The Sunday Mail
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STRUGGLING coal miner Hwange Colliery Company Limited (HCCL) is preparing to roll out an ambitious plan that hinges on managing the company’s staggering $310 milllion debt and injecting fresh capital to finance working capital requirements and remove the company from the brink.
Details gathered by The Sunday Mail Business indicate that of the $310 million debt, the bulk is owed to business creditors ($210 million), followed by employees ($69 million), suppliers ($24 million) and retrenchees ($5 million).
Among the group of business creditors, Government is owed $87 million, while obligations to Mota Engil, which currently provides contract mining services, stand at $29 million.
Indian Eximbank, which helped finance the recent acquisition of mining equipment, is owed $13 million, while the Zimbabwe Asset Management Company and the Mining Industry Pension Fund are owed $14 million and $23 million, respectively.
The ballooning debt has had the adverse effect of choking HCCL’s operations.
There are real fears that if urgent steps are not taken, the company will suffer the same fate as steel maker Ziscosteel, whose operations are now indefinitely mothballed.
In order to stem the continued hermorrhage and clean the balance sheet, management has devised a mix of cost-cutting measures and capital raising initiatives, including an engagement with creditors.
Payment plans for 80 percent of the creditors who are owed more than $166 million are already in place. It is estimated that the coal miner will be able to save $2,1 million annually from the 55 top officials that have been fired. Further savings are also expected from the huge cut in salaries and allowances.
HCCL managing director Mr Thomas Makore said last week the restructure of the company’s balance sheet was likely to provide a platform for growth.
“As part of the restructuring initiatives,Hwange is proposing an $87,1 million rights issue which entitles shareholders to buy additional shares directly from Hwange in proportion to their existing holdings.
“The rights offer size is derived from the liabilities owed to Government of Zimbabwe related entities and will be fully underwritten by the Government of Zimbabwe.
“Shareholders will participate in the rights issue through direct cash injection or conversion of liabilities to equity,” said Mr Makore.
If fully subscribed, the rights issues will inject $50 million into the business and reduce liabilities by $87 million.
Part of the debt burden will resultantly be shed.
It is envisaged that such an outcome will improve HCCL’s prospects of opening up new credit lines and grant the miner more headroom and legroom to compete more effectively in the market.
Market watchers say a strong balance sheet is critical for meeting certain financiers’ contractual obligations such as maintaining a debt equity ratio below a certain number.
Sources say the rights issue process has begun and all regulatory approvals are being sought.
“Cabinet has approved the rights issue and the Zimbabwe Stock Exchange has been notified,” said privy to the new developments.
On Wednesday, HCCL reported to the market that it was at an advanced stage of converting Government debt to equity and at the same time raising working capital for the company through a private placement.
The Minister of Mines and Mining Development, Mr Walter Chidhakwa, referred questions to board chairman Mr Jemister Chininga, who in turn asked for questions in writing. Mr Chininga had not responded by the time of going to print.
The spectre of van Hoogstraten
However, the plans will have to be approved by shareholders through an extraordinary general meeting. There are real fears that Hwange’s second-largest shareholder Mr Nicholas vanHoogstraten will block any plans that are being mooted by management.
He has done it before.
The British-born business tycoon holds a 30 percent stake in the business through his investment vehicle, Messina Investments.
Parties close to the rights issue say Mr van Hoogstraten cannot possibly block the process as he does not have a controlling stake.
“All shareholders are allowed to underwrite. Hwange is a public company and every shareholder is equal, there is no special treatment. Why will it be about others?
“If other shareholders fail to follow their rights, then they will put in cash and Hwange will realise over $40 million. We therefore think Mr Van Hoogstraten would not want to block the rights issue, but if he has enough shares to block the rights issue, then let him go ahead,” said the sources.
Government is the biggest shareholder with about 43 percent stake. If the rights issue sails through, Government’s stake is likely to further rise.
Negotiations to restructure debt
Part of efforts to put the coal miner on the mend also involves converting short-term debt into “manageable” long-term plans. As a result, there are plans to engage Indian Eximbank and Zamco.
Said Mr Makore: “In order to align debt repayments and the business’s cash generation capacity, management is working on converting short-term debt into a manageable long term plans.
“A debt redemption plan and strategy has now been put in place which would result in most of the creditors being paid through a debt instrument structured through the Central Bank.”
It is understood that some creditors have agreed to be paid in Treasury Bills and the RBZ is expected to soon issue TBs worth $29 million.
Debts owed to India Eximbank ($13 million) and Zamco ($14 million) are considered to be relatively fresg and are repayable in seven years.
Mota Engil’s $29 million debt is repayable in about five years, which allows HCCL to push up production at the moment and generate more revenue.
The Portuguese- based firm has been crucial in raising production at HCCL’s coal mines and generating revenues. Under the $240 million contract, Mota Engil is expected to produce 200 000 tonnes of coal per month. Hwange signed a five year mining contract with a Portuguese firm, Mota-Engil, worth $26o million. Under the contract, Mota Engil is supposed to produce 200 000 tonnes of coal per month. Having started operations in September 2014, Mota Engil has since reached the targeted output leveraging on production efficiencies.
Mr Makore said contract mining is favourable because of “higher production volumes with lower capital expenditure and limited borrowing by Hwange”.
As a measure to further conserve cash and reduce Hwange’s capital expenditure, the company entered into vendor financing transactions worth $31,2 million and in June last year, it commissioned mining equipment worth $18,2 million from Belaz of Belarus through a line of credit structured by Reserve Bank of Zimbabwe (RBZ) and PTA Bank.
A second suite of equipment worth $13,3 million was acquired from BEML of India financed by Export Import Bank of India and also commissioned in June last year. The deal has since turned sour after excavators obtained suffered several breakdowns resulting in work stoppages, consequently affecting output.
Government has engaged the suppliers with a view to have them repair or replace the machinery.
However, sources say BEML remains reluctant.
Cost cutting initiatives
HCCL is determined to slash its operational costs and a number of initiatives have been lined.
The main cost component has been employment-related expenses. With an average monthly bill of $5 million, it means HCCL has salary arrears of about 11 months. Mr Makore said the company has taken “a deliberate step towards headcount reduction” at the executive management level.
“The directors approved the adoption of a leaner management structure with fewer levels of hierarchy. In addition, board fees and management salaries have been reduced by 50 percent effective April 2016.
“The total saving upon reduction by 50 percent will be $2,2 million per year,” said Mr Makore.
Similarly, management is currently reviewing supply contracts in order to address any anomalies that are responsible for negative gross margins.
Negotiations have started with major contractors to reduce charges based on low prices for fuel, commodities and equipment.
There are expectations that once the rights offer succeeds and the outstanding debt is rescheduled, HCCL will be on a solid growth path.
While some critics have been calling for the liquidation of the company to salvage residual value, Mr Makore says “with a combination of the right assets, the right strategy and the right balance sheet”, the coal miner will succeed.
HCCL has already commenced pre-exploration and development work at the three new coal concessions it was awarded in July 2015.
The process of identifying the technical and financial strategic partners was done through a public invitation for expressions of interest in the exploration of the concessions.
The new concessions will be developed as a separate business unit to enable bankability and project financial and resource mobilisation.
Unlike Ziscosteel, which didnt have any local competitor, if HCCL recovers, it will have to contend with other coal miners that have been growing at its expense. For example, Makomo – regarded as the second largest coal producer – has been producing between 130 000 tonnes and 200 000 tonnes per month. The miner’s production is currently constrained by demand but has capacity to produce up to 300 000 tonnes a month.
The Zimbabwe Power Company (ZPC) is its biggest consumer while some coal is sold to Triangle.
Other new mines that have chipped off considerable market share from HCCL are Garlpex, also known as WK Blasting and Coal Brick.
But some of the miners are now struggling, with Chilota Colliery suspending operations mid last year as it sought to engage another contractor so as to increase market share from 5000 tonnes to 30 000 tonnes per month. Coal Brick also stopped production at its mine last year following the attachment of its machinery by the Messenger of Court over a $280 000 debt.
