Zambia’s once enviable combination of copper reserves and low debt has reversed in the past decade. External debt for Africa’s second-largest copper producer has jumped while economic growth has stagnated. This week, Zambia’s government, led by President Edgar Lungu, boldly bought out its majority partner Glencore in the Mopani copper mine, for $1 plus $1.5bn of debt.
Glencore is dumping an unwanted asset on its sovereign host, which gets back control of its resources. Zambia will take over the 90 per cent of Mopani it does not own from Glencore, which has 73 per cent, and Canada’s First Quantum. But Zambia’s move is a gamble. Its external debt more than quadrupled between 2013 and 2019 to $27.3bn, on World Bank data. On Financial Times estimates, Zambia’s external debt-to-GDP ratio has exceeded 140 per cent. It defaulted on bonds in November.
New debt is not cheap, requiring annual interest of just over 3 per cent plus a percentage of Mopani’s copper revenues, and a third of annual ebitda. After 2023 the share of revenue will rise.
Glencore’s investors wanted out of Mopani after two decades of investment and years of poor returns. But Zambia does not want to shutter the mine. For good reason: a national election approaches and Mopani employs 9,000 potential voters for Mr Lungu.
Zambia claims its debt will not sit on the country’s balance sheet. What the IMF thinks matters more. Zambia wants to renegotiate terms on $3bn of bonds it has ceased servicing. Bondholders want the IMF involved. Glencore has gambled that Zambia will either find the funds to keep Mopani going, or sell the asset on. That could happen. Chinese miners such as China Molybdenum and Zijin have an appetite for foreign copper mines. Mopani, with its 25-year mine life and relatively high 2 per cent ore grade, could attract bids.
Glencore has forged a seller’s market deal. Zambia’s bet looks politically opportunistic and depends on foreign capital. Unless copper keeps rising the losers will be Zambia’s foreign bondholders.