Indigenisation reports from Zim should be viewed with pinch of salt

In a recent publication, Newsday cited Welshman Ncube (MDC), Zimbabwe’s Industry Minister, indicating the country was not strictly implementing a law to compel foreign companies to sell 51% of their assets to black Zimbabweans given the fact that the economy is struggling and there was a need to attract foreign investment.

However, two weeks ago we then saw a contradictory report in the state mouthpiece Herald newspaper stating that Zimbabwe‘s cabinet had agreed that the government will take 100% ownership of all alluvial diamond mining in the country and will also press ahead with the 51% ownership plans for the rest of the mining industry.

Youth Development, Indigenisation and Empowerment Minister, Saviour Kasukuwere (Zanu PF) was quoted saying, “All new projects in the mining sector are expected to comply with the requirements of the law.”

Under the same law, it has been stated that communities would receive 10% of gross profit from mining activities in their area.

It is a no-brainer that such rules will impact negatively on players such as Anglo Platinum, Impala Platinum Holdings and Rio Tinto as well as drive away potential capital to “safer” investment destinations.

The above highlights the fractious nature of Zimbabwe’s Government of National Unity (GNU), with the two main political parties to the arrangement now constantly at loggerheads.

We anticipate increased politicking in the next few months given the increase in political gatherings around the various party congresses and possible electioneering.

While we are not advocating that investors disregard all these statements, we urge investors to view them with a pinch of salt, given what is at times a disconnect between the reality on the ground and newspaper headlines. We still believe that over time, economic realities will overcome political expediency in Zimbabwe.

Of course, the investment horizon might appear to be clouded in the current environment given the uncertainties around the possible elections in 2011.

However, we remain strongly convinced that long-term investors should seek exposure to Zimbabwe.

Zimbabwe should be viewed as a recovery play, with significant upside off a very low base. According to the Ministry of Finance, growth rates of 8.1% and 9.3% are expected in 2010 and 2011 respectively.

Most companies are valued at well below asset replacement value, and have considerable headroom for volume growth.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.