better performing markets but was prone to large swings (volatility). The single largest contributor to the volatility (risk) in Zimbabwe being the dip between August 1 and September 5 which started soon after the election period.

On a risk adjusted basis (return/ annualised volatility) Kenya provided the best return for each unit of risk (2.56) and Botswana, the worst (1.09) by this measurement. Zimbabwe was the second worst country by this measure (1.34) even though it placed it alongside the average for African Frontier Markets ex-SA as measured by the MSCI EFM ex-SA index (1.33).

In the smaller markets thin trading usually contributes to wide swings in returns and in so doing can result in low risk adjusted market returns. In the case of Zimbabwe, however, the risk adjusted performance of 1.34 was not due to thin trading. The chart below shows that the value of shares traded as a percentage of market capitalisation (turnover ratio) was slightly above regional average at 9%.

Our above average turnover ratio was largely supported by foreign investor participation which stood at 60% over the entire year.

Notably, in the second half of the year foreign investor participation increased to approximately 80% (against a relatively flat local participation)suggesting that the attractiveness of Zimbabwe equities was enhanced by the market.

This is to say that the dip was not driven by the company or sectorial fundamentals underpinning the equities but was simply a system wide shock.

With an eye on our risk adjusted performance it is important to identify which sectors were the

Figure 2

key drivers of that number. Figure5 shows the risk and return of the 5 prominent sectors into which Zimbabwean equities fall according to the MSCI GICS 速 classification.

The Consumer Staples sector has had the highest return and the lowest risk in the market and has, consequently, been the chief target of foreign investors. On the other hand, the Financials sector has been the worst performing sector lagging the others in terms of return and second worst in terms of risk. The weakness in the Financials sector reflects the struggling banking industry in Zimbabwe that has been characterised by severe liquidity concerns and the relatively high ratio of non-performing loans.

Figure 3

The global outlook for 2014 suggests that the appetite for equities will persist suggesting another good year for equities. However, in the face of the tapering of US QE measures the returns are expected to be lower than 2013.

We expect African Frontier Markets to remain strong largely on the back of strong economic fundamentals specifically in the consumer-facing stocks. In Zimbabwe, we expect the appeal of the Consumer Staples sector to persist (both for local and foreigner investors). However, an improved performance in the Financials sector is predicated on the liquidity concerns that have hampered the banking industry being addressed on a macro level.

Written by G3 Analytics 2014.

Neville Mandimika G3 Analytics (Private)Limited 15 Somerset Road, Eastlea Harare Tel: +263-4-776270/2 Mobile: +263 774 688 831 nevillem@g3analytics.co.zw www.g3analytics.co.zw

Figure 4

Figure 5

FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

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Telecoms

Zimbabwe’s Zimbabwe’s Demand Zimbabwe’s Demand for Data Grows Demand for for Data Grows Demand forData DataGrows Grows

Drivers leading to growth in demand for data in Zimbabwe Drivers Drivers leading leading to to growth growth in in demand demand for fordata datain inZimbabwe Zimbabwe

Main Main Main Article Article Article

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These the office while away from thethe mobile device.

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Dropbox is one example ofupan delivered viathe first generation themselves. across devices, tion GSMinto networks later themselves.

Dropbox isfrequent one example try’s growth was fuelled by the thus often leaving them in a ated apps promote cloud usage we have today.

The industry is Tube is clearly the leader is everyday cloudcloud application.

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Th3G efirst video YouTube is tion.

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viders. Wearable technologies emerged from the annual Consumer Electronics Show in Las Vegas this January as the technology trend to watch out for in 2014.

Implications Implications and opportunities and opportunities vice provider strategies to drive meet service This new demand will net. The time is to now forInterserproviders build

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this demand for data including service provider strategies to This new demand will drive the need to invest in increased meet this demand for data inservice provider strategies to cluding thedemand need to invest in indata on their meetcapacity this fornetworks, data increased data capacity on in their providing network cluding the need to redundancy, invest innetworks, providing data security and privacynetwork systems creased data capacity on their redundancy, data and This newproviding demand networks, network as consumers wantsecurity andwill aredrive deprivacy assecurity consumers redundancy, data and servicesystems provider strategies to manding more reliable, affordawant andsystems are demanding more privacy as connections consumers meet for data inble, fastthis anddemand secure reliable, affordable, fastmore and want andthe are demanding cluding need toZimbabwean invest in inwith 100% uptime. secure connections with 100% reliable, affordable, fast and creased data capacity onmeet their service providers must now uptime.

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Zimbabwean service tion in the market.

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The population time is now for to be connected to the Inter-

capability to do which in toorbe connected to so the Interturn could lead to consolidation in the market.

At only 40% penetration, Zimbabwe still has an untapped potential market of 60% of its 13m population yet to be connected to the Inter-

net packages which are relevant, affordable and reach the remaining 60% so that the growth trend is maintained for the good of the the remaining so that the industry and of 60% the country.

As the of the industry and of net.good Thetrend time is now for sergrowth isthe maintained for documented by World Bank, the country.

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theZimbabweans. good the industry andfor of all 2.5% nowof that’s good news theZimbabweans. country. As documented all by the World for every Article

by Bank, Ngonidzashe 10% increase broadband Article by Article by in Ngonidzashe Katsamba penetration, the underlying Katsamba Dandemutande Marketing Ngonidzashe Katsamba Dandemutande GDP could grow Marketing as much as Ngonidzashe.Katsamba@ Dandemutande Marketing Ngonidzashe.Katsamba@ 2.5% now that’s good news for dandemutande.co.zw dandemutande.co.zw Ngonidzashe.Katsamba@dandeTel: 791675-8 all Zimbabweans.

Tel: 791675-8 mutande.co.zw ArticleTel: by Ngonidzashe 791675-8 Katsamba Dandemutande Marketing Ngonidzashe.Katsamba@ dandemutande.co.zw Tel: 791675-8

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FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

Banking

Looming deflation and the investor’s position

By Rutendo Victoria Ndoro Many Zimbabweans remember the days of carrying large amounts of money to pay for goods and services as the inflation rate reached an alarming level. The introduction of the multicurrency system brought

inflation under control. In fact, year on year inflation and has been falling from arate of 4, 3% in July 2012 to 0.33% to January 2014. We are in a period of disinflation and which could potentially lead us into deflation. The December yearly rate

already was a negative 0.08%. Deflation is not a desirable state as it is indicative of a shrinking economy which could potentially lead to falling company profits and declining incomes, closure of companies and rising unemployment. Companies and individuals are also likely to default on loans and advances.

To counter deflation in America for example, the Federal Reserve can use monetary policy to increase money supply thereby boosting aggregate demand, all things remaining constant. This will lead to a rise in prices, causing inflation. Increased demand will filter positively to companies through increased revenues and ultimately, profitability. In the Zimbabwean context, however,with the prevailing multi-currency system, Government does not have much in terms of monetary policy tools at its disposal such as the printing of money (seigniorage), which was infamously used during the hyper-inflation period. As a result, curbing the looming deflation will prove to be a herculean task.

Disinflation and the possibility of deflation has largely been due to the significant decrease in money supply post the harmonized elections as the banking public panicked on prospects of the return of the local currency.An estimated $1 billion is said to have left the banking sector during the pre-and post-election period. Funds may not have necessarily left through Exchange Control, but rather via the holding ofcash by investorsout of fear of investing,and companies opting to hold cash as inventory/stock. In an economy that was already experiencing a liquidity squeeze; the capital flight had a huge impact on money supply. Resultantly, this caused company profits and revenues to decline further towards and during the last quarter of the year. In addition cash flows became significantly difficult to manage. Over and above this, the instability of the financial services sector did not help the situation as there was a run on deposits especially among indigenous banks, due to flight to quality. The reservations about the stability of some financial institutions reduced the deposits flowing intobanks.

With that established, the increase in civil servants’ salaries is generally regarded as having a positive impact on money supply.

Historically, increases in the wage bill for civil servants would push inflation because of the increase in money supply, in turn increasing aggregate demand which could benefit the economy. The recently awarded 27% salary increment to the civil service is, however, highly unlikely to have an impact on money supply which could defer the looming deflation. This is because there is a huge funding gap in the economy which civil servant salary increments cannot fill.

All this could have the impact of reducing total investment spending from the investor. This is also exacerbated by the fact that our investment culture has generally been low. However, an investor is likely to be offered attractive interest rates as financial institutions try to manage their dwindling cash flows. They will also be in a bid to chase after the few liquid investors .Currently in Zimbabwe investors seem to have adopted a ‘wait and see’ attitude as they watch economic events unfold. Many are holding on to their funds as there is a lot of uncertainty about policy and economic direction. For those that would like to invest, they should not just be attracted to the interest rate, but also do an analysis of the soundness of the financial institution.

If it sounds a little bit too good to be true, it probably is too good to be true and chances of recovering ones investment might be questionable. The duty lies with the investor to perform due diligence on the financial institution they are investing in and the nature of the assets. With this said it is highly likely that as the economy continues to recede, non-performing loans (NPLs) are likely to increase as consumption reduces and profit margins shrink, again pushing the investor to hold onto their cash rather than investing,further reducing money supply. It would be prudent for investors at the moment to invest in short-term non-toxic liquid assets that offer competitive, safe and favourable returns.Short-term assets are recommended because the Zimbabwean economy is volatile and it would be cautious to avoid making long term decisions. Indications of reasonable returns can be pegged against market indicative rates that are currently averaging at 9.24% per annum. However, in deflationary conditions, it is difficult to peg a safe interest rate, contrary to when there is inflation; it may be easier to peg what is a safe return is, because in an inflationary condition financial advisors will encourage investors to invest slightly above the rate of inflation to earn a favorable return without taking too much risk. An investor in a deflationary condition may opt to make a decision of which investment package to take based on the general returns sound financial institutions are offering, provided that it is shortterm, nontoxic and liquid.

Rutendo Victoria Ndoro is a Business Development Officer at TFS Management Company. She may be contacted via e-mail on victoria@tetrad.co.zw

FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

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Banking

Bank deposits marginally rise The total banking deposits closed 2013 at $4,7 billion while loans and advances were at $3,7 billion, the central bank said yesterday.

As at May 2013, total deposits stood at $3,7 billion down from $4,2 billion during the first quarter of 2013 due to liquidity constraints. Presenting the monetary policy statement yesterday, acting Reserve Bank of Zimbabwe governor Charity Dhliwayo said the loans to deposit ratio increased from 37,33% in June 2009 to 78,29% as at 31 December 2013.

“Notwithstanding the deceleration in deposit growth, the loans to deposit ratio increased from 37,33% in June 2009 to 78,29% as at 31 December 2013,” Dhliwayo said. Dhliwayo said the bulk of the deposits were short term in nature which has constrained the banking sector’s potential to provide effective financial intermediation to productive sectors of the economy. “The tenor of lending has remained confined to the short-term at a time when the productive sectors require long-term funding for re-tooling.” Individuals constituted the bulk of lending distribution at 23,80%, a reflection of the attendant macroeconomic challenges currently experienced.

“In addition, this development exposes the structural fragilities in the sector, particularly in view of the consumptive nature of the lending and widespread deindustrialisation in the economy. Lending to the construction sector remained low, accounting for about 4% of total banking sector lending as at December, 31, 2013,” Dhliwayo said. She said under capitalised banks were saddled with high levels of high non-performing loans resulting in the understatement of the level of provision of bad and doubtful debts, thereby overstating the respective institutions’ earnings and capital positions.

“As such, banking institutions are required to set aside adequate provisions that reflect the level of credit risk in their loan portfolio. Within this context, the banking sector’s average non-performing loans to total loans ratio stood at 15,92% as at 31 December 2013,” she said. Dhliwayo said the central bank has noted abuse of loans and advances by related parties particularly directors and shareholders that has resulted in huge levels of non-performing insider loans. However, the acting governor did not give the status of under capitalised banks in the monetary policy.

Presenting the Monetary Policy Statement yesterday, acting RBZ governor Charity Dhliwayo said as market conditions improve, the apex bank intended to introduce repos and reverse repos to improve interbank trading and help ease attendant liquidity challenges.“Importantly, as enunciated by the Minister of Finance and Economic Development in his 2014 National Budget, the Reserve Bank will resume its traditional function as the banker to government. Within this context, the Reserve Bank will host Government’s Exchequer Account with effect from 31 March, 2014,” Dhliwayo said. “The restoration of the lender of last resort (LOLR) facility implies that an overnight accommodation rate will be announced by 31 March, 2014 and becomes applicable for the facility. The overnight accommodation rate will be the anchor interest rate that will act as a benchmark for market rates.”

Turning to gold production, Dhliwayo said a unit of the RBZ has plans to re-apply to the London Bullion Market Association amid concerns that Treasury was not benefiting from the real value of the precious metal due to intermediaries. Before 2006, gold produced by both small scale and large scale miners exceeded 15 tonnes. During this time, Fidelity Printers and Refiners was the sole buyer and refiner of gold and an accredited member of the London Bullion Marketers Association (LBMA). This was largely so, as the gold output realised by the country exceeded the 10-tonne annual threshold required to maintain membership with the London Bullion Metal Exchange.

Under this arrangement, gold produced and refined in the country was directly exported at the international gold prices obtaining at the LBMA, without any middlemen or intermediary. This, notwith-

standing gold output, declined to levels below 10 tonnes in 2007, on the back of the general contraction in economic activity.

As such, Zimbabwe could not maintain its position as a member of the LBMA, therefore we have been exporting gold through South Africa for refining.“In line with the 2014 National Budget Statement, a wholly-owned subsidiary of the Reserve Bank of Zimbabwe was designated to resume its role as the sole buyer and exporter of gold in the country,” Dhliwayo said.“As such, Fidelity Printers and Refiners will apply for accreditation to the London Bullion Marketers’ Association once they refine gold in excess of 10 tonnes per annum. Notably, the framework would pave way for the country to directly export refined gold to the international market, build gold reserve buffers as well as resuscitate the domestic jewellery industry.

Furthermore, the company is working on modalities of entering into hedging arrangements which will ensure that they buy gold at favourable prices even during

times when the price of gold is declining.”Dhliwayo said Fidelity will open buying centres in addition to the ones available

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F6

FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

Finance

RBZ extends bank capital deadlines by 6 years Actng Reserve Bank of Zimbabwe (RBZ) governor Charity Dhliwayo extended the deadline for bank’s minimum capital requirement of US$100 million to 2020 from June 2014 in a move seen as giving financial institutions time to put their houses in order. Presenting her monetary policy statement Dhliwayo said capital requirements would remain at the December 2012 levels of US$25 million.

“As such we urge banking institutions to continue their efforts to strengthen their capital positions in order to maintain relevance in the economy,” she said. Dhliwayo said total banking assets as at December 31, 2013 were at US$6,7 billion with commercial banks accounting for 82,69 percent, Building Societies at 13,65 percent, Merchant Banks at 2,31 percent and Savings Banks at 1.35%.

As at December 31, 2013 total banking sector deposits amounted to US$4, 73 billion while loans & advances were US$3, 70 billion. Notwithstanding the deceleration in deposit growth, the loans to deposit ratio

increased from 37,33 percent in June 2009 to 78,29 percent. Dhliwayo noted that under-capitalised banks are saddled with high levels of non-performing loans. In addition, banks were also under-declaring of the level of provisions for bad and doubtful debts, thereby overstating their earnings and capital positions.

“Within this context, the banking sector’s average non-performing loans to total loans ratio (NPLs/TLs ratio) stood at 15,92 percent as at 31 December 2013,” she said.

“Notably, as at 31 December, 2013, the level of total insider loans in the banking system was US$175.3 million (including Interfin). Of these insider loans US$117,4 million (66,97 percent) was non-performing. The growth in non-performing loans within insider loans is a worrisome development. “The restoration of the Lender of Last Resort (LOLR) facility implies that an overnight accommodation rate will be announced by 31 March, 2014 and becomes applicable for the facility. The overnight accommodation rate will be the anchor in-

MBCA 27 X 5

terest rate that will act as a benchmark for market rates.

The central bank also called for the creation of a secondary mortgage market, which will be for the sale of securities collateralized by income streams from mortgage loans.

Dhliwayo noted that the banking sector was generally stable in spite of the various underlying macro-economic challenges and institution specific weaknesses. The few troubled banking institutions are of low systematic importance as they accounted for less than 10 percent of the banking sector’s total assets, total deposits and total loans as at December 31 2013.

However, the predominance of short-term deposits has constrained the banking sector’s potential to provide effective financial intermediation to productive sectors of the economy. Again, the tenor of lending has remained confined to the short-term at a time when the productive sectors require long-term funding for re-tooling. Individuals continued to dominate at 23, 8 percent

in terms of credit. Services were at 18,42 percent, agriculture 15,12 percent, Manufacturing at 15,03 percent and construction at 3,69percent. “The scenario where lending to individuals constitutes the highest proportion of total lending reflects attendant macroeconomic challenges currently experienced. In addition, this development exposes the structural fragilities in the sector, particularly in view of the consumptive nature of the lending and widespread de-industrialisation in the economy,” she said.

The Reserve Bank of Zimbabwe (RBZ) also widened the multi-currency basket to include four more foreign currencies in what analysts see as a way of addressing the cash shortage in the economy. Currencies of China, India, Japan and Australia are now legal tender, alongside the greenback, South African Rand, Botswana Pula, British Pound and the Euro.

Zimbabwe adopted the multi-currency system in 2009 to curb runway inflation which peaked at 500 billion percent in 2008 and destroyed its local currency.

“Trade and investment ties between Zimbabwe, China, India, Japan and Australia have grown appreciably. It is against this background of growth in trade and investment ties that in the 2014 national budget, the minister of finance and economic development underscored the importance of including other currencies in the basket of already circulating currencies,” said the acting governor, Charity Dhliwayo in the first monetary policy statement since January last year. She said exporters and the general public could open accounts in the various currencies in the basket. RBZ would also assume its role of banker to government on March 31 and resume its lender of last resort function after government agreed to inherit its $1.35 billion debt and recapitalise it to the tune of $200 million.

“The bank will also be responsible for raising funding for government as and when the need arises,” Dhliwayo said.

In the absence of the lender of last resort, the interbank market was inactive with average money market surpluses exceeding $250 million in 2012 and 2013.

“With a well funded lender of last resort facility, RBZ will accommodate solvent banking institutions experiencing temporary liquidity challenges against acceptable collateral,” she said. Due to a decline in exports, banks reported a decline in foreign currency receipts by 2.1 percent to $7.5 billion last year compared to 2012.

Foreign payments amounted to $8.9 billion last year compared to $8.2 billion in 2012.

International money transfers received declined by 15 percent to $1.8 billion last year down from $2.1 billion in 2012.

Dhliwayo said the banking sector remained generally stable despite the various underlying macroeconomic challenges and institution specific weaknesses.

Total banking deposits in 2013 amounted to $4.73 billion while loans and advances were at $3.70 billion.

Despite the decline in deposits, the loans to deposit ratio increased to 78.29 percent during the period under review from 37.33 percent in 2009.

Banks are now required to set aside adequate provisions that reflect the level of credit risk in their loan portfolios.

The banking sector’s average non-performing loans to total loans ratio stood at 15.92 percent as at 31 December last year.

Banks will now be required to maintain capital thresholds that were obtaining in December 2012 of $25 million for commercial and merchant banks, while building societies should bring their capital to $20 million; $15 million for discount and finance houses and $5 million for microfinance banks. Banks and building societies are expected to increase their capital levels to $100 million and $80 million respectively by December 31, 2020.

Dhliwayo urged banks facing challenges to immediately consolidate or merge, dilute shareholding by potential investors or convert licences to microfinance banks.

She expressed concern over the growth of insider loans which stood at $175.3 million of which $117.4 million or 66.97 percent were non-performing.

FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

F7

Mining

Exploration and beneficiation key to sector growth There are currently major issues facing the mineral resources sector the world over but, there are also numerous opportunities that Zimbabwe can take advantage of. These include the country’s vast and unexploited mineral resources (and indeed unexplored)in order to continue to attract investment and build a sustainable mining industry.

There is an urgent need to incentivise exploration and make it easier for investors to access information about our rich mineral resources.With events such as the upcoming Mining Indaba in South Africa, scheduled for this coming week, and most mining companies looking at attracting investors, investment in exploration will help companies that own various mining claims to go to financial markets knowing the value of their mineral reserves.

This will help us continue to use our mineral resources to accelerate overall economic growth.

Given the incredible potential Zimbabwe is endowed with, it is clear that the exploration and beneficiation of our minerals is lamentably underutilised. The focus has mostly been on precious stones (such as diamonds), and on precious metals(such as platinum and gold),yet the country needs to diversifyand explore other minerals as well. A case in point is lithium, whose price of late has been at an all-time high – and Zimbabwe has meaningfully large reserves of this mineral.

In order to continue to grow the mining sector and its contribution to our economy, more opportunities should be created for junior miners partnering with indigenous players - including artisanal miners –as well as a need to continue developing sustainable models for community participation. Considering that exploration takes time and requires significant investment, due attention should be paid to promoting exploration activities well in advance of the time the actual mining is expected to thappen.

While mineral exploration is the absolute key for the continued growth of our mining sector, it can be costly and therefore risky

The Purple Page

for the investor, especially junior miners. The setting up of a mining exploration and promotions company in Zimbabwe would go a long way in pursuing the exploration agenda. The Prospectors & Developers Association of Canada (PDAC) said recently that “the challenge for the mining industry is to find ways to finance exploration”. This is obviously a challenge in the Zimbabwean context,given our present economic challenges, as is the case for most other developing countries,yet we must prioritise the need for incentives to be afforded companies who wish to undertake exploration activities.

“Zimbabwe could learn a great deal from initiatives in place in developed economies such as Canada, to encourage exploration by reducing the risks and financial outlay”.Incentives

for exploration should be offered, with government or the relevant statutory bodies also keeping copies of information on the results of exploration activities, for future reference.

Canada provides innovative solutions such as flow-through shares which allow exploration costs incurred by mining companies to be passed through to investors who then deduct them to reduce their taxes. Some individual Canadian investors are also eligible for a 15% mineral-explo-

Zimbabwe mining industry must focus on mineral exploration and beneficiation to secure a long-term mining pipeline and stimulate growth in the sector.

ration tax credit on flow-through mining expenditures, which further incentivises them to support higher-risk ventures.

Directly addressing the issues that hamper exploration, particularly incentivising companies that incur these significant costs, would certainly aid Zimbabwe exploration companies to secure long-term pipelines.

An advantage of the current era is that mining investors coming into the country are now devoting a lot more resources to exploring

mineral deposits.

A significant percentage of this country’s geology has been mapped and some exploration activities have been conducted in the past years, but much of that information is not on record. Many mineral deposits discovered in other African countries and not regarded as viable in the 1970s are now regarded as worth pursuing, thanks to advances in technology and the ability to exploit lower grade mineral deposits.

Similarly, many mine dumps can also be reprocessed with improved recovery rates asprocessing methods used in the present age are now much more efficient.

If government offered significant incentives, not only for mineral exploration but also for providing pertinent information gleaned during the

pre-independence era, Zimbabwe would stand a better chance of building a significant pipeline for future mining.

In South Africa, for example, there are two companies which have transformed ‘historic’ information into successful mining operations. Coal of Africa, one of the companies, is an emerging developer with two main coal deposits, one at Vele and Makhado on the outskirts of Messina. These coal deposits were discovered several decades ago by what was

then Iscor. When new rights were issued in 2004, Coal of Africa was able to submit an application to re-explore the area.Known deposits of diamondiferous kimberlites explored in the Mokopane (formerly Potgietersrus) area during the last century were initially not economically viable to be extracted by larger mining houses. Today, the area is known as Klipspringer Diamond Mine, a joint venture between Mwana Africa Plc and Naka Diamond Mining (Pty) Ltd. These operations came about because of knowledge of past finds that were never fully exploited.

There must be a great deal more information about our mineral resources lying about in bottom drawers. Companies need to be incentivised to submit these old reports to the Geological Survey Department so that the information goes on record.

It is also imperative that communities continue to be involved to build a more sustainable Zimbabwe mining industry. We must strengthen local community access to mineral wealth and develop models to benefit everyone.

We need a system which promotes greater participation and encourages cooperation between mining companies and communities.

There is room in this country not only for the major mining houses to grow, but also for junior miners (from prospectors to small producers) to participate. Zimbabwe should extend its base of active mining companies by focusing on smaller companies that can exploit lesser deposits.

These are significant reasons for investors to look to Zimbabwe and we need to communicate with them more effectively because many major mining companies are heading further north in Africa, lured by the greater prospect of undiscovered new deposits. Zimbabwe needs to focus on exploration and be positive about our rich and plentiful meniral resources, as this will grow the mining industry and accelaratte overall growth.

Grant Thornton Camelsa 135 Enterprise Road, Highlands, Harare T +263 4 442511 - 4 F +263 4 442517 E info@zw.gt.com

www.grantthornton.co.zw Grant Thornton Camelsa - Zimbabwe is a member firm of Grant Thornton International Ltd (Grant Thornton International). References to Grant Thornton are to Grant Thornton International or its member firms. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by the member firms.

F8

FINANCIAL MATTERS FRIDAY JANUARY 31, 2014

ZIMBABWE INDEPENDENT MONTHLY SUPPLEMENT

Monthly Catchup

Agriculture

Energy

BAT says not exiting Zimbabwe

Chinese energy firm to invest US$160m in Zimbabwe

THE world’s second largest tobacco firm by sales, British American Tobacco (BAT), said it does not plan to leave or divest from Zimbabwe.

The company, which has over the last couple of years been attacked by President Robert Mugabe and also come under pressure over compliance with the country’s indigenisation laws, said it was committed to value addition of Zimbabwe’s major export crop BAT Zimbabwe is 56.95% owned by London-based BAT International with other major shareholders including Old Mutual which has a 19.1% stake. However, authorities said the firm was only 6.22% indigenised, compelling management

CHINA Powerway Renewable Energy Company through its regional subsidiary Powerway South Africa plans to invest about US$160 million in the construction of a 100MW solar plant in Zimbabwe once all the regulatory processes are completed. Powerway will partner with Mobility Holdings, a local company that specialises in renewable energy projects. The project is expected to occupy about 400 hectares ofland that has already been identified while it would take about 12 months to complete. The plant will carry a 25-year guarantee.

The officials were not at liberty to divulge the location but only hinted that the

to come up with a plan to comply with empowerment laws that require foreign companies to localise ownership and control of at least 51 percent of their Zimbabwe operations.

Under its plan, BAT said it would have to meet 36% indigenous status by October 2013, 46% by October 2014 and 51% by October 2015.The company said it would also donate shares representing 10 percent of its issued share capital to an employee share ownership trust (ESOT) as part of the compliance plan.“We believe we have a strong business in Zimbabwe because we uphold high standards of business conduct and this is recognised by all of our stakeholders.”

place would be about 150200km from Harare. Initial technical expertise will be imported from China and South Africa but thereafter the company will embark on a series of training locals for skills transfer while an estimated 600 contract jobs are expected to be created.

Powerway is a solar farm engineering and construction company, with subsidiary companies in Japan, Pakistan and the United Arab Emirates, and production bases in Guangdong, China, as well as Port Elizabeth in South Africa. Powerway has provided more than 1,2 GW of solar power products and construction services in over 22 countries.

Investments

Hon. Patrick Chinamasa Minister of Finance

Mining

Gulliver seeks investors

Parliament endorses $4.4 billion budget as Chinamasa proposes one diamond miner

Steelmakers courts Indian investors

Distressed Gulliver Consolidated Limited (Gulliver) seeks investors to help turn around its waning fortunes.

The industrial and engineering group — delisted from the Zimbabwe Stock Exchange in July last year — was placed under provisional judicial management after failing to perform due to a debt burden and high administrative costs coupled with acute liquidity challenges. The industrial conglomerate, which is technically insolvent, urgently requires funding to clear between $4 million and $5 million creditors with financial obligations to about 100 of the firm’s workers also top of the priority list. As part of measures to resuscitate the company, it slashed its salary

obligations from $90 000 to $20 000 per month, while excess staff was sent on unpaid leave until the company returned to profitability.

The group is forecast to generate at least $5, 1 million in the next four years without factoring in major projects underway which could increase revenue. Income stood at $2, 7 million in 2012 compared to $3, 1 million the year before while administrative expenses swallowed $1,1 million, almost half of the company’s income. Finance costs also ballooned from $720 000 in 2010 to $1, 3 million last year as the company borrowed to recapitalise the business. Group total assets are valued at $10, 8 million while liabilities are at $7, 4 million.

The Lower House passed the $4.4 billion 2014 budget without amendments, which will now go to the Senate for further debate before it is sent to President Robert Mugabe for final approval.Defending the budget, finance minister Patrick Chinamasa said the debate did not proffer solutions on how to get the country out of its economic crisis characterised by a crippling liquidity crunch.

Chinamasa told Parliament that there were too many players in the diamond sector and that government would soon consolidate them to one player without elaborating. There are currently seven diamond mining companies operating in Marange. The government holds 50 percent shares in all except Marange Resources, which it wholly owns. He said the government would also start exploring for more gems as the valuable kimber lite and conglomerate diamonds only constituted between 10 and 15 percent of total output while the rest were industrials with little value.

There are plans to also market the diamonds in Shanghai and Dubai following the successful first auction in

Antwerp in December last year which fetched $10.7 million. On banks, he said government would soon reintroduce interbank lending to enable banks with excess cash to lend to others. Government proposed to assume the RBZ debt of $1.35 billion and recapitalise it to the tune of $200 million.

Chinamasa sought the House’s approval to pass unbudgeted expenditure for last year worth $490 million and a further $400 million payment to service providers which was budgeted for but could not be paid due to shortage of funds. This was referred to the Parliamentary Legal Committee.

Despite civil servants salaries gobbling 73 percent of its income, Chinamasa said the government would not be retrenching but would instead find ways to grow the economy and accommodate its bloated staff.

He proposed to maintain the indigenisation law which critics says needs to be toned down to promote investor confidence and attract foreign direct investment. The law requires foreign-owned firms to cede 51 percent shares to local blacks.

Financial Matters Monthly

Readers write.....

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Steelmakers Zimbabwe is now courting Indian investors in a bid to raise $30 million to recapacitalise its Masvingo steel plant after failing to raise the money locally, a company official has said. Steelmakers general manager Alexander Johnson said that efforts to raise the bulk of the money locally had failed due to the liquidity crisis in the country. “The project is in limbo.

We have been approaching banks but there is no money and we are now looking for partners abroad to get this project running,” he said.

Johnson said efforts to raise part of the money through shareholders had also hit a brick-wall due to the cash crunch. The company wants

to increase the capacity of its rolling mill in Masvingo three-fold from the current 2,800 tonnes per month, but suspended iron processing at the plant last year. The plant is currently producing sponge iron.

Steelmakers is currently producing over 3,000 tonnes of steel per month at its Kwekwe plant with iron ore from its mining operations, Johnson said, adding that production would increase if NewZim Steel, formerly Ziscosteel, becomes operational and supplies the raw materials. In November last year the government and Essar said they were close to resolving an impasse over mineral rights that stalled the $750 million deal to revive the steelworks.

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