Chihota takes control of RioZim operations

Published: 12 July 2016

RioZim Ltd chairman Lovemore Chihota has taken over the day-to-day management of the mining group amid indications he now has an office and works closely with external managers, the Zimbabwe Independent has established.

Sources close to the developments said Chihota has an office at RioZim where he has taken over management.

His office works closely with GEM RioZim investments, the group's 44% majority shareholder, who were controversially given a management contract in July 2012.

Manet Shah, an official of Gem RioZim Investments, is said to be working closely with Chihota.

"Shah is working from Chihota's office. Chihota is basically an executive chairman now," a source said.

The company has a full management complement of a chief executive and finance director. "Shah is the extenal manager from GEM RioZim. They work very closely," a source said.

A call to RioZim head office yesterday was directed to his office. Chihota's personal assistant said he was out of the office for a meeting with the minister but insisted he would return the call when he returns.

"He is attending a meeting out of the office and cannot be disturbed. He will be returning to the office after the meeting," she said.

It has since emerged that Chihota and RioZim chief executive Noah Matimba have a prior working relationship.

Chihota was until recently chairman Aurex Holdings (Pvt) Ltd, a jewellery manufacturer while Matimba was hired as the MD of Aurex. Matimba then joined RioZim in 2014 as chief executive. His appointment coincided with the elevation of Chihota to chairman of RioZim. Prior to his appointment in November 2014, Chihota was a non-executive director of RioZim. The new management set up has virtually rendered Matimba redundant, but sources say the duo have a cozy working relationship.

This comes after businessdigest last week revealed sensational details of how Gem controversially and fraudulently shored up its shareholding in RioZim.

Global Emerging Markets (Gem) founder Harpal Randhawa, a majority shareholder in RioZim Ltd, controversially pocketed 20 million shares worth US$3 million in the local mining group without paying a cent in a US$10 million rights offer for the restart of Cam & Motor Mine.

About 67% of RioZim shareholders paid cash to follow their rights in a US$10 million rights offer last year.

Randhawa's GEM RioZim achieved this by converting a US$2,88 million owed in management consultancy fees as his contribution towards the rights issue.

Since taking control of RioZim in 2012, Gem has been charging a 1% fee on turnover. The fees are for "advisory and consultation services rendered by Gem RioZim", a shareholder in RioZim to the group. The management fees are charged as 1% of group turnover for "running and subsistence" expenses. Simba Makoni, a former board member, last week said there was initial "discomfort" over the management fee GEM RioZim is charging on the board.

"As I recall, the management contract was brought to the board by the remuneration committee. Yes, there was discomfort among some directors about aspects of the contract relating to imprecise functions and deliverables, especially vis-a-vis the executive team; reporting and accountability lines, the contract's duration and the amount of fees payable," Makoni told the Independent last week. "It is inappropriate to assign specific views or positions to individual directors."

This presents evaluation headaches for the board given that Chihota has usurped management.

According to people who sat on the board of RioZim, when a management evaluation was due in 2014, the board found conflicting roles between executives and Gem RioZim.

According to a person on the board who spoke to businessdigest on condition of anonymity this week, the board took a decision to review the management contract.

"They was no simple way of assessing how management was doing when you have Gem. Then there was talk to get rid of the arrangement," a person who served on the RioZim board said.

The payment of a management fee to a shareholder borders on preferential treatment of shareholders and amount to payments of dividends at a time other shareholders have not received a penny in years.

This would make the management fee an asymmetric pay-off to the same class of shareholders.

Investigations showed that immediately after approval of the management fee agreement by the RioZim board in July 2012, RioZim turnover suddenly jumped from US$72 million to US$105 million from 2012 to 2013. This was achieved by accounting for matte refined on a toll basis for BCL, a Botswana based company, as a sale to the matte supplier.

Accounting for toll refining as a purchase and sale of the material back to BCL allowed the revenue to suddenly jump dramatically yet the company was only making a toll refining fee. The new inflated revenue base increased the 1% fee payable to Gem RioZim.

In the same year, the group reported a US$4,7 million loss from US$5,5 million in 2012.

Calculations at 1% of the revenue base means that Gem got US$720 000 in FY12, US$1 million in FY13, In FY14, Gem got US$650 000 in management fees as revenue plunged to US$65,9 million. In FY15, Gem got US$564 000 after reporting a revenue of US$56 million. Gem has received US$2,93 million as at FY15.

However, according to the group's FY14 annual report, Gem was owed US$1 041 000 for FY14 and US$1,875 million for FY13 in management fees.

When RioZim floated a US$10 million rights issue early last year, Gem, according to the rights issue circular, was paid US$300 000 in shares at a price of 15 US cents or two million shares at the same for underwriting the rights offer.

It has since been established that a figure of US$2,887 million, which was said to be for refinancing of funds already expended and general purposes in the rights issue circular, were actually funds outstanding to Gem in management consultancy fees Randhawa charges the group.

From the US$2,887 million, he was paid US$700 000 for a loan he alleged advanced. The remaining US$2,1 million was converted to RioZim stock. At the same conversion rate, Randhawa got 13,3 million RioZim shares in management fees.

This figure equates to 20% of the rights issue shares.

All in all, Randhawa got 20 million shares in the rights issue without paying a cent. Of the 66,6 million new shares issued last year, 44,9 million shares were subscribed for.

The only shares he could have paid for were 33% of the unsubscribed for shares in the right issue amounting to US$3,3 million.

According to the report, Gem RioZim was owed US$887 000 in FY15 and US$1 million in FY15. As at December FY14, related parties were owed US$2,887 million.

In the rights issue circular, RioZim chairman Lovemore Chihota did not notify shareholders the US$2,887 million was a management fee owed to Gem RioZim when the group wanted to raise US$10 million in rights issue last year.
Asked to comment on the management fees Gem is charging RioZim last week, Chihota referred all questions to management.

RioZim FD Bheki Nkomo last week defended paying management fees to Gem.

"The issue of management fees is not peculiar to RioZim. It is quite common," he said. "This was well within the limits of the RBZ (Reserve Bank of Zimbabwe)."

Asked what Gem actually managed on behalf of the company, Nkomo said: "They do a lot of things for us. They are specific tasks such as debt rescheduling and structuring. The board approved this."

Chihota refused to comment on why the company has a management contract when it has a chief executive, financial director and fully constituted management team.

"The AGM is over. If you have any other questions feel free to write to us seeking clarification," he said.

RioZim has been posting a series of losses since 2012. Other shareholders don't see the company declaring a dividend any time soon. Gem invested in RioZim on the back of a promise to invest US$45 million in convertible debentures. The convertible debentures were supposed to be called on by the board of directors to fund the company over a period of five years starting in 2013.

Sources say when directors called on the debentures, Gem raised concerns of possible breach of indigenisation regulations.

However, following last year's Cam & Motor's US$10 million rights issue Randhawa's Gem RioZim has already increased its shareholding in RioZim to 45% by following its rights using the amounts owed in management fees.

- the independent