Vedanta Resources, the London-listed metals and mining group, has announced the acquisition of the 51% controlling stake in Konkola Copper Mines (KMC) in Zambia for a total cash consideration of $48.2m.
The company in a statement said the agreement is conditional on the approval of the shareholders of Zambia Copper Investments (ZCI) and is expected to be completed by end-October.
"Our immediate task will be to stabilise the existing assets and enhance production," Vedanta Resources' chief executive officer Anil Agarwal said in a press statement issued on Friday.
According to him, the outlook for copper demand remains positive over the medium term.
The acquisition will put Vedanta in the league of the five largest producers of refined copper.
With KMC under its fold Vedanta's refined copper capacity will now be over five lakh tonnes. Sterlite Industries, its Indian subsidiary, produces three lakh tonnes of copper, while KMC presently produces two lakh tonnes.
KMC is currently 58% owned by ZCI, which is listed on the JSE Securities exchange South Africa, while 42% is owned by ZCCM Investments holding (ZCCM), a company listed on the Lusaka Stock Exchange in Zambia.
ZCCM is 87.6% owned by the Government of Zambia and 12.4 % by public shareholders.
The deal with the Government of Zambia includes subscription to $25m of new ordinary shares, representing 51% of the enlarged issued share capital of KMC by Vedanta.
Following this issue, ZCI's shareholding in KMC will be diluted to 28.4% and ZCCM's shareholding will be diluted to 20.6%.
Vedanta has also agreed to pay $23.2m to ZCI, made up of an initial payment of $2.3m, with the remaining $20.9m payable in equal instalments over four years from December, 31 '05. Vedenta will obtain operating, management and board control of KMC and will appoint the CEO and chairman.
KMC's assets consist of three mines, a leaching plant and a smelter, which are located in the Zambian copper belt in northwest Zambia. The Konkola mines are underground with reserves of 21 million tonnes (mt) at 3-4% copper.
Nchanga has both an open pit and an underground mine with reserves of 28mt at 1.7% copper and 18mt at 2.7 % copper, respectively.
The leaching plant at Nchanga has a capacity of one lakh tonnes per annum, while the Nkana smelter and refinery have a capacity of 1.8 lakh tonnes.
With this acquisition, Vedanta now controls one of the largest reserves in the world.
Vedanta, however, has the right to exit KMC at any time after December 31, '07, subject to a 12-month notice period.
Vedanta is required to meet its obligation to cover any cash flow shortfalls during the notice period and to make a payment equivalent to the budgeted capital expenditure for that period.
The deal includes an undertaking by Vedanta to underwrite and fund any cash shortfalls at KMC, to an aggregate limit of $220m over a nine-year period from the completion of the transaction.
Associated with the Konkala mine are substantial deeper level resources containing estimated resources of around 250mt at 3.8% copper.
Vedanta has agreed to evaluate these deeper resources by December 31, '06 and will contribute $1m towards the cost of the feasibility study.
According to the press release, neither Vedanta nor KCM is required to undertake an expansion project.
The release further states that, "Should the KMC board determine to proceed with further development of the deeper level resources at Konkola, Vedanta will be responsible for securing the necessary funding."
If such a project has not been implemented, and the life of the existing mines has not been extended by five years or more, December 31, '09, ZCI and ZCCM have the option of buying Vedanta's stake at a fair market value.
The Vedanta board, however, has assessed the investment in KCM without assuming any development of or benefit from the potentially-substantial resources in the deeper levels at Konkola.
Further, in the event that KMC meets certain production targets, or the development of the deeper resources at Konkola, Vedanta has a call option over the shares held in KCM by ZCI.
The exercise of this call option, at a fair value, would bring Vedanta's interest in KCM to approximately 79%.
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