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KRAOMA MINING: a joint venture at the centre of attention

KRAOMA MINING: a joint venture at the centre of attention

This article is the first in a series dedicated to KRAOMA SA

By Tiana Rakotobe and Riana Raymond

 

An industrial jewel under threat

It was in 1948 that chromite was discovered for the first time in Madagascar, near the village of Androfia (Andriamena), in the southeastern part of the Betsiboka region about 350 kilometers north of Antananarivo. Chromite is the key chromium ore used in a wide variety of metal, chemical and manufactured products.

In order to mine the chromite on an industrial scale, the Compagnie Minière d'Andriamena (COMINA) was created in 1966. This company, with mostly private capital, was then 20% owned by the Malagasy State. Mining began two years later, and the first 10,800 tons of ore were shipped in July 1969.

In 1975, during the socialist era that marked President Ratsiraka’s first term, COMINA was nationalized and renamed Kraomita Malagasy, or KRAOMA.

KRAOMA SA is now a public limited liability company, 97.17% of the shares are owned by the Malagasy State and 2.83% by the staff’s mutual fund. Its Board of Directors is made up exclusively of representatives of state bodies.

KRAOMA SA was the pride of the nation for a long time, but the only industrial mining company where the Malagasy State is a majority shareholder has been piling up debt. Mismanagement and the tendency of the country’s successive leaders to use the company’s treasury as their own have bled it dry.

The company’s already weak financial state has deteriorated still further under the Rajaonarimampianina presidency. The company’s equipment and infrastructure are increasingly dilapidated. There are longer delays in paying suppliers. Since 2015, mining royalties have no longer been paid to the rural district council of Brieville where mining is done, as the law requires.

 

Aging facilities at the Brieville site

 

An unbalanced partnership?

It was then that KRAOMA SA’s executives turned to the Russian company Ferrum Mining for help. A strategic partnership between the two companies was signed on August 8, 2018. The contract’s signatory for KRAOMA SA was Eric Jean Noël RANDRASANA, Chairman of the company’s Board of Directors at the time. This strategic partnership provides for the creation of a joint venture named KRAOMA MINING SA (see Box 1).

"As KRAOMA SA was no longer able to pay its debts, we were forced to find a solution. Hence this joint venture contract between KRAOMA SA and Ferrum Mining. We only want the best for everyone. [...] What is certain is that KRAOMA SA has not been sold" says Benjamina Ramarcel RAMANANTSOA, the current Chairman of the Board at KRAOMA SA, interviewed in Brieville on December 18, 2018. Like his predecessor, Mr. RAMANANTSOA is both Chairman of KRAOMA SA and Director of the President’s private office. He was appointed in October 2018 after Mr. RANDRASANA left.

The same month, Simon Seva MBOINY, the former representative for STORK INTERNATIONAL in Madagascar, KRAOMA SA’s main customer, was appointed Managing Director of KRAOMA MINING SA.

 

Box 1: KRAOMA SA’s experience with joint-ventures

The purpose of a joint venture is to pool some of the partners’ resources with the aim of achieving goals that each partner could not manage to reach as effectively on its own. This is not the first time that KRAOMA SA has set up a joint venture with an overseas partner. The Italian company United Technologies set up a joint venture - United Chrome SA - with KRAOMA SA in 2009 before giving up this partnership the following year.

 

KRAOMA MINING SA is incorporated in Madagascar. The partnership plans for 80% of the joint venture’s shares to go to Ferrum Mining, with the remaining 20% ​​going to KRAOMA SA

This partition of shares is widely contested as many consider it too favourable to the Russian company. Another point of friction is the farmout agreement signed on September 12, 2018 between KRAOMA SA and KRAOMA MINING SA which transfers from the former to the latter three licences to mine chromite deposits on the Brieville site (Betsiboka), for a period of 5 years (see Box 2). KRAOMA MINING SA plans to mine 3,000,000 tons of ore during this period.

The three mining licences (Nos. 33, 45 and 49) were effectively transferred to the joint venture by the Madagascar Mining Cadastre Office (Bureau du Cadastre Minier de Madagascar - BCMM) on October 12, 2018. KRAOMA MINING SA began extracting chromite on October 22, 2018.

 

Box 2: Farmout agreements in the mining industry

farmout agreement, which does not transfer ownership, is a legal act by which a public authority or an individual assigns land to a third party (private enterprise or community) for a limited period of time, reversibly, in theory. In the mining sector, a farmout agreement refers to the act by which the owner of the mining concession entrusts mining operation to another person or entity. This is not an ordinary lease, because in this case, usage destroys the object of the lease: therefore, the registration fees are those of a real estate sale, not a lease.

 

Staff demands

Ferrum Mining provides technical support to KRAOMA MINING SA via nine of its employees, all Russian nationals based, until recently, at the Brieville site.

Since the end of November 2018, KRAOMA SA’s staff has been on strike. KRAOMA SA’s union representatives complain that salaries have not been paid on a regular basis and demand the departure of the Ferrum Mining consultants due to difficult working conditions. To Jean Sosthène RAKOTONIAINA, President of KRAOMA SA’s interunion association, “Delays in paying wages and overtime hours have triggered our strike. The two months we have worked with the Russians are more than enough …”.

 

Staff at the Brieville site have been on strike since the end of November 2018

 

Talks on this issue were initiated with Ferrum Mining, which paid staff salaries for September 2018 even though production only started the following month. Before paying wages for October and November 2018, KRAOMA MINING SA’s management demanded that KRAOMA SA disclose detailed payment statements and a list of paid staff, which the KRAOMA SA management refused to do.

Salaries for the month of October were finally paid by KRAOMA MINING SA, amounting to US$198,000, plus 15,600,000 ariary for drugs. According to Valerii KARIAVKIN, Ferrum Mining’s technical manager who advises Dominique RAJOELISON, the Brieville site operations manager, KRAOMA SA’s management does not support KRAOMA MINING SA, either in social dialogue with the staff or in purchasing equipment and supplies needed for mining operation. "We do not work with the central office [Ed.: KRAOMA SA’s head office in Antananarivo]", reports Mr. KARIAVKIN.

The partnership agreement and the farmout agreement provide for some of KRAOMA SA's staff to be made available to KRAOMA MINING SA. In a letter received on 23 November 2018 by KRAOMA SA’s management, KRAOMA MINING SA’s Managing Director wrote that "During the talks, both parties agreed that the joint venture would only employ staff of [KRAOMA SA] who work at the Brieville plant. Central office staff were not covered by this agreement." To Mr MBOINY, making KRAOMA MINING SA pay the entire KRAOMA SA staff would make KRAOMA MINING SA an empty shell, and Ferrum Mining could then be accused of having bought KRAOMA SA.

Though it was sent in to be signed on 19 October 2018, the staffing agreement was not signed by KRAOMA SA’s management. Some employees see the delay in paying wages as blackmail by KRAOMA MINING SA, so the staffing agreement is signed. The union is concerned that any KRAOMA SA employee not transferred to KRAOMA MINING SA will be dismissed. The day before, however, in a meeting between representatives of Ferrum Mining, KRAOMA SA’s management and KRAOMA SA’s unions, Ferrum Mining explained that it did not plan to substitute or eliminate jobs. Since KRAOMA SA does not have the cash to pay the salaries of its staff that will not be transferred to KRAOMA MINING SA, the latter has proposed to KRAOMA SA a loan it can pay back by reducing future dividends it will receive as a minority shareholder of KRAOMA MINING SA.

According to Mr. MBOINY, the KRAOMA SA acting Director General, Mr. Terji RAKOTONDRAZAFY is the instigator of the strike, for reasons he considers obscure.

 

A partnership reassessed

The strikers’ demands are not only social ones. More generally, the partnership with Ferrum Mining is targeted. According to the unions’ leader, "Brieville and Andriamena have been in operation for almost 50 years, the foreigners left in 1980 and since then it has been the Malagasy who have been running this company, with no issues. We don’t need foreigners, we have got the experience for that [note: mining]. [...] The strike will not end until the contract with the Russians is cancelled."

For Mr. KARIAVKIN, "We worked very well with the plant’s staff in November. We had no problem with them before the union’s representatives came from the central office." So why are these unions demanding they leave? "Which unions?" retorts Mr KARIAVKIN. "We do not know these people. They do not speak to us at all [...] We kept all our promises, we signed all the documents [note: certifying that the staff’s benefits would be maintained]." According to Mr. KARIAVKIN, staff are being threatened to discourage them from working with the Russians.

Interviewed for this investigation, Mr. RAMANANTSOA, current Chairman of the KRAOMA SA Board of Directors, notes that Ferrum Mining employees "do not know Malagasy culture and this is what caused frustration as well as the strike." To RAMANANTSOA, the distribution of shares in the joint venture is also an issue: "The terms and conditions of the shareholders agreement are not clear to everyone and they must be further refined as the partnership develops. This lack of understanding leads to misunderstandings and frustrations that must be ironed out among all stakeholders."

The Finance and Budget Ministry, acting as the financial supervisor of KRAOMA SA, is demanding that the partnership between KRAOMA SA and Ferrum Mining be rebalanced in practical terms.

In a letter received by KRAOMA SA on 20 December 2018 and addressed to its acting general manager, the Finance and Budget Minister notes that "[i]n its current state, the partnership agreement and the farmout agreement are not playing a part in the recovery of [KRAOMA SA]. I therefore have the honour to request that you take the necessary steps to review the terms of the partnership agreement, especially what relates to the inclusion of contributions in kind in the share capital or in shareholder current account after valuation by a contribution commissioner, the provision of equipment and materials for a fee, and the method of distribution of income from the new company. For the farmout agreement, payment should not be diluted in the net profits shared under the partnership agreement.” An unequivocal call to order for KRAOMA SA’s executives who failed to sufficiently consider the company's interests when forming KRAOMA MINING SA.

 

Suspected corruption

Clouds are gathering over this partnership that was supposed to save KRAOMA SA from bankruptcy. The imbalance between the two shareholders of KRAOMA MINING SA can be explained by KRAOMA SA’s weak bargaining power due to its disastrous financial situation. However, the fact that the partner - Ferrum Mining – was chosen without a tender and with a complete lack of transparency, raises suspicion of corruption benefitting the former president, RAJAONARIMAMPIANINA. Suspicions swept aside by Mr. KARIAVKIN, for whom “We are just doing business. [...] We are here to develop production, that's all." KRAOMA MINING SA’s general manager, Mr. MBOINY, justifies the absence of a call for tenders by the fact that KRAOMA MINING SA is working on the ​​KRAOMA SA mining area but does not have a licence in its own name. "We only bring in money. [...] I don’t see the point of having a tender." According to Mr MBOINY's explanations, Ferrum Mining, via KRAOMA MINING SA, is providing US$16 million in investment to purchase the equipment needed for production. This amount would therefore not correspond to the necessary financial compensation paid to KRAOMA SA by KRAOMA MINING SA to lease the three mining licences for the Brieville site, as the press has reported in recent months. Since we could not access the entire farmout agreement, we could not determine the actual amount of the financial compensation.

Although the company is still operating at only a fraction of its capacity, 12,000 tonnes of chromite have been mined since production was restarted by KRAOMA MINING SA, and some of the ore has already been transferred to a storage facility in Toamasina. Nearly US$3 million have been spent by Ferrum Mining to boost output. Despite the strike, Ferrum Mining’s staff wanted to stay in Brieville to secure production. But in the face of growing tension with employees, they eventually had to be repatriated to Antananarivo.

Dismissed from his position as acting general manager by KRAOMA SA's Board of Directors, Mr. RAKOTONDRAZAFY was replaced in mid-December by Jaobarison RANDRIANARIVONY, another baron of the HVM team, like Mr. RANDRASANA. "We want to negotiate. If there are things to improve at the contractual level, we agree. If there are things that can be rectified, we agree," says Mr. MBOINY. Given the reluctance of all parties to move forward, it is not sure that the partnership with Ferrum Mining will be relaunched …