Ministers are torn between demanding cash from a mining giant accused of fraud and maintaining a cosy relationship
The move by Zambia’s largely government-owned mining investment company to sue First Quantum Minerals for fraud has put its chief executive officer Pius Kasolo at loggerheads with figures close to President Edgar Lungu. Under Kasolo, Zambia Consolidated Copper Mines Investment Holdings, which holds Zambia’s stake in foreign-owned privatised mines, brought a suit against FQM with the Lusaka High Court in November and simultaneously filed a Notice of Arbitration in London claiming the Vancouver-based company cheated Zambia of US$2.3 billion. ZCCM-IH accuses FQM of defrauding it by using money from its Kansanshi copper and gold mine as cheap financing for its other operations without the state investment company’s consent.
From a small company running only the Bwana Mkubwa copper processing plant in Ndola, FQM has grown to become Africa’s biggest copper miner. The 80% ownership of Kansanshi it acquired in 2001 propelled it to prominence and it now has several projects in the country. According to official data from the Zambia Development Agency, FQM has invested $5.7 bn. in Zambia, with $2.6 bn. going into the Kansanshi Mine, $1 bn. into the Kansanshi smelter and $2.1 bn. into the Trident Project at Kalumbila, which includes the Sentinel (copper) and Enterprise (nickel) mines. It also has a 16.9% stake in Glencore’s Mopani Copper Mines.
FQM bought the greenfield mining project at Kalumbila in the Northwestern province in 2010 by leveraging the warm relationship it enjoyed with then President Rupiah Banda. This expansion in its Zambian interests came in the wake of an ugly dispute in Congo-Kinshasa, where the company had established itself as one of the country’s biggest investors before simmering bad blood led President Joseph Kabila to expropriate mining units at Kolwezi, Frontier and Lonshi in 2009-10. The company has also become an increasingly significant player globally. In 2013, it acquired Cobre Panama, a large open-pit copper development project in Panama, and it has operations or projects in Mauritania, Australia, Turkey, Spain Argentina and Peru.
FQM’s rapid expansion from small-scale Zambian origins to major global reach has upset ZCCM-IH, which owns 20% of Kansanshi Mining Plc. ‘What we have seen is that in the years between 2006 and 2012 when there was a copper boom, First Quantum got money out of Kansanshi Mining and built other mines, which included Kalumbila, but did this without consent of ZCCM-IH, which is shareholder in Kansanshi,’ a source from the Ministry of Mines said. ‘ZCCM-IH owns 20% of Kansanshi and as a result should have been fully involved in all new investments by FQM because they deserve to share in the profits of Kansanshi,’ said another source.
During the period under scrutiny, about 90% of FQM’s revenues came from Kansanshi, according to government sources. According to the claim before the Lusaka High Court, between 2007 and 2014, FQM directors ordered over $2.3 bn. of Kansanshi profits to be transferred to FQM Finance Limited, which performs treasury functions for the group. FQM Finance then started investing money of Kansanshi to grow the group without ZCCM-IH’s consent.
According to court documents, the claim includes $228 million in interest on the $2.3 bn. as well as a further 20% of the principal amount ($570 mn.), according to sources close to ZCCM-IH. The state-backed company is also seeking $260 mn. as part of a tax liability the Zambia Revenue Authority levied on Kansanshi.
‘Whereas we were told that the money was deposited with FQM Finance Limited as working capital for Kansanshi Mining, we saw the main shareholder sanctioning new loans for Kansanshi and at one point we had to pay $24 mn. in arrangement fees… meanwhile, the Group started growing and we have no doubt that it is Kansanshi money they used for expansion,’ a government source explained.
FQM says the claims are ‘inflammatory, vexatious and untrue’, and that the loans were at fair market rate. It argues that Kasolo could not sue because by November 2016, the ZCCM-IH board which could have given consent had been dissolved and that the action was statute barred. Government sources counter that the board had sanctioned the suit before it was dissolved. FQM also argues that it cannot be sued in Lusaka when the matter is already under arbitration in London.
‘Fraud is a criminal act in Zambia and that is why both legal actions were taken out concurrently,’ a legal source said anonymously. ‘They [First Quantum Minerals] have gone for the technicality because they have a weak case to defend,’ the source added.
The FQM executives being sued by ZCCM-IH are Chairman and CEO Philip Pascall and directors Arthur Mathias Pascal, Clive Newall and Martin Rowley. Since November, they have abandoned their frequent visits to Zambia for fear of arrest. They are represented in Zambia by lawyer and politician Sakwiba Sikota, a strong ally of Banda, the former president who has since become a key ally of President Lungu (AC Vol 56 No 2, PF set for victory).
Newall told Reuters in February that First Quantum planned to invest up to $1 bn. in modernising Kansanshi mines. ‘But there are a number of conditions that need to happen before we do that,’ he noted. This may mean ZCCM-IH dropping the legal suit.
According to government sources, the suit does not sit well with some top government officials. Zambia’s top politicians are not known for having arm’s length relationships with mining firms. Kasolo’s foes in the cabinet include Finance Minister Felix Mutati, Mines Minister Christopher Yaluma, Commerce Minister Margaret Mhango Mwanakatwe, Energy Minister David Mabumba and National Planning Minister Lucky Mulusa. Kasolo has since sued the Daily Nation for defamation after the paper accused him of wanting to unseat Lungu.
A cousin of the late President Michael Sata and one of the Patriotic Front’s early backers, Kasolo is a mining geologist and a radical nationalist who is said to be determined to fight on. ‘Multinational companies are raking this country and there are some government officials okay with this because their hands are smeared by the mines…I am not a sellout,’ Kasolo is said to have told his confidants.
Intelligence sources in Lusaka say President Lungu is aware that top government officials are frequently feted and hosted by FQM but seems unwilling to rein in his ministers. On the other hand, he is reluctant to let go of the suit as Zambia is desperate for cash and is currently negotiating a planned $1.6 bn. IMF loan facility to deal with its deteriorating balance of payment position (AC Vol 57 No 25). ‘Previously, government officials had been dismissed on the instigation of mining firms but so far President Lungu has stood by ZCCM-IH,’ a source said.
Experts close to the transaction declined interviews as it illegal in Zambia to comment on matters active in court.
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