Forced Diamond Firms Merger To Spell Disaster: Financial Analysts

The forced merger of diamond firms renewed fears of government clampdown on private investment, which had subsided after a perceived climb-down on the controversial indigenisation crusade. Analysts warned this week that the latest government manoeuvre to force Zimbabwe Stock Exchange (ZSE)-listed Murowa Diamonds to merge with alluvial diamond firms in Chiadzwa could spell disaster to efforts by government to lure foreign capital into the country, desperately needed to turnaround a now-comatose economy.
An empowerment policy put in place about seven years ago wreaked havoc on the country, resulting in capital flight and shrinkage in foreign direct investment inflows into the country.
Analysts warned that the State had no legal basis to take over shareholding in privately-held firms.
Such a move, they said, would impede efforts to court new investment in the country, which has witnessed an unprecedented number of company closures in the past four years due to lack of capital for retooling. 

Mines and Mining Development Minister, Walter Chidhakwa, said recently that government would force at least eight diamond mining firms to merge and create one entity in which it would control 50 percent shareholdings while the private players would share the remaining 50 percent.
He said government was not prepared to negotiate and would kick out any firms not willing to participate in the initiative.
Government already controls shareholding in corporations involved in gold, diamond and coal mining. These have been poorly managed, closing down over the years or courting foreign shareholders for capital.
Government holds most of these investments through the Zimbabwe Mining Development Corporation.

Moves to increase participation in highly complex and capital intensive diamond production could spell doom for the growth of the industry, or even create massive avenues for corruption and leakage of the gems, a practice government has been desperate to plug, industry players warned.
“If government is failing in other mining ventures that it is involved in like Hwange Colliery Company, it is very worrisome how they will manage this mega diamond corporation,” said Economist Takunda Mugaga, who is head of research at Econometre Global Capital.
“The diamond sector requires high capital outlays but government has no cash. It is generating only about US$3,5 billion in revenues.
“It means the 50 percent that they are pushing for is a bit on the up side. It will be hamstrung by its poor fiscal position. The merger is also compromising the indigenisation policy because even indigenous Zimbabweans will not be able to own claims in the sector; government will have most of the rights just like what happened in Zambia during Kenneth Kaunda’s reign. The merger will complicate the climate and confuse investors,” he said.
At least seven diamond mining firms operating in the controversial Marange gems fields will be merged, according to Chidhakwa, who spoke to a parliamentary portfolio committee recently.

The highlight of his announcement was the shock inclusion of Murowa, which is 78 percent controlled by the world’s sixth largest resources firm, and had generally been seen as a model gems outfit.
The remaining 22 percent is owned by the ZSE -listed RioZim Limited.
Other mining firms operating in Marange include Marange Resources, Diamond Mining Company, Anjin, Jinan and Mbada Diamonds.
A legal expert who spoke on condition of anonymity said it was imperative that government enters into negotiations with the concerned mining houses.
“Government will have to create a statutory instrument to create the merger, or just to reach a consensus with the mines concerned, otherwise they can’t be able to merge them,” he said.
“At the moment that framework is not there and they cannot force them.
“At the same time, companies will not refuse because the claims are owned by the State. If they say no government can decide to cancel their licences,” said the legal expert.

Financial Gazette