About some comments made by a team of the university of Columbia
Perrine Toedano and Juan Aristi of the University of Columbia have approached me to exchange on the subject of Kamoto KML project and contract with Gécamines. For better understanding of the background, I edit here the exchange of Emails that lead to the present situation.
Dear Pierre,
We are writing to you because we are part of a team whose members are
professors, lawyers, MBA students from Columbia University and have
decided to take up the challenge to lead the RDC government to
renegociate its mining contracts. The World Bank and the French and
Belgium government are with us.
Juan and I are specifically in charge of the Financial Analysis of the
Kamoto Contract. Since your analysis is second to none we looked
carefully at it and based on it we have come up with our own analysis.
Our findings are different from yours so we would be happy to compare
our reasoning to yours. Is that a way to be in contact with you?
Thanks a lot for your consideration,
Best,
Juan and Perrine
Dear Pierre,
We just wanted to let you know that some differences exist between our models but they are of minor importance:
- we use the numbers of the technical report for production and prices whereas you use different numbers (feasibility study)
- it seems that you have not considered the maintenance/replacement capex cost whereas we have taken into account this cost in the amortization after EBITDA - considering that maintenance cost are amortized in the same year of cost incurring/purchasing;
- we considered taxes on dividends (10% * 75% KML profit share) ). However these points are not the main ones that we wanted to discuss with you.
Of major importance are these following issues.
We understood both of the flaws that you raised concerning Kamoto contract
negotiation:
- the value accrued to gecamine through its 25% share worth less than its contribution to the joint venture through the equipment
- the price used by the technical report is underestimated as compared to the market price and the actual increase in price plays against Gécamines and DRC share in the joint venture.
Although we consider that you raised the crucial issues, we have
adopted a different approach considering an effective
tax analysis rather than NPV analysis. Here are the reasons for it:
To us, Gecamines is not a typical investor that can be compared to
KML using Free CashFlow NPV. Indeed, even if Gecamines brings
equipment (we'll talk about this later) , Gecamines does not bring
equity as opposed to KML. Gecamines is another instrument for DRC
government to raise tax and exert some control over operations through
Board participation.
The issue of co/cu price increase is relevant only in the context
of NPV analysis. Indeed in this context and as you have shown, since
KML invests equity in the first year and Gecamines does not, the
increase in price has a more positive effect on KML NPV than on
Gecamines NPV. But because Gecamines does not bring equity, both
partners are not comparable and that is why we consider that NPV
analysis might not be appropriate.
The issue of equipment: we believe also that Gecamine does not
receive a fair value for its equipment contribution. We have
identified in the contract that the royalties to gecamine (2% on net
sales) are supposed to be a lease payment for this equipment. The NPV
of this royalty is worth less than the equipment estimated value so we
believe that this royalty has to be raised or otherwise an up-front
payment has to be paid to gecamines as you also suggested.
Our analysis to assess the fairness of the contract (leaving aside
the equipment issue): The effective tax approach.
This approach consists in considering what happens with the revenues
from copper-cobalt shares. Some of them pay for the costs and Capex of
the operation, some of them go to the government through various types
of taxes: (tax on profit, DRC royalties, gecamines share, tax on
dividends) and some of them end up as dividend to KML. We consider all
payments to Gecamines similar to other DRC taxes since Gecamines is 100% owned by DRC- is only an instrument for the government to raise more tax. However we do
not consider Gecamines royalties here because they are a rent payment
for the equipment (too low as we said). In another mine without
previous equipment, these royalties would, in theory, not exist. We
think that the equipment issue has to be separated from the tax + DRC
royalty + GCM share issue and dealt with separately (with upfront
payment or increased lease payment as we said).
To reach the final effective tax figure, we compare DRC share with KML
share. What we are planning to do to assess fairness is compare the
different Congolese contracts among them and with international
benchmarks.
The main difference between tax effective analysis and NPV analysis is
that in the former, equity does not appear and hence the impact of
prices on DRC and KML shares is minimal.
We look forward to receiving your reply about these points. We
believe that the objective of this discussion is only to make a
stronger case for the renegotiation of the mining contracts.
We just wanted to let you know that our broad team (composed of
professors lawyers and financial analysts) is reviewing the other
controversial mining contracts as well (GEC, TEnke...))
Thanks a lot for your help,
Best Regards,
Juan and Perrine
Dear Pierre,
I was reviewing the email Perrine and I just sent you and I have
spotted a mistake we made. At the end of the email when we are
explaining the difference between effective tax and NPV abalyses we
stated that equity does not appear in the former. This is not true,
over the life of the project aggregate dividends equal
equity+aggregate profits after tax. The model formulae follow this.
In the effective tax analysis, which is aggregate and not discounted,
we are looking at where the benefits of the project go, irrespective
of who puts money to make it happen.
Thanks again for your time.
Best regards
Juan
Here is my response.
Mis en ligne le 07/11/2007 par Pierre Ratcliffe. Contact: (pratclif@free.fr) sites web http://paysdefayence.blogspot.com et http://pierreratcliffe.blogspot.com