The Zambian government moved to liquidate KCM in May 2019, alleging Vedanta breached the terms of its licence, leaving a litany of unpaid bills and failing to deliver on work commitments.

Since then, Vedanta has used courts in Zambia and South Africa to dispute the liquidation, most recently by arguing the state-appointed provisional liquidator was exceeding its powers through its plan to split up KCM and sell off its mining and smelting assets as two separate businesses.

But a ruling by a Zambian court on February 1 means the asset sales are set to go ahead regardless.

The court said it would not intervene to stop Milingo Lungu, the provisional liquidator, from making the sales, and Mining Journal understands talks are already at an advanced stage regarding the sale of the smelter business. A buyer is expected to be unveiled in the coming weeks.

Under Lungu's control, KCM followed up the ruling with an advert in Zambia's Daily Nation newspaper on February 8, in which it accused Vedanta of spreading "falsehoods" about the state of KCM, also detailing the "stressed financial position" of the company when run by Vedanta.

Among the more eye-catching statements was the allegation Vedanta operated a transfer pricing strategy "which weakened the KCM business while propping up other Vedanta India-based operations".

"The bulk of major contracts with third-parties were negotiated at a higher price and under unfavourable terms for KCM. This also applies to the transportation costs agreed with third-parties, which would be higher than market rates," said KCM.

Vedanta, for its part, said on February 18 it remained committed to investing up to US$1.5 billion in KCM, and that splitting up KCM would constitute an "illegal" act.

However, KCM's financial position under Vedanta raises questions as to the investment portion of that statement.

At the time of Lungu's appointment, KCM held just US$650,000 across all its bank accounts "a situation which had raised serious questions about KCM's viability and its ability to meet its immediate, short and long-term obligations as a going concern", said KCM.

Meanwhile, Vedanta's financial statements for the year ended 31 March 2019 showed KCM made a seventh consecutive annual loss of US$332.2 million after tax, a regression from a post-tax loss of US$131.6 million in 2018. At that point the company's liabilities exceeded its assets by US$605.5 million, KCM said.

The legality of the liquidation is less clear cut, despite the recent court ruling.

Peter Leon, Africa co-chair at law firm Herbert Smith Freehills and advisor to Vedanta on matters separate to this case, said the ruling was "obviously not good news for Vedanta".

However, he added that although KCM's assets could now be sold under the protection of a court order, given the fact KCM has been under provisional liquidation since May 2019, "it does seem rather anomalous that the provisional liquidator is allowed to do so in the absence of a final liquidation order".

"All the more so when the Zambian Court of Appeal ruled in November that KCM's liquidation should never have happened in the first place and that shareholder disputes should be resolved by arbitration under the shareholders' agreement, which is still ongoing in London," said Leon.

Christopher Swart, a partner and litigation specialist at law firm Squire Patton Boggs, told Mining Journal the provisional liquidator was selling the asset under judicial sanction, "so by definition, he is selling a clean asset".

"It's not tainted legally with anything, whatever the history of the asset or the company does not affect the validity of the title that he passes by selling the asset to a third party, and that's the whole purpose of a sale by a liquidator," said Swart.

In addition to the Zambian lawsuit and as referenced by Leon, Vedanta has also taken the state miner ZCCM to arbitration, with a hearing set to take place in London in November.

Swart said the arbitration would be unaffected by the liquidator's sale, but that it was "irrelevant to the titling of the asset".

"The assets are gone; once the liquidator sells it, it goes," said Swart.

"The liquidation gets whatever the purchase price is and that sits the company accounts for distribution to the creditors. And the purchaser of the assets don't care," he said.

However, even if sales are agreed, the story is unlikely to end there. Vedanta declined to comment on the matter, but it has already made an application for direction on the provisional liquidator's powers, with a hearing due to take place on Thursday.

Further action in the Zambian High Court or even in the UK, against either Lungu or any potential purchaser of the assets, looks to be a given, especially considering Vedanta is claiming security rights over the assets in the form of a guarantee to Standard Bank to help secure a $820 million loan facility to KCM.

Vedanta is understood to have made a payment of US$120.4 million to the lenders on behalf of KCM, meaning whoever buys the smelter business will find themselves on the hook for that amount.

There is also the copper price factor. Relinquishing assets tied to a commodity which has risen in price by about 40% over the past five months is unlikely to sit well with any management team.

Zambia's decline

In addition to Vedanta's alleged financial and operational shortcomings, the company has drawn criticism for its environmental track record. 

In January, Vedanta settled a lawsuit brought by more than 2,500 Zambian villagers relating to alleged pollution from the Nchanga Copper Mine.

However, the Zambian government's way of handling the issues have done little to boost investor confidence in the country.

Chris Cann, head of Mining Journal Research and Intelligence, said the Zambian government had overstepped the mark with the liquidation.

"You revoke the licence, not liquidate the subsidiary," he said.

Risk consultancy Verisk Maplecroft said it judged the attempt to liquidate KCM as "essentially an attempt to expropriate the asset from Vedanta".

The move triggered a downgrade to Verisk's Resource Nationalism Index.

Zambia has dropped into Verisk's 10 highest risk countries in its Resource Nationalism Index and is categorised as ‘extreme risk', "reflecting President Lungu's ongoing bid to increase state control over strategic mining assets".

Lusaka has also made itself unpopular with other miners with its heavy-handed fiscal approach. The government raised mineral royalties by 1.5% at the beginning of 2019 - the tenth change to the country's mineral tax regime in 16 years.

First Quantum Minerals and EMR Capital put US$2 billion-worth of investment in their respective copper mines on hold in September 2020 in response to the royalty tax hike.

This was followed in January by news that Glencore had agreed to sell its majority stake in the Mopani copper mine to minority partner ZCCM, an investment vehicle controlled by the Zambian government, in a debt-funded deal worth US$1.5 billion.

Analysts view Zambia's efforts to effectively nationalise assets on the Copperbelt as a ploy by president Edgar Lungu to boost his popularity ahead of a general election in August.