Private and Confidential Enclosure 3 ZCCM Investments Holdings Plc AUDIT COMMITTEE REPORT TO THE 74TH BOARD MEETING OF TUESDAY, 25 JANUARY 2016 25 January 2017 Lusaka AUDIT COMMITTEE OF THE BOARD REPORT TO THE 74TH ZCCM-IH BOARD MEETING OF 3 FEBRUARY 2017 The Audit Committee of the Board (AC) held its 49th Meeting on 25 January 2017. Present at the meeting were Mr M Kaluba (Chairperson), Mr P Taussac and Dr P Kasolo. In attendance were, Mr. M Chipata, Ms W Mangambwa, Mr C Chabala, Mr S Mubano, Mrs Y C Banda and Mr C Mjumphi (Secretary). The following are highlights of the matters that were discussed at the meeting and resolutions made thereof: 1. DELIBERATIONS UNDER MATTERS ARISING 1.1 Konkola Copper Mines Plc (KCM) dues following ? The judgement was made in favour of ZCCM-IH in December 2016. Further to this, negotiations for settlement of the judgement sum were concluded on 11 January 2017. KCM shall pay: • Legal costs of US$180,000 on 13 January 2017 (this has since been paid) • US$20 on 31 January 2017; • US$22 on 28 February 2017; • and US$2,550 per month until full balance is paid with interest of 3% per annum on these payments and • If it is proved that KCM made payments to Vedantta in breach of Settlement Agreement, sums shall be paid to ZCCM-IH. ? The AC was informed that the with regard to the breach in the SA involving Vedanta, ZCCM-IH had engaged a law firm to pursue the matter and provide the necessary advice. Furthermore, it was highly likely that the judgment would be in favour of ZCCM-IH which would potentially result in ZCCM-IH receiving an additional sum of about $ 30 million. In an event that ZCCM-IH received judgment in its favour, KCM would have to pay the total amount in two years in equal installments. 1.2 Directors’ Half Yearly for the period ended 30 September 2015 ? The AC was informed that the Board approved the Directors’ Half Yearly Summary for the period ended 30 September 2015. This was, however, not issued to the market as the Securities and Exchange Commission (SEC) refused to clear it. The SEC stated that the delayed audited Financial Statements for the year ended 31 March 2015 should first be issued. ? The Directors’ Half Yearly Summary was finally issued in June 2016. 1.3 Engagement of consultant for the forensic audit of Kansanshi Mining Plc (Kansanshi) ? The AC was informed that there was no forensic audit work was conducted at Kansanshi as it was decided that there was enough evidence to proceed with the legal route. ? Following this decision, a lawyer was engaged who assessed that there was enough evidence to take to Court. The matter is in Court of Arbitration in London and Lusaka High Court. ? However, the option to conduct a forensic audit was still open. ? The AC was informed that the arbitration process would be concluded within a period of about 6 months while the court process had no finite timeline. ? ZCCM-IH would step up efforts to ensure a quick settlement (and bring in some level of predictability) of the matters raised in the summons filed in the courts of law. The options include instituting criminal proceeding against the parties since the cases were bordering on criminality. ? The AC directed Management to make a presentation to the Board (74th Board meeting to be held on 3 February 2017) outlining the process and support required to ensure a swift conclusion of the pending matters. In particular, the presentation should highlight the process of stepping up the legal proceeding to include criminal charges. The process should be outlined and justification given on how this route would bring speedy conclusion to the matter. 1.4 Investment in Agriculture ? The proposed investment in Wangwa was reviewed by the Management Investments Committee and found that it did not meet the requirements as specified in the Investments Policy. It was therefore deemed unviable on account of its high indebtedness. It was however, noted that Management would further review the proposal. Once reviewed, and if found viable, the proposal will be presented to the ICB. 1.5 ZCCM-IH Strategic Plan 2017-2021 The AC was informed that the new Strategic Plan covering 2017-2021 financial years will be presented to the Board for consideration at the scheduled March 2017 Meeting. The AC directed Management to finalise the SP within the timeframe proposed. Furthermore, the Draft SP should be presented to the IDC for feedback, if any. 1.6 Consider investing in SCAW ? The due diligence process was discontinued owing to difficulties in getting information within the time limit set for expression of interest. ? The AC observed that there was need for ZCCM-IH to be part of the value chain as this would provide an opportunity for the development of local content within the mining sector unlike the scenario were most of the value chain was controlled by foreign investors. ? It was noted that the new Investments Act was meant to protect and grow the local industry which ZCCM-IH could take advantage of. 1.7 IDC’s request for Audited Accounts for period September to December 2015 The AC was informed that following negotiations with KPMG (Company Auditors) a figure of K 278,940 (exclusive of VAT) for the four months’ audit requested by the IDC and K 671,060 (exclusive of VAT) for ZCCM-IH 2016 audit was agreed and approved by the Board. 2. FINANCIAL RESULTS FOR THE QUARTER ENDED 30 SEPTEMBER 2016 2.1 The AC reviewed the Financial Results for the Quarter ended 30 September 2016. 2.1.1 Profitability: The company recorded an after tax loss of K21.7 million for the second quarter ended 30th September 2016 (Sept 2015:K417 million) compared to a budgeted loss of K31.7 million. The result was within expected levels. While income exceeded budget and expenses were within budget, the effect of the Kwacha appreciation weighed heavily to suppress the final result. On a year to date basis (six months) the loss was K127.4 million (Sept 15: K965.9 million Profit) against a budgeted loss of K64.3 million. 2.1.2 Cashflows and liquidity: The Company’s net cash flows were positive K7.1 million during the second quarter. 2.1.3 Statement of Financial Position: Total Assets decreased slightly by 0.3% from K9 334 million to K9 308 million. Shareholders’ funds decreased from K6 348 million to K6 326 million. The decrease was mainly due to the loss recorded during the second quarter of K21.7 million. 2.2 Following review of the Financial Results for the quarter: ? The AC observed that as ZCCM-IH was largely dependent on dividend income, there was need to explore other options/alternates as the predictability of dividend income was very low owing to various issues surrounding the management and control of the mining companies. Furthermore, the minority status of ZCCM-IH in the mining companies was a source of concern. In this regard, any efforts that would result in ZCCM-IH pursuing its rights would be worthwhile. ? The AC observed that there was need to explore all available options to extract value from the mining companies even if this meant going the legal route. It was noted that ZCCM-IH’s exercise of its rights was limited by the current Shareholders’ Agreements (SHA) particularly on the issues of control. ? Notwithstanding the limitations on ZCCM-IH’s exercise of its rights through the SHAs, there was need to take a more proactive and if necessary aggressive approach in pursuing these rights for the benefit of ZCCM-IH and Zambia as a nation. ? The AC directed Management to aggressively pursue all rights in both small and big mining companies to take advantage of the favourable political environment. It was noted that the earlier ZCCM-IH took advantage of the favourable political environment the better as the window of opportunity was limited. ? The AC recognized with pleasure the efforts Management had put in place in ensuring that matters related to KCM were concluded in favour of ZCCM-IH. This was going to send a clear warning message to other mining companies and that the momentum should be maintained. ? With regard to the performance of NLC, the AC was informed that the business was distressed and that NLC performance had continued to deteriorate. ? The AC enquired on the future prospects of Misenge. It was reported that while Misenge was formed to primarily deal with ZCCM-IH’s liabilities, efforts were made to increase the ratio of business with other clients apart from ZCCM-IH. Furthermore, once the laboratory was completed (by mid-2017), it was expected that Misenge would increase its client base with a resultant improved performance. ? With regard to tax liabilities on the basis of exchange gains (which were a book entry and did not result in any cash benefit to ZCCM-IH), the AC was informed that, tax obligations were a matter of law and as such there was very little that ZCCM-IH could do to avoid paying interest arising from exchange gains. The only sustainable option in the long run would be to find an appropriate match between assets and liabilities tied to an appropriate currency. ? The AC enquired on what efforts were made to ensure that mining companies paid the management fees. It was reported that particularly for Chibuluma, the company had indicated that it was facing cashflow constraints and hence made a request for ZCCM-IH to write-off the fees due. ZCCM-IH did not agree to the reasons advanced by Chibuluma and sent a demand letter. Feedback was being awaited. ? With regard to Lubambe, it was reported that a number of foreign based companies had expressed interest in buying off the other shareholders i.e. 80% of the shares. Further details would be provided once the transaction was completed. The AC directed Management to explore the opportunity of renegotiating specific clauses of the SHA and leverage ZCCM-IH’s position with the ‘new’ owners before the transaction was concluded. 2.3 The AC adopted the Financial Results for Quarter Ended 30 September 2016 and now submits the results to the Board for Noting (these are incorporated in the IOR for the Quarter ended 31 March 2016 under Finance section of the report). 3. RISK AND INTERNAL AUDIT REPORT FOR THE SIX MONTHS PERIOD ENDED 30 SEPTEMBER 2016: 3.1. The AC reviewed the Risk and Internal Audit Report for Six Months Period ended 30 September 2016. 3.1.1 During the period RIA, drafted the Enterprise Risk Management policy and guidelines, conducted compliance audits for ZCCM-IH and internal audits at Ndola Lime Limited. Furthermore, the Issue Tracking Status Report and the status of the RIA Work Plan 2016/7were presented. 3.1.2 Compliance Risk Management The Report highlighted that out of fifteen Acts audited for compliance, the Company was compliant in only three as tabulated below: Table 1 – Compliance Audit Table S/N Compliance obligation Compliant? 1 Employment Act NO 2 Environmental Protection Act NO 3 Ionising Radiation Protection Act NO 4 Mines and Minerals Act NO 5 National Pensions and Security Act NO 6 Personal Levy Act NO 7 Road Traffic Act YES 8 Value Added Tax NO 9 Workers’ Compensation Act NO 11 Lusaka Stock Exchange Listing Rules NO 10 Lands and Deeds Registry Act WIP 12 Securities Exchange Commission Act NO 13 Public Procurement Act WIP 14 Companies Act WIP 15 Income Tax Act NO 16 Occupational Health and Safety Act NO 17 Accountants Act YES 18 National Payments Systems Act YES 3.2. Following presentation of the RAI report: ? The AC enquired on the extent required for the review of the Company policies. It was reported that some policies were in existent and just needed a review while there were a few other policies which needed to be developed. ? The AC enquired on the proposal that Management would hire a consultant to help in the development of the required policies and whether it was feasible (from a skills point of view) that one consultant would spearhead the review and in some instances the development of all Company policies. It was reported that some polices would be reviewed/developed in-house while the hired consultant/s would facilitate the review/development of the rest of the policies. The decision to hire an external consultant was in view of the time constraints due to competing needs. The AC observed that there was need for Management to consider the requisite skills for the proposed consultant/s to be hired for the development of the policies as the impact of a lack of the required skills would be retrogressive to the needs of ZCCM-IH. The AC directed Management to review the proposed approach of using an external consultant. ? The AC was informed that the Enterprise wide Risk Management Policy would be presented to the next AC meeting to be held in March 2017. ? The AC was informed that generally the levels of awareness on compliance had grown over time. Furthermore that the situation had improved as there was effort by Management in ensuring that the Company remained compliant. ? In order to strengthen controls and ensure accountability going forward, the AC directed that for future RIA reports, the following should be included: • The computation of the cost of noncompliance as this would help to increase awareness on the cost implication for noncompliance. • Clearly distinguishing the causes of noncompliance whether systemic or not. This would help in allocating responsibility for noncompliance. 4. OTHER MATTERS: ? The AC reiterated the need for Management to vigorously pursue ZCCM-IH’s interests as this would improve ZCCM-IH’s cashflows providing an opportunity for other investments.