Kayelekera Uranium Deal- Take It Back to the Drawing Board! Mar 12,2007 by Rhodrick Junaid
The recent revelation by the Government of Malawi that it will get 15% stake in the Kayelekera Uranium Project in return for a reduction in corporate tax rate from 30 to 27.5 percent, 0% percent resource rent tax among other revenue and expense concessions to Paladin Resources, is nothing but win-lose deal in favour of Paladin Resources.
Prima facie, the deal appears to be quite lucrative bearing in mind that it brings Foreign Direct Investment (FDI) much needed to sustain the phenomenal economic growth rate of 8%.
Additionally, the project is more enticing by the fact that at an approved CAPEX of US$185 million and US$45 million working capital, it is the biggest single foreign investment Malawi has ever secured.
However, a risk-reward analysis of the financial package with regard to the 15% equity stake shows that Malawians are getting a raw deal from the Australian firm. A vigilant business and financial risk analysis coupled with resource allocation exposes the unfairness and inequality of the whole deal. The Govt should have negotiated a higher stake and more infrastructural benefits to compensate the seemingly high business and financial risks.
Despite owning 50 per cent in Valhalla project in northern Queensland and 41.7 per cent Bigrlyi project in the Northern Territory (Australia), Paladin Resources can be considered as an amateur company in as far as uranium mining is concerned. The company’s first fully-fledged project is the Langer Heinrich Uranium Project in Namibia which was commissioned on 28 December 2006, having bought it from Aztec Resources. Production at this project just began in late December and the first commercial shipment is expected this month (March 2007).
Consequently, the Kayelekera Project happens to be Paladin’s second development project. The company has not been in the uranium mining business long enough to be very conversant with the various operational and business risks inherent in such a highly delicate and dangerous business.
Apparently, uranium mining is far more dangerous than any other hard rock mining since uranium emits Radon and other harmful and highly radioactive gases which can cause small-cell lung cancer.
Furthermore, there are financial risks in addition to the above business operating risks. At 80% debt and 20% equity, the project is thinly capitalised, thus very highly geared. Such a thin capital structure entails high financial risk. According to Paladin Resources, the project will be financed by a portion of its $250million convertible bonds that were raised in Dec 2006, with another debt facility of up to US$90million secured from a bank.
In investment finance, a company or project’s financial gearing is a significant indicator of its success and risk. A large amount of debt in proportion to equity designates future problems in servicing its debt effectively. Therefore, investing in this kind of companies is generally considered very risky, hence must be compensated with high rewards. High financial gearing can lead to the company experiencing financial distress and ultimately bankruptcy. Thus companies generally do not raise their debt-to-equity ratios to very high levels.
With the obvious high business and financial risks associated with the project and Paladin Resources as a company, it was imperative for the Government to negotiate for both a higher financial stake (more than 15%) and more infrastructure projects on top of the school and health facilities to be built by the company after year 3. The Government should have at least negotiated for one of the much needed roads in the Northern Region to be constructed after year 2 of the project and perhaps another one towards the end of the project’s 11 year life.
Of course, the project will create local jobs of up to 260 as reported, but still it falls short of conforming to the fundamental financial concept of risk-reward relationship, where high risk must be compensated with high returns. Malawi acutely needs FDI to sustain its pulsating economic growth, but this FDI must be generated at a fair and equal basis.
The Government can not afford to enter into raw deals that continue to keep our people at a disadvantageous position. Therefore, this whole Kayelekera Uranium Project deal with Paladin Resources ought to be taken back to the drawing board to raise our stake and negotiate for more and better infrastructural benefits.
Since now the Members of Parliament have asked to see the secret MOU between government and Paladin Resources, maybe there will be more to be revealed than what has been put in the public domain. Let’s wait!
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