Zimplats, Caledonia set 2021 tone
PLANS by three of the country’s biggest foreign-controlled firms to invest fresh capital into their local operations represent the earliest pointers to a potential bounce back next year following a turmoil-filled 2020, researchers at IH Securities said on Monday.
Swiss-headquartered foods and beverages giant, Nestle and Jersey-based Caledonia Mining Corporation have announced combined investments totalling US$62,5 million into Zimbabwe in the past week.
Caledonia operates Blanket gold mine, one of the country’s biggest bullion extraction outfits.
Platinum miner, Zimplats has also been making aggressive expansion moves at its Ngezi operation.
Foreign firms hold the key to the development of frontier markets and the attitude of those already invested shapes perceptions across fund managers and individual investors seeking opportunities in a given destination.
In a two-page paper titled Macro-Economic Update, Zimbabwe 2021 National Budget Review, IH said the optimism demonstrated by the three firms received a boost when Finance minister Mthuli Ncube attempted in next year’s fiscal plan to make interventions that may steer industries back to improved production.
The past two years have been difficult for Zimbabwe, which has battled acute foreign currency, fuel and power shortages.
These were compounded by inflationary surges in the past 12 months, together with exchange rate volatilities that only cooled off after the central bank introduced the forex auction system in June.
At the beginning of the year, Zimbabwe’s fragile economy was hit by the COVID-19 pandemic, which forced government to shut down businesses, as authorities tried to prevent contagion.
However, IH’s paper said stability would only be sustained if the exchange rate continued on a positive trajectory.
“The 2021 budget attempts to solve the underlying problem of productivity through several measures, the main lever of which is stabilisation of the local currency,” IH said.
“Trading updates for 3Q20 (third quarter 2020) have consistently shown recovering retail volumes from the sharp decline in 1H2020 (first half 2020) implying some recovery in consumer demand. Interestingly, companies servicing the infrastructure industry such as Proplastics and Lafarge have also shown improved order books implying growth in capital spend. We also note signs that some foreign-based parent companies, including Nestle, Caledonia and Zimplats, have indicated intent to increase investment in their local subsidiaries. The relatively stable environment in H2 set up by a surprisingly stable forex auction market and a resultantly stable Zimbabwe dollar has improved business and consumer confidence,” the paper said.
Last week, Caledonia said it had spent US$60 million developing its flagship central shaft project, which is due to be commissioned in 2021.
“We have invested approximately US$60 million in this project since we first announced it in 2015 and it has been ownerbuilt and fully funded through internal cashflow and has been completed at a cost that is well below initial quotes received,” Caledonia CEO Steve Curtis said.
“The last five years have been a tremendous team effort and we commend our employees for their hard work and their commitment to safety. Central shaft will also position us to step-up our deep level exploration which, if successful may extend Blanket mine’s life, which is currently to 2034,” he said.
Central shaft is seen as a game-changer to Caledonia’s Zimbabwean ambitions, with capacity to lift output by 45% to 80 000 ounces by 2022.
Nestlé Zimbabwe has commissioned a US$2,5 million cereals manufacturing line in Harare, taking its total investment to over US$40 million in the past decade.
“The milestones above are aligned to Nestlé Zimbabwe’s transformation plan which seeks to address accessible and affordable nutrition,” Nestle Zimbabwe managing director Eunice Ganyawu-Magwali said.
“The transformation plan, which was rolled out towards the end of 2019 is focused on future-proofing the business in Zimbabwe through import substitution, local value chain development, expanding manufacturing capacity, increasing capacity utilisation, innovation and renovation of our product portfolio focusing on use of local ingredients, digital transformation, empowering communities and leading the sustainability agenda,” she added.
IH said if month-on-month inflation was kept under control, there would be significant positive spin-offs for the economy in 2021.
“Should the month-on-month inflation continue to trend below 10%, we expect production and consumption to maintain their positive upward trend. Increase in excise duties on alcohol and cigarettes will likely see gross margins squeezed for listed entities like Delta, Afdis and BAT. Sugar manufacturers, Hippo Valley and starafrica Corporation could, however, benefit from the exclusion of the commodity from the open general import licence,” the paper noted.
“Although we expect to see margin suppression and moderating profitability in the coming year as cost lags actively catch up valuations remain undemanding making equities attractive at current multiples,” it added.