CENTRAL bank governor John Mushayavanhu has slammed investors in the mining sector over “unfair” debt-to-equity (D/E) ratio on investment, which he felt was prejudicing the country.
According to experts, the optimal D/E ratio varies by industry, but it should not be above a level of 2,0.
Although it varies from industry to industry, a D/E ratio of around 2 or 2,5 is generally considered good. This ratio tells us that for every dollar invested in the company, about 66 cents come from debt, while the other 33 cents come from the company’s equity.
“Something that is not quite right is the debt-to-equity ratio of investment, especially in the mining sector. It is not right. We are increasingly seeing people bringing in US$50 000 in equity and US$300 million in debt,” the governor told a Chamber of Mines of Zimbabwe annual conference held in Victoria Falls recently.
“I think if you are a serious investor, you should know that this is not right. We now have to pay interests on an investment that should have been equity.
“So, not only are you taking the business, you are now taking interest and I think that is the issue that we are going to be looking into because you can’t be getting (that much) from our country in that regard. That ratio is not right at all.”
Mushayavanhu highlighted that during the days of the indigenisation regulations, investors would say “if I bring US$1 billion as equity and I am supposed to be a 49% shareholder, where are the locals going to get the US$1,1 billion, so that we are equal?”
“So, at that time, the equity amount will be reduced so that everything else becomes debt but now, that is behind us and we are saying equity is equity. If you are going to invest in equities, put in money as equity, not putting a dollar as equity and then you want the rest to be non-capital and then we are paying you dividends, we are paying you interests. It’s not fair.”
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Data obtained from the Zimbabwe Investment and Development Agency (Zida) show that foreign investment inflows into Zimbabwe are projected to surge this year, following revelations that an Asian mining firm has proposed a deal worth about US$7 billion.
The deal represents one of the most significant developments in the sector in recent years.
The proposal, reminiscent of a Glencore-style operation, has been submitted by Ajako United to Zida, as the country aims to fortify its position in the global mining industry. This is according to Zida’s 2023 report which explains investment trends in the past year. If approved, this deal would stand among the largest projects since a decade-old proposal by Russian investors to inject US$4 billion into a platinum operation.
United’s ambitious US$6,94 billion proposal, currently undergoing due diligence by Zida, aims to establish a comprehensive mining, processing, and trading operation based in Harare.
While not as colossal as Glencore Plc, the Swiss multinational commodity giant, the scale of the investment underscores the potential transformation awaiting Zimbabwe’s mining sector.
