Why RioZim should consider a VFEX listing

Zimbabwe has suffered from limited Foreign Direct Investment (FDI) flows and lines of credit.

The low levels of investor confidence and uncertainties on the economic and political environment in Zimbabwe have been a major impediment in terms of FDI flows into the country.

That said, Zimbabwe has a dynamic mining sector that contributes an average of 7%-8% to Zimbabwe’s GDP and presents a long-term solution to the foreign currency shortages issues in the country.

Zimbabwe has a rich mineral endowment with one of the world’s largest platinum reserves and has chrome, coal, nickel, diamond deposits and significant coal-bed methane discoveries.

Over 40 different minerals have been extracted and mining has remained an important cog in the Zimbabwean economy; creating jobs, earning foreign currency and diversifying the economic base.

Our research on the mining sector in Zimbabwe shows that one of the key constraints affecting mining operations has been limited capital.

In addition, most mining firms also require foreign currency to import machinery, spare parts and chemicals. This means that attracting new investors in the space provides access to the much needed capital to extract the mineral resources in Zimbabwe.

The RioZim group is currently listed on the Zimbabwe Stock Exchange (ZSE) and its business is divided into five distinct units; RioGold, RioBase Metals, RioChrome, RioDiamonds and RioEnergy. The business has been evolving into a diversified mining group as illustrated in the infograph.

An evaluation of the RioZim group structure clearly shows that the business is operating in strategic sectors such as gold, base metals (EVs space), energy and diamonds.

These sub sectors have seen some interest and the following are examples of investments being made in the space;

  • Dallaglio Investments has been engaged in developing and operating large scale commercial gold mines. In 2015, the business managed refurbish the Pickstone Peerless mine and brought it back to life. The gold mine had not been operational for 44 years. More recently, Padenga Holdings invested in the gold mine and the business has embarked on the refurbishment of the Eureka Mine located near Guruve. Eureka has the potential to become one of the largest and most technologically advanced mines in Zimbabwe; and
  • Caledonia Mining PLC (dual-listed on AIM and NYSE) operates the Blanket gold mine in Zimbabwe has been increasing its capacity. The company produced 57,899 ounces of gold in 2020, approximately 65,000 ounces is expected in 2021 and the target for 2022 is 80,000 ounces. The mining company is also considering listing on the Victoria Falls Stock Exchange (VFEX).

An analysis of the RioZim business units clearly shows that while the group is a mature business, it has several projects in the greenfield and development stages.

Further, our assessment shows that the business has been financing its activities through internal resources (retained earnings) and borrowings (credit facilities from banks).

The major constraint is that the funding is inadequate and there is need to move to the next stage, which is funding through issuing equity.

As part of our assessment, we used the company’s business life cycle to identify appropriate financing strategies. Morgan & Co Research contends that RioZim should consider an option that enables the business to raise adequate capital (preferably in foreign currency) to as to finance businesses in the launch and growth stages. Internal resources are not adequate while debt capital in Zimbabwe is expensive and of a short -term nature (lending rates of c50%).

Based on our research, we recommend a listing of new shares on the newly established; Victoria Falls Stock Exchange.

The new bourse is a subsidiary of the Zimbabwe Stock Exchange (ZSE) and was established to kick start the Offshore Financial Services Centre in the tourism destination.  We note that the whole VFEX idea is hinged on the fact that rules in offshore financial services centers are different from those that are in place in mainland zones.

This means that the VFEX operates independently, using a set of rules of trading that are different from the mainland zone. Securities listed on the VFEX are tradable and settled solely in United States Dollars or a convertible currency.

The fact that the VFEX allows for transactions in foreign currency means that it is a way to encourage foreign investors to come through and invest in Zimbabwe.

There is also a strategic logic for RioZim to list on the VFEX given that policy makers have also come up with the following incentives aimed at supporting new listings and trading activity on the VFEX such as;

  • Exemption from Corporate Income Tax for Issuers;
  • Exemption from Capital Gains Withholding Tax on disposal of shares listed on the VFEX;
  • A lower rate of 5.0% on dividends payable to non-resident investors on the VFEX; and •A 100% retention on incremental export proceeds for VFEX- listed exporters that are licenced under Special Economic Zones. All in all, it is envisaged that the incentives will help attract new listings on the VFEX. Currently, there are two listings on the exchange; Seed Co International and Padenga Holdings.

We note The SeedCo International listing was triggered by the suspension of the stock from the ZSE alongside PPC and Old Mutual Limited. Padenga Holdings is the latest addition to the VFEX after moving from the ZSE considering the incentives being put in place for exporters.

In our view, incentives for exporters (mining groups) will likely boost interest and activity on the market while creating an interesting avenue for local mining groups like RioZim to raise new capital in foreign currency.

In conclusion, a listing on the VFEX will also provide RioZim with the visibility it requires to attract international partners to some of its projects such as Sengwa and the Empress Nickel Refinery.

Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com

 

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