Business Day (Johannesburg)

South Africa: Arm in Copper Joint Venture in Zambia

Allan Seccombe

30 August 2010

Johannesburg — AFRICAN Rainbow Minerals (ARM) is embarking on its first production foray outside SA with a R2,77bn copper project in Zambia with a joint venture partner, Brazil's Vale.

ARM, which releases its financial results today, has put in place a R584m debt facility that it can draw down on during the second year of the 27-month construction phase at the Konkola North copper project.

"The new copper mine we are building in Zambia with our partner, Vale, is significant because it adds a new exciting commodity to our diverse commodity portfolio and is also our first investment in Africa," said Patrice Motsepe, ARM's executive chairman.

"The partners view the project as early development for a copper growth strategy in Africa," he said last week, adding that ARM has established a new division, ARM Copper, to house its copper assets. Construction has already started at Konkola North, which will deliver 45000 tons of copper in concentrate in the first phase of the project.

A second phase will lift production to 100000 tons.

The partners have a three-year exploration programme to supply material into that expansion.

The partners are in talks with three companies operating in Zambia to toll treat their concentrate, Stompie Shiels, ARM's director of business development, told Business Day on Friday.

"We are very close to finality," Mr Shiels said.

The partners are talking to the owners of the Mopani smelter, the Chambishi smelter and Vedanta.

ARM and Vale spent 18 months studying the copper market and the expectation is for there to be a growing deficit from 2015, which is when Konkola will reach steady state production in the first phase. The price of a three-month copper contract on the London Metal Exchange rose 9,75 to 7314,25 a ton by early on Friday, having risen by more than 200 on Thursday in its strongest one-day performance in more than a month.

The reason for the rapidity at which the mine can be brought into production is that Anglo American operated Konkola until the late 1950s, having sunk a 420m-deep shaft there, which ARM and Vale will rehabilitate and re- equip. The mine is forecast to have a life span of 28 years.

A decline will also be sunk into the ore body in which three working levels already exist, Mr Shiels said.

"We don't need any funding in the first year, but we will do an $80m loan for the second year. There will be no hedging," he said.

Creditors sometimes insist that mining companies sell their production forward at set prices to guarantee repayment of loans.

Electricity supply is a problem in Zambia, but the partners have an existing 11kVA line into the project. "We've got a full power agreement awaiting signatures.

"Once all our corporate governance is finished it will be signed. It will take a year and then they'll ramp us up to 45MVA, which will be more than sufficient," Mr Shiels said.

State-owned Zambia Consolidated Copper Mines has a right to buy 15% or 20% of the joint venture, of which 5% will be a free carry.

The president of the Mine Workers Union of Zambia, Rayford Mbulu, recently said the union is opposed to the entrance of Vale into Zambia because the labour organisation regards Vale's human rights record in other parts of the world as poor.

ARM produces platinum group metals, chrome, manganese, iron ore and coal.

It expects to post a fall in full-year basic earnings per share to between R8,30 and R8,75, from R13,55 a year earlier, the company said last Monday. The stock fell R4,08, or 2,7%, to R147,90 on Friday.

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