The following transcript of the Q&A session made at the 23rd Annual General Meeting, held on 30 April 2021 may contain forward-looking statements and should not be used as a substitute for professional advice. These forward-looking statements are based on information available at the time the statements are made and/or management’s belief as of that time with respect to future events and may involve risks and uncertainties that could cause actual results and outcomes to be materially different, for which CEC cannot be held liable.
London Mwafulilwa: Thank you, Mr. Chibuye. I now invite questions from the shareholders on the reports received from the Chief Executive Officer, the Chief Financial Officer and the auditors. The events coordinator will assist with the question and answer process. Mr. Simakoloyi.
Gilbert Simakoloyi: Thank you very much, Chair. Dear members, before we get into this session, a few guidelines will be applicable.
You are advised to limit your questions to a maximum of two questions per person. The questions should be clear and to the point. Please note that you are required to give your full name before you ask your question. For purposes of orderliness in this meeting, we request that you address all your questions to the Chairman.
The way we are going to raise the questions is, first of all, you will be required to raise a virtual hand by activating the feature with the icon of the hand, which is found under the tab that says participation. Once you find it, please click on it and the virtual hand will show alongside your name.
Upon having done that, you’ll be given the floor to address the Chairman with your question or questions. By a similar token, immediately after asking your question, kindly click the same icon activated earlier, and this time it will deactivate your virtual hand. We want to avoid old hands continuing to appear on our screen. If that suffices, we are now ready to take your questions and comments.
Mbikose Phiri: I’m participating in the meeting for the first time. Unfortunately, I’m one of those that did not receive dividends. Thank you. That’s the only concern.
Julia Chaila: Mbikose Phiri, if you can please contact Corpserve, I’m not sure if you contacted them before. Please contact Prisca Chizi. Her line is (097) 789-9379, or you can call our Investor Relations Office here at CEC on (0212) 244-281 and talk to Precious.
London Mwafulilwa: We apologize that you didn’t get your dividend, but be rest assured once the communication is established, you will receive. To all the shareholders, please do make use of the Investor Relations Office at any time for queries that you may have.
Julia Chaila: Chair, I’m advised by the Investor Relations Office that she’ll be paid through a cheque and she should contact the numbers that I’ve given her.
Francis Daniels: My first question relates to note 29 of the accounts dealing with contingent asset liabilities. I note that the language in note 29 about the ZESCO USD225m potential liability is phrased differently from the way it was in the 2018 accounts.
Insofar as the 2020 language refers to a BSA amendment having to be signed and the customers having to pay, I just wanted to understand the reason for the difference.
Second, what happens if the BSA amendment is not signed by either Copperbelt Energy or ZESCO? Is that going to have a positive or negative impact on the amount which is in dispute in arbitration and, and where does the arbitration stand?
Julia Chaila: CEC has been in an arbitration process with ZESCO whose proceedings closed on the 12th of this month. The arbitral process started about over a year ago, which was based on a claim that ZESCO made against CEC for monies which it alleged CEC owed to it.
The proceedings finally were heard before the arbitrator and an international arbitration almost three weeks ago, and like I said, the closing arguments were presented on 12 April. We are now awaiting the ruling or the award of the arbitrator who heard the matter to determine whether there were merits or not in the ZESCO claim against CEC. That is where we are with the arbitration, Chair. We are waiting for the judgment on the matter.
Chair, I note that I think Mr. Daniels was talking about a different arbitration than I was talking about.
The one I referred to earlier was an international arbitration, which has been there between ZESCO and CEC. The arbitration, which is in the note is one which is before the Zambian courts in the High Court, where the mines contested an increase in tariffs, which was effected by the ERB in 2014. The mines took the matter to court for judicial review. The matter remains pending before the High Court. It’s been transferred all over the place.
It was in Lusaka, but because the judge was transferred to Kitwe, he moved with the case to Kitwe. The matter was then referred back to Lusaka because most of the litigants were in Lusaka, the lawyers’ litigants were in Lusaka. The judge who was then appointed in Lusaka moved to Ndola. He has been saying he needs to find time to sit in Lusaka because it’s now a Lusaka matter. He has not given us a date of hearing, and the issues are still on preliminary matters, which some of the parties have raised.
We do not know when the date of trial will be set by the judge, so the matter remains pending. I don’t know what difference there was with the language in the previous report.
Owen Silavwe: Let me add to what Mrs. Chaila has mentioned. I think Mr. Daniels’ question focused on the addition to the notes, which says, “In this regard, in the event that the court’s ruling will be in favour of the ERB and subject to an amendment of the BSA,”. There’s that addition of “subject to an amendment of the BSA,” whereas the second part, which is “subject to receipt of amounts,” has always been in the note.
The first part, “the amendment to the BSA,” has been added following further advice from both the internal and external counsel that consideration of an amendment to the BSA will be required in the case that the ERB won this matter in the courts.
The issue that Mr. Daniels raises is what happens if that amendment is not then achieved. We believe that the parties would have to negotiate in good faith, but from a CEC perspective, we think the two conditions go hand in hand.
If there’s a need for an amendment of the BSA in order to effect the decision of the ERB, then the second part is also important, meaning that we need to amend the PSAs as well because the PSAs will support the amendment of the BSA.
In the end, any additional requirements or increase of tariffs is paid by the customers, so the two amendments would need to be hand in hand. It’s basically working with everybody in the value chain to achieve that. Otherwise, if CEC could agree to an amendment without having agreed to an amendment of the PSAs with the mines, it would be put in a very difficult position to meet those additional monetary requirements.
Francis Daniels: My second question relates to the deferred consideration from the Liquid transaction. There was an amount which was supposed to be paid which was received in January 2019, but when you look at the cash flow statement of 2020 referring to 2019, there doesn’t seem to be a reference to that. I just wanted to understand what happened. Thank you.
Mutale Mukuka: If you recall, in 2018 CEC divested out of CEC Liquid. The transaction was recorded as a 2018 transaction and the amount was essentially a receivable. In the subsequent year, in 2019, you essentially see it as a movement in working capital. You will not see it as a single line item, but it is in the cash flow of the audited FS.
Bupe Mwansa: My concern is with the shareholding in the Company, especially to do with the youths. I don’t know what advertisement has been done to increase the shareholding. I believe this is not only for the older people who invest in the Company, but the youth should also play a major role in it. I think we need an increase in advertisements to have more shareholders on board, and an increase in the number of youths as well in the Company.
London Mwafulilwa: CEC is listed on the Lusaka Securities Exchange and it’s open to the public, including the youth. Please feel free to contact the brokers or even the CEC Investor Relations Office to basically get the procedures. You are free to go to the stock exchange and buy shares today, you are free to buy them tomorrow and, therefore, we remain open to everyone – individual citizens, the youth, corporate entities. The markets in other countries are very, very active, and it is a good idea that you are thinking of participating in the market. Please do make contact with CEC Investor Relations and the brokers on the Lusaka Securities Exchange.
Titus Mapani: I’d like to believe GRZ and ZCCM-IH have representatives on the Board. I’m sure they’re aware of the good business that CEC has been conducting over the years, which has benefited the Zambian economy in general. Was there no way to avoid pushing the Company in a direction where it had to go to the courts to deal with the ZESCO issues, and for issues which, at face value, a lot of people thought wouldn’t come to what they have come to in the end?
London Mwafulilwa: GRZ do sit on the board. ZCCM-IH are 24% shareholders in the Company. We do continue to engage all stakeholders, all the shareholders, the ministry – we engage everybody because this is what affects our business. We do not want to be in the courts. We’re not in the business of being in courts, but where we feel that your business is threatened, we have no choice, but to look for a mediator.
And in this country, we do have the courts to basically look at it, other than the arbitration. We’re not the only ones that have gone to court. Colleagues have also gone to seek justice from the courts. But as the Board and Management, we will do our level best to protect your business interests.
So we find ourselves in situations where we shouldn’t be, but we need to be there to protect your interests. We should be concentrating on developing the business and moving it forward. But where we meet such challenges, we do both. We engage, we are in a lot of dialogue with the relevant parties and where it gets to a situation where we regrettably have no choice, we’ve ended up in the courts.
Kelvin Chisanga: First of all, I would love to find out from the Chief Financial Officer in regard to the huge impairment that he has referred for the year 2020. At last year’s meeting we were told that the Company survived on the reserves. What is sustaining the Company, considering that a lot of things have actually been put in perspective as negatives, whereas we have seen that there have been some good cash conversion ratios, which he has projected to say has gone to 66%? We’ve seen that against all these, the Company hasn’t been showing good operational costs or operational outlook, but we are able to see that some good positive sentiments are being met over that.
Mutale Mukuka: If we go through the presentation that was given with the detailed annual statements, and you have the annual reports before you, you will see that from a cash perspective, the business is not in any way, relying on reserves. By that, I mean that it’s not using the money that is generated in prior years to cover its ongoing obligations or costs, or indeed to pay for dividends.
What you will see is that at the end of 2019, the business had a cash balance of USD77.9m. In 2020, the business had income and it had costs. Some of the costs include operating costs or capital expenditure, or indeed the distribution of dividends to the shareholders.
Having taken into account the money that was generated during the year, taking into account the operating costs, taking into account the capital expenditure, the repayment to our lenders, as well as a dividend distribution, the business ended up with a cash balance of USD83m. Essentially, we are growing from USD77m to USD83m, so in that regard, we definitely did not use any of the reserves that were built up from prior years from a cash perspective.
From a profitability perspective, yes, the level of impairment means that the profit realized in the years 2019 and 2020 was significantly lower than the dividends distributed in those years. The comment in that respect is correct, that a portion of the dividend to pay down represented a distribution from prior profitability of the business.
How do we see the business going forward? What we anticipate is that post 1 June 2020, which essentially filters into 2021, we expect the level of impairment to significantly reduce. We think that 2020 was probably amongst the worst years with respect to the level of impairment. We expect some level of impairment in 2021, but definitely nowhere near the quantum that we’ve seen in prior years. In that regard, our expectation is that the profitability will probably be matched by any form of distribution that the business may have.
The result is that we expect the shareholders’ money, which is called equity, essentially to continue to grow. Whereas if we continue on a path of 2019 and 2020, the expectation is that the balance sheet will continue to reduce as a result of the decisions made to distribute dividends out of prior year profitability.
Kelvin Chisanga: What has happened so far in terms of the sales office in Congo or the business development office that has been set up there? How are you faring considering that the system in terms of the market is not shaping up in Congo as far as we are concerned?
Owen Silavwe: The DRC market has been very good to the CEC business. We’ve created a lot of value from that market and certainly we want to continue creating value in that market.
The reason we opened that office in DRC was that as our business grew in that market, we needed some form of presence because we started getting calls from our customers when they’d interact with us and get certain issues discussed and resolved between them and ourselves. The requirement for marketing activities also increased. So we did resolve that we needed the local office to try and focus on some of the issues that required attention. The local office has done reasonably well so far.
There are things that we would want the local office to do that are still on the cards as part of our strategy, and so we are continuing to engage the local office.
In terms of market development, the DRC is probably just a step behind us, but they’re also making efforts to try and move the market forward. For example, they have finally appointed or set up the regulator, and that office is beginning to function. There are other facets of the market that they are working on. So just like Zambia is trying to move its market forward, the DRC also continues to do that.
Overall, as a business, we’re going to operate within the framework of our risk management. We are aware of risks associated in a market that we operate in, and so we continue to operate within the risk management framework of the Company.
Peter Kunda: In Q1 this year, we received news of the court judgment on the matter between CEC and KCM, and it was a favourable judgment to CEC. Has the government already triggered an appeal, or will we see an appeal coming from the government against that ruling? Also, the Minister’s decision to sign the Act or Statutory Instrument made the supply lines for CEC to KCM as national carrier. I saw it as a threat towards possible nationalization of private assets. Are we seeing that threat coming post-elections given that there’s still this battle between CEC and KCM?
London Mwafulilwa: I must advise the shareholders that Management is pursuing the KCM debt, and we look to succeeding in that line.
There was a question asked on the Statutory Instrument 57 and whether the government would be making an appeal. Yes, the government has intimated and made a move to make an appeal. They have the rights to do this, and it’s only fair that we go through the entire process.
Post elections, it’s difficult for us to make any projections to that, but you can rest assured that you have a very responsible Management and you have a very responsible Board.
Besides protecting your interests in the courts where necessary, we are continuously negotiating with all the relevant authorities on the business platform in terms of government, the mining industry and the regulators, to ensure that a win-win situation is achieved for both CEC, the nation and everyone that we serve.
Chanda Henry Nshikita: Please, may you give an update on the progress of the project at Kabompo Hydropower.
Owen Silavwe: Kabompo is a project that the Company has been considering for a while now, and if you’ve been participating in these Annual General Meetings you will note that we’ve reported on Kabompo a number of times. When we finished the initial study, we had indicated that the technical solution at the time showed that the project was relatively expensive and, therefore, we could not progress with implementation of the project in that form.
What was then decided was to see whether the project could be reengineered. That work started in 2019 and continued in 2020, and some of the aspects of that work mostly relating to the marketing of the power have not been concluded.
So, part of the consideration was that the project could be done under the auspices of GET FiT Hydro. But as I said the GET FIT programme itself is a government programme. It’s supported by KFW and at the moment it’s been put on hold. Therefore, the commercial considerations for the project could not be finalized. So maybe at this stage, it suffices to say there are aspects of project viability that have not been finalized, but are still being considered. Therefore, once those have been finalized, our shareholders, just like everybody else in the nation, will be advised whether the Company will be progressing or not progressing with the project.
Mumba Musunga: I have two questions. The first one is on page 130, which relates to the credit risk profile on the receivables. Do most of the amounts which are past due relate to KCM, and are there any other clients that we should be concerned of with relation to old debtors, and also just other steps being undertaken to collect on the receivable?
The next question I wanted to ask is regarding your thoughts on outlook. We’ve seen copper prices are reaching USD9,000, 10,000 per tonne. What are your clients saying? Do we see bumper growth in energy demand from our clients, whether in Zambia or the DRC owing to the high copper prices?
Owen Silavwe: I do agree that the red metal is doing very well at the moment on the global market, and certainly it’s encouraging all those in the business of copper to try and ramp up very quickly and take advantage of the bull market at the moment.
This is anticipated to stay for a relatively long period of time because of the fundamentals.
These are mostly the improving fortunes of the global economy with most of the economies beginning to look good as a result of solutions that are being implemented to roll back COVID-19 but, more importantly, it’s the development of the green economy that we think in the long term is important to try and sustain a good level of the copper price. It’s difficult to say that it will stay at USD10,000, but it might stay at a relatively good price going forward.
From the conversations that we’ve had with our customers, this is definitely good news, and a lot of them are beginning to take advantage of this. However, there are still concerns about some of our internal issues as a country, and the mines are obviously focused on resolving that. The government has also made a commitment that they are quite focused on resolving any policy issues that could be impacting the productivity of the copper mines. So, we do think that insofar as that is concerned, it is good news to the business and as a company we do need to take advantage and work with our mines, both existing customers and indeed the prospecting future mines.
Emmanuel Chisenga: My question is just a case of curiosity or teasing an idea. When you look at business expansion with renewables, and we note that CEC disposed of two ventures – that is CEC Liquid and CEC Africa, and then you have GET FiT Solar.
My question is how much market research has been done in terms of expanding across the country, because much of the infrastructure for GET FiT Solar is in the Copperbelt? Is it meant for mining customers in terms of increasing capacity? And if you’re saying it’s renewable, you’re going into that sector. Why not go countrywide with green infrastructure using that model?
For those who’ve worked in rural areas, you note that most people in those areas have taken up solar. Technology is widely adopted, but they only rely on consumer products where you have a solar panel and those things to set up their lighting needs or energy needs. And are you looking at competitors such as Bamboo solar?
Owen Silavwe: In terms of renewables, this is important insofar as the energy transition agenda is concerned, but specifically for the business, we do see renewables as playing a critical role in augmenting our supply portfolio in terms of strategy there.
We believe that because renewables can be developed very close to load centres, and in Zambia at the moment there are three key load centres – these are the Copperbelt, the North-West and Lusaka – we have an advantage in that our network is all over the Copperbelt.
So, as a first step, what we need to do is to take advantage of our network and develop these renewables around the Copperbelt. In the medium to long term, we do need to look at the options of developing these elsewhere around the country. However, before we do it closer to our network, it wouldn’t make too much sense. Remember we’re sitting on two markets, we’re sitting on the Copperbelt market in Zambia, and then we’re sitting on the Copperbelt market in the DRC. So, we do need to take advantage and develop these assets closer to these markets.
So yes, we’ve looked at the situation and we do think as a first step, we need to take advantage of these important markets.
George Silutongwe: What is the situation concerning the common carrier issue, in relation to these transmission lines? Secondly, what is the immediate outlook for CEC for the next 2-3 years?
London Mwafulilwa: Your issues have been answered through the management presentation and we also discussed the issue of the common carrier. As it stands right now, the High Court ruled that the SI be quashed, and it remains as such until an appeal is made.
In terms of the outlook, I would encourage you to get hold of the Investor Relations team, because the presentation was made on this matter.
Job Lusanso: When we are going to receive hard copies of the annual report?
Julia Chaila: The hard copies of the annual report were delivered. Maybe Mr. Lusanso could tell us where he resides. This year, I think most of our shareholders will agree with us that efforts were made to ensure the hard copies were delivered well in advance of the AGM and I can confirm that they went out well in advance, so we are a bit surprised that you have not received your copy. If you could please contact our Investor Relations Office after the meeting on (0212) 244-281 and speak with Precious who can avail you a hard copy of the annual report. Please also reconfirm your physical address with her.
Moshe Sekeli: Has the Board of Directors thought of allowing willing shareholders who want to trade their dividends for more shares at a discounted market rate?
London Mwafulilwa: That is not possible because as shareholders, you actually go to the market to obtain your shares. Where we’ve given out a payment you are free to go and buy the shares on the market. The Board does not discuss or fix the rate of the shares. That is market fixed and I would encourage you to continuously participate and engage the brokers on getting more shares.