By Sandile Mbulawa (Head: Resource Finance)
The positive outlook for the copper sector bodes well for Zambia and its copper mines with copper comprising around 60% of the country’s total exports, while the country is expected to produce more than 1 million tonnes of the metal this year. Mining companies such as Canadian-based First Quantum Minerals (FQM) are expanding their copper mines to cater for expected growing demand particularly from the Chinese market, a major driver of consumption.
The outlook for copper has not always been so positive with the sector experiencing prices as low as US$2/lb in 2016, compared to a peak spot price of $3.30/lb in 2018 so far. The copper price rose by 30% in 2017, however, the price has softened somewhat of late alongside a strengthening US dollar. The longer-term outlook is buoyed by lower mining costs, and global undersupply caused to a large extent by demand from China’s power and infrastructure sectors and increasingly by rising electric vehicle production globally. The engine used in conventional cars usually contains about 20kg of copper while engines in an electric car contain copper weighing about 80kg. Some forecasts expect refined copper to register a deficit of 251 000 tonnes in 2018 and remain undersupplied until 2023.
Rand Merchant Bank (RMB) identified an opportunity to offer FQM debt funding by co-arranging a $400m term facility for its subsidiary Kalumbila Minerals. RMB participated for $100m in the facility which is repayable over three years, with the option to extend for another two years. The facility, finalised at the beginning of this year, was structured to fit within the group’s corporate capital structure which includes $6.0bn of bonds with various maturities and was tailored to dovetail with the FQM corporate facility provided in 2017. The facility provides the group with additional cash as it grows its business further, taking into consideration the positive long-term growth outlook for the copper market. RMB’s relationship with FQM began in 2012 when RMB was one of the lenders which provided one of FQM’s mines in Zambia, Kansanshi, with $1bn of debt funding for its expansion. Over the years, together with other banks, RMB has also provided various other debt facilities including a portion of the $3bn corporate facility raised in 2014.
FQM is the largest company in Zambia operating two of Zambia’s largest copper mines, Kansanshi and Sentinel, with Kansanshi being the largest copper mine in Africa with production of around 240 000 tonnes/year. However, Sentinel, which was developed by Kalumbila Minerals, is expected to ramp up its production to 255 000 tonnes/year by 2020, overtaking Kansanshi as Africa’s largest copper mine. FQM’s $2.1bn investment in developing the Sentinel mine is the second largest foreign investment in Zambia to date.
Sentinel, located in the north-west region of Zambia, utilises the world’s largest excavators, haul trucks and mills to economically mine the relatively low-grade copper resource in the Kalumbila region. The mine development also entails the development of a purpose-built town of Kalumbila, which was planned and funded by FQM. Kalumbila is not a typical mining town as it is designed to outlast the mine with sophisticated infrastructure and incentives to attract other businesses to the region. So, while the mine may produce copper for 20 plus years, the town is designed to continue for far longer.
Sandile Mbulawa is Head of Resource Finance at Rand Merchant Bank.