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Sunday, 21 December 2008

A self fulfilling prophecy..

After the election, the National Post predicted : "It appears that the onerous tax rates enacted into legislation in Zambia earlier this year are likely to be significantly watered down. And this should enable the country's copper producers to regain a stable economic footing.." It appears the mining companies are now keen to fulfill this prophecy :

Foreign mines ask Zambia for tax break - Minister (Reuters 21/12/08) - Foreign owners of Zambian copper mines have asked the government to cut fuel prices and mining taxes introduced this year to help them survive a commodities downturn, Mines Minister Maxwell Mwale said on Sunday.

Mwale said the mine owners were pressing the government to reduce electricity tariffs, fuel prices and to cut some taxes, including a 25 percent windfall tax introduced in April.

Faced with a sharp drop in international commodity prices, the mines need to cut operational costs to avoid further closures, after Luanshya Copper Mine (LCM) halted its operations on Saturday.

Copper is Zambia's biggest export and mines are a major employer in the southern African country. Mwale and Labour Minister Austin Liato held crisis talks at the weekend with owners of some copper and cobalt mines.

"They want reductions in electricity tariffs, taxes and also referred to removal of some levies on fuel," Mwale told Reuters.

Zambia has some of the highest fuel prices in southern Africa at nearly $2 per litre while mining companies have complained of higher electricity tariffs.

Mwale said the government wanted to keep mines operational but said more consultation was needed.

As well as the 25 percent windfall tax, the government in April introduced a 15 percent variable profit tax on income above 8 percent of sales, raised mineral royalties to 3 percent from 0.6 percent and corporate tax to 30 percent from 25 percent.

This prompted some mining firms to threaten litigation, saying the government had reneged on development agreements it signed with them to maintain lower taxes.

The chief executive officer of the country's largest copper producer, the Konkola Copper Mines (KCM), said the mine would seek ways of reducing operational costs rather than cutting jobs. Konkola is majority owned by London-listed Vedanta Resources Plc .

"We have made representations through the Chamber of Mines, especially in relation to duties (taxes) and mineral royalty," R. Kishore Kumar told privately owned Radio Phoenix.

Kumar said the Konkola Deep Mining Project (KDMP), which is due to come on stream in 2010, was on schedule.

The KDMP is due to start producing 150,000 tonnes of copper cathode per year and will together with other KCM new operations help raise the firm's total output to 500,000 tonnes from the current 200,000 tonnes, Kumar said.


  1. If they want a tax break, the government should say - sure, you can have a tax break, but we get 51% of all shares in your mine.

    If they don't pay in cash, they'll pay in shares.

  2. Apart from the 15% variable profit tax on income above 8% of sales, these taxes are not too onerous for the mining companies to pay.

    The rates of royalties tax levied by other governments range between 3 and 5 percent.

    As regards windfall tax, the mining companies have nothing to complain about.According to the measures introduced in the budget, mining companies will only pay windfall tax for the portion of the price above US$2.5/pound (US$5,500/ton). In the past 25 years, the price of copper had been above US$5,500/ton for just over 2.5 years (from March 2006 to October 2008). Indeed the three month price of copper is currently US$2,960 and it may take a long time before we see it recover to previous highs.

    The government would do well to consider the earlier proposal by the mine owners to increase the income threshold on variable profit tax from 8% to 16%.

    As far as I'm concerned, the government got it right on royalties and windfall tax and should have actually introduced these measures much earlier.

  3. MrK,

    Tempting proposition, however impractical, because if the companies are already publicly traded, their shares are already being sold for the maximum price the market will bear, and can be bought for that price by anyone, including elements of the government of Zambia. The only possible incentive the companies would have to trade stock directly in lieu of taxes would be if they could repurchase shares off the open market for less than the tax credit awarded to them by government, in which case government is better off buying the shares themselves in the first place. The only possible incentive government would have to accept shares in lieu of cash for taxes would be if the shares were credited at less than the market rate, in which case the companies would be better off paying cash. Issuing new shares to cover the taxes is just going to push the value of existing shares lower, threatening the financial stability of the company. If the company isn't solvent and profitable in the first place, then there is no incentive to accept shares instead of taxes, especially because if you buy the company you not only get its assets, you get its liabilities too.

    Rogue Trader,

    I think you've got an excellent point there, the royalty adjustment was already long past due, and merely brought the nation into line with other copper exporters like Chile (who themselves have been complaining for years that 3% is too low). Likewise the windfall profits tax is just that, for circumstances where conditions outside of the normal range of commodity fluctuation result in prices so far above the costs of production as to render ordinary royalties grossly unfair (as opposed to just ordinarily unfair). Since it doesn't apply when the company isn't making money hand over fist, then it makes no sense to call for its removal in times when they aren't making much money at all.

    I think that I understand your argument about the variable profit tax, but must admit that I don't know enough details about its specific implementation to say whether I agree about 8% or 16% or some other number. I assume that the definition of profit has already been adjusted by various mechanisms to reflect the terms of existing development agreements, and therefore 8% may in fact be the equivalent of unadjusted 16%, unless this tax is designed differently somehow? Please help me to understand why 16 is better than 8 in this circumstance.

    One thing that is clear to me in all of this is that when times are bad for the mining companies, like now, they are also bad for Zambians in general, and for those connected to the mining industry in particular. This is a shared downside risk. Why so much resistance to a shared upside return? The mining industry seems to be ignoring that things for the miners were pretty bad when the prices and profits were high, and they weren't so great for the treasury either, which is what the royalty and tax increases were about in the first place. Are they now declaring that in order to maintain even lower standards for Zambian miners and their families during the near term, the nation must surrender its long term prospects for a fair share of returns after prices recover?

  4. Yakima,

    The only possible incentive government would have to accept shares in lieu of cash for taxes would be if the shares were credited at less than the market rate, in which case the companies would be better off paying cash.

    Problem solved. :) The problem is that they are not forthcoming in paying their taxes, so anything that would urge them to pay is a plus.

  5. A bit of a Lumwana Mine Update:
    Equinox Minerals Limited has reported that First Quantum Minerals has disclosed under Canadian insider trading laws that it bought a substantial amount of their stock early in the year.

    Equinox Minerals Limited (TSX and ASX symbol: “EQN”) ("Equinox" or the “Company”) notes the recent filing on December 16, 2008 of a substantial shareholder notice (called insider trading reports under Canadian regulations) by First Quantum Minerals Ltd. ("FQM") indicating an increase through 13 trades over a substantial period of time from January 24, 2008 to July 28, 2008.

    The SEDI reports show an increase in shareholding in Equinox from the 97,556,700 common shares disclosed in FQM’s early warning report filed on December 6, 2007 which at that time represented 17.27% of the then outstanding Equinox common shares on an undiluted basis. This position was subsequently diluted to 16.45% of Equinox's issued and outstanding common shares following the conversion of Equinox's outstanding warrants prior to their expiry on May 6, 2008.

    Following these latest reported acquisitions; FQM holds 114,132,300 common shares representing 19.25% of the currently outstanding Equinox common shares on an undiluted basis.

    On Behalf of the Board of Directors of Equinox:
    Craig R. Williams - President & Chief Executive Officer

    Of course at the time of the last announced trade, 28/7/08, the stock closed at CA$3.93 per share, as opposed to CA$1.28 today. Their current financials are pretty dismal (net profit margin -132.09%, return on equity -4.56%, and debt to equity of 130%), however they have completed handover of the Lumwana facility from their sub-contractors, with capability for production of salable copper beginning this month, so these numbers may be misleading beyond the short term.

    I suspect their biggest problem is going to be the debt, since they are carrying over CA$400M in variable rate debt (avg. interest as of Sept. 30th 2008 was 7.53%), CA$141M of which is due within 1 year. That is in addition to CA$143M in fixed rate debt, CA$43M of which is due within a year, and CA$47M of non-interest bearing debt, which is unfortunately all due to be paid back before Sept. 30th 2009. They have about CA$50M in cash and equivalents on hand to cope with expenses, but in addition to their loans, they have probably taken a bath on derivatives of copper forward contracts (about CA$400M of potential exposure over the next 3 years) and deferred premiums on copper put options (around CA$86M over 3 years). All in all, it appears that Equinox is going to have to refinance about CA$405M in some way shape or form, prior to Sept. 30th 2009.

    Equinox company directors show no hesitation issuing "deferred share units" to themselves (this is like a stock option, except that it is vested immediately, and is redeemable in cash on the date the director ceases to be a director of the Company), awarding themselves CA$421,000 worth of DSUs in 2007, and another CA$424,000 worth during the nine months ended on Sept. 30th 2008. Between January and June of 2008, the company issued 28 million new shares of stock, either due to the exercise of options or warrants, for the purpose of compensating contractors or employees. They have over 20M shares worth of options still outstanding, out of 38M (6.4% of the total already issued) available for grant. 99% of their equity assets are located inside Zambia. It seems to me like there ought to be a deal in here somewhere, if the current shareholders can be convinced to make further grants available, in exchange for favourable refinancing terms of short term variable interest rate debt.


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