PRIVATE AND CONFIDENTIAL ZCCM INVESTMENTS HOLDINGS PLC MINUTES OF THE 32ND MEETING OF THE INVESTMENTS COMMITTEE OF THE BOARD (CONTINUATION) HELD ON THURSDAY, 4 MAY 2017 Minutes of the 32nd Meeting of the Investments Committee of the Board (ICB- Continuation) held at ZCCM-IH Office Park, Stand No. 16806, Alick Nkhata Road, Mass Media Complex Area, Lusaka, in the ZCCM-IH Board Room on the 1st Floor on Thursday, 4 May 2017 at 14:40 hours. PRESENT: Mr Philippe Taussac Non-Executive Director (Chairman) Mr Mateyo C Kaluba Non-Executive Director Mr Paul Chanda Non-Executive Directo Dr Pius C Kasolo Chief Executive Officer – Director Mr Charles Mpundu Co-opted Member Mr Basil Nundwe Co-opted Member Mr Mabvuto Chipata Chief Financial Officer Mr Situmbeko Mubano Acting Chief Investments Officer APOLOGIES : Mr Patrick D Chisanga Co-opted Member SECRETARY: Mr Charles Mjumphi Corporate Services Manager IN ATTENDANCE: Mrs Matildah P Lyama Business Development Manager Mr Wilphred K Katoto Chief Technical Officer Mr Tapiwa Msusa Portfolio Analyst Ms Yadika Mkandawire General Counsel 1. QUORUM AND OPENING REMARKS The quorum for the meeting was confirmed and the Chairman called the meeting to order. The Chairman reminded the ICB members that this meeting was a continuation of the meeting which was deferred on 3 May 2017. 2. DIRECTORATE None. 3. CONSENT TO SHORT NOTICE The Directors gave consent to short notice. 4. DECLARATION OF INTERESTS None. 5. STRATEGIC OPTIONS ON INVESTRUST BANK PLC (INVESTRUST) 5.1. The ICB was informed that: 5.1.1. Analysis of the performance of Investrust 5.1.1.1. Investrust’s audited accounts were qualified by its appointed external auditors on account of the treatment of the preference shares following an agreement between Investrust and Meanwood Venture Capital (MVC). 5.1.1.2. The preference shares did not provide any cash benefits to the bank as there were no cash sales of the plots (subject of the agreement between Investrust and MVC). 5.1.1.3. The valuation of the plots did not involve an independent valuer and hence there was a risk that the carrying amount of the asset may have been overstated. 5.1.1.4. Investrust’s quarterly report for quarter ended 31 March 2017 revealed an accelerated loss of K 17 million against anticipated improvement in the performance based on the budget. 5.1.1.5. A review of Investrust’s financial performance up to February 2017 revealed that the Bank’s loss during the two month period to 28 February 2017 was substantially worse than was budgeted. Invetrust recorded a loss of ZMW 11,731,801 against a budgeted loss of ZMW 6,039,758. 5.1.1.6. At the Annual General Meeting held in April 2016, it was revealed that Investrust made an additional provision for bad loans of about K 100 million. 5.1.1.7. Investrust’s liabilities as at 28 February 2017 were in excess of the liquid to semi-liquid assets by ZMW 179.039 million – which raised concerns on the ability of the bank to settle its short-term obligations as they fell due. 5.1.1.8. There were significant discrepancies (negative variances) between Investrust’s Five year Corporate Plan and the projections generated by the Independent Reporting Accountant. 5.1.2. Key attractions of Investrust The following were key attractions: a) Publicly listed company. b) Local Bank: (i). Key decisions were made locally hence quick turnaround time. (ii). The Bank could also benefit from pro-government policies. The Bank had in the past benefited from deposits from government institutions and agencies. c) Extensive branch and agency network d) Dividend prospects and capital appreciation – commercial banks were innately expected to pay out most of their earnings as their growth was seldom driven by investment in assets which were less liquid. 5.1.3. Key challenges and risks: The following were some of the challenges and risks that were identified: a) Capital Adequacy. b) Weak information flow between Management of ZCCM-IH and the Representative Directors nominated by ZCCM-IH. c) In the current state of the Bank, it was unlikely that ZCCM-IH would receive a dividend in the medium to long term nor would it be able to dispose of its interest for capital gain. No reliance could be placed on the business plan submitted by the bank. d) Potential governance challenges between the major shareholders during the transition period. e) Market risks as a result of increased competition. f) Legal risks arising from the default on the Share Sale and Purchase Agreement. g) The convertibility of the preference shares. 5.1.4. Recommended option for ZCCM-IH On the basis of the review, the following option was recommended to the ICB: a) ZCCM-IH should maintain its shareholding position, while introducing external interventions i.e. additional equity capital injection and a new operator. b) ZCCM-IH should identify a strategic partner who could provide both capital and operating expertise. In order to be able to pursue this option ZCCM-IH should undertake the following steps: (i). Immediately engage the Bank of Zambia and the major shareholders including the pension funds, with the view to working out a joint strategy for the survival of the Bank; (ii). Scan the market for local and international parties that could potentially be interested in investing in the Bank; and (iii). Consider conducting a joint due diligence assignment with prospecting strategic partners. Such process would enable ZCCM-IH to leverage off the expertise of the partner and help develop a survival plan for the Bank. 5.2. Following presentation, the following discussions ensued: 5.2.1 The ICB observed that maintaining the status quo in itself would not make any significant impact on the performance of Investrust as ZCCM-IH would not exert real influence in the operations of the bank. What ZCM-IH needed was to exert real influence on the operations of bank through a Board and Management team which would drive ZCCM-IH strategy going forward. In this regard, the choice was one between acquiring a substantial stake (at least 75%) that would guarantee control of the bank or totally exiting the bank by selling its shares. As the situation stood, ZCCM-IH had very limited influence while it was carrying a huge risk compared to the minority shareholders. 5.2.2 The ICB observed that the situation at the bank was getting worse and there was a risk of a run on the bank given its continued poor performance. 5.2.3 One way to ensure that ZCCM-IH had a significant stake in the bank was to undertake a rights issue which would result in the dilution of the existing shareholders assuming they were unwilling to exercise their rights. Once ZCCM-IH acquired a significant stake following a rights issue, a strategic partner/s with similar goals as ZCCM-IH could be attracted to invest in the bank by acquiring part of the shares in the bank. 5.2.4 It was doubtful whether the current shareholders had similar goals as those of ZCCM-IH regarding the future of the bank. As a result of the challenges in the corporate governance of the bank, it was difficult to attract institutional shareholders who could potentially support the bank’s operations by providing the funds required to improve the performance of the bank. 5.2.5 Another option would be to undertake a mandatory offer, however, shareholders were not obliged to sell their shares in a mandatory offer. Given that a mandatory offer would only be beneficial if other shareholders were willing to exit, this could affect ZCCM-IH strategy going forward. Making a mandatory offer would require an outlay of around $ 5 million. 5.2.6 On the operational side, the ICB observed that it would be necessary to engage the Minister of Finance on the need to support the bank through GRZ deposits. 5.2.7 The ICB directed ZCCM-IH Management to review the implications of the proposed decision (i.e. undertaking a mandatory offer) vis-à-vis the existing agreement between Investrust and MVC. 5.3. Following deliberations, the ICB Resolved that the following be presented to the Board for review and approval: 5.3.1. ZCCM-IH undertakes a mandatory offer with a view to acquiring a substantial/controlling stake in the bank. 5.3.2. As the mandatory offer was being developed, ZCCM-IH should simultaneously start working on an operational plan that would help in improving the bank’s performance. In this regard, the ICB appointed a sub-committee to spearhead these efforts. Members of the sub-committee were Mr C Mpundu (Chairperson), Mr B Nundwe, Mr S Mubano and Mr M Chipata. 5.3.3. If the option of the mandatory offer failed, ZCCM-IH should pursue the option of a rights issue. 6. UPDATE ON THE PROPOSED PROJECTS: Management presented the following proposed projects: 6.1. Kapiri Glass Manufacturing (KGM) 6.1.1. The ICB was informed that: 6.1.1.1. KGM was a private glass manufacturing company which had recently been recapitalised at a cost of around $ 16 million through debt finance. KGM was seeking $ 4 million for pre-operating expenses and working capital funded through equity, to sustain operations for six months before contracts with customers were finalized and sales began to be realized. 6.1.1.2. ZCCM-IH was still undertaking further reviews to determine appropriate actions to be taken. Once this was finalised, a project proposal would be submitted to the ICB for review. 6.1.2. Following presentation: The ICB observed that there was need for ZCCM-IH to undertake a review and make recommendations on the basis of the viability of the business both in financial and operational terms (quality of the products compared to imported glass products) and sound corporate governance. The review should include determining the true value of the plant given that there were delays in completing the plant which could have resulted in cost escalation. 6.2. Wangwa Farms Limited (Wangwa) 6.2.1. The ICB was informed that: 6.2.1.1. Wangwa was a mixed farming operation, producing crops and livestock. The Farm, had a total area of 4,147 hectares (Ha), situated in Chibombo District. Wangwa was 100% owned by the Burton Family since 1983. 6.2.1.2. Wangwa and its Promoter/Transaction Advisor, Kurema Private Equity Limited approached ZCCM-IH with a proposal for ZCCM-IH to acquire an equity stake of up to 90% of Wangwa, via a capital raise, for USD 50 million and subsequently migrating from a family run business to a fully-fledged corporate entity. 6.2.1.3. The value of Wangwa was found to be NIL on account of its debt burden of around $ 20 million from Zanaco Bank Plc (Zanaco). 6.2.1.4. ZCCM-IH Management was reviewing available options including holding discussions with Zanaco on how the debt could be restructured while continuing with operations. 6.2.2. Following presentation: 6.2.2.1. The ICB observed that there was need to take a cautious approach in the selection of projects and avoid those which could result in eroding the value of ZCCM-IH. 6.2.2.2. The ICB was informed that ZCCM-IH’s approach would include engaging with strategic partners in the development of the farm and that once the farm was operational, the model could be replicated at the ZCCM-IH farm in Lufwanyama. 6.2.2.3. The ICB directed that ZCCM-IH engages an independent firm to assess the viability of the proposed project and provide recommendations. This was necessary as there was need to ensure there was expertise (which was not available in ZCCM-IH) to undertake detailed analyses given the risks associated with the agricultural sector. 6.3. Other Projects under consideration Regarding the proposed project with Luiri Gold, the ICB directed Management to expedite the engagement process for a strategic partner as the resource had potential for value addition. Furthermore, the engagement process should take into account favourable terms that were mutually beneficial including an appropriate shareholding structure, management positions and a clear dividend policy among others. 6.4. Cement Project 6.4.1. ZCCM-IH took over the proposed cement project from NLC. 6.4.2. In August of 2015, a draft feasibility study report by SinoConst and Anhui Conch was received by ZCCM-IH. The draft feasibility study prompted SinoConst along with the Industrial and Commercial Bank of China (SinoConst’s financiers for the project) to visit Zambia, specifically to meet with ZCCM-IH officials and perform their due diligence. In November, 2015, ZCCM-IH Management visited SinoConst as part of the due diligence process. 6.4.3. In January 2016, ZCCM-IH engaged an independent consultant to prepare a detailed market study. The report was meant to highlight the viability of having another cement plant in Zambia after the entry of Dangote Industries Zambia Limited and other cement manufacturers. The report indicated that the cement project was viable, however, there was need for ZCCM-IH with its potential partners to agree on the shareholding structure and funding model among other matters. 6.4.4. Sinoconst advised that they intended to transfer their 65% shareholding in the Project to their sister company China National Heavy Machinery Corporation (CHMC) and Anhui Conch Cement Company Limited. 6.4.5. Sinoconst/CHMC had requested ZCCM-IH to take up 49% equity stake in the Special Purpose Vehicle (SPV) while they would have 51%. CHMC had further proposed that, ZCCM-IH should provide a short term loan of U$D 21.4 million (to meet the Bank’s requirement) to be paid to the SPV and would be repaid (to ZCCM-IH) within 18 months of the project commencing. 6.4.6. ZCCM-IH Management was still reviewing the proposal and would provide details to the ICB once the review was completed. 6.4.7. The proposed project was on the basis that NLC would sell its limestone to the SPV. 6.4.8. The ICB observed that there was need to reconcile the structure of the project with the proposed privatization of NLC as the proposed privatization was meant to be a hybrid approach whereby the proposed privatization package included the manufacturing of both lime and cement. 6.4.9. Dr P C Kasolo requested that the meeting should note that he held a different view to the recommendation to package both the lime and cement business in the privatisation of NLC (mainly due to the huge liability that NLC was carrying). He stated that privatizing NLC would most likely succeed if the two were separated. 7. QUARTERLY BANK ANALYSIS FOR THE QUARTER ENDED 31 DECEMBER 2016: 7.1 The ICB was informed that on the basis of the bank analysis, the following funds placements were made: Name of Bank Average Interest Rate (%) LIQUIDITY RATING QUARTER-END DEPOSITS $ CONVERTED INTO ZMW TOTAL As a % of Total TOTALS TOTALS PER PER @ DEPOSITS CATEGORY CATEGORY USD ZMW USD$'000 ZMW'000 9.87 ZMW'000 ZMW'000 % 1 Bank of China - - 15% A 0 0 0 0 0.00% 181,363 73.8% 2 Barclays - - 26% 0 0 0 0 0.00% 3 BancABC - 25.15% 32% 0 19,000 0 19,000 7.73% 4 Finance Bank - - 45% 0 0 0 0 0.00% 5 FNB - 24.04% 20% 0 40,000 0 40,000 16.28% 6 Indo Bank - - 45% 0 0 0 0 0.00% 7 Stanbic - - 23% 0 0 0 0 0.00% 8 Standard Chartered - 23.00% 15% 8,750 15,000 86,363 101,363 41.25% 9 Zanaco - 26.00% 34% 0 21,000 0 21,000 8.55% 10 Citibank - - 22% B 0 0 0 0 0.00% 0 0.0% 11 Cavmont Bank - 24.50% 17% C 0 4,000 0 4,000 1.63% 64,376 26.2% 12 Ecobank 4.33% - 47% 2,000 0 19,740 19,740 8.03% 13 First Alliance 4.25% - 25% 2,800 0 27,636 27,636 11.25% 14 First Capital / ICB - - 23% 0 0 0 0 0.00% 15 Investrust - 24.50% 27% 0 3,000 0 3,000 1.22% 16 UBA - 23.00% 38% 0 10,000 0 10,000 4.07% 18 Access Bank - - 20% 0 0 0 0 0.00% 19 AB Bank - - 32% D 0 0 0 0 0.00% 0 0.0% 13,550 112,000 133,739 245,739 100.0% 245,739 100.0% 7.2 The ICB noted the Quarterly Bank Analysis for the Quarter ended 31 December 2016: 8. ANY OTHER BUSINESS There being no other business to discuss, the Chairman closed the Meeting at 17:16 hours. Chairman: _________________________________ Date: _________________ Mr Philippe Taussac Secretary: __________________________________ Date: _________________ Mr Charles Mjumphi