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Tuesday, 6 January 2009

Is government about to nationalise ailing mines?

Yes. Apparently discussions are underway on "when" this might happen. Not only that, but for the "vibrant" mines the government is now talking about "PPP" :

President Banda says government is considering taking over operations of mines that are facing operation difficulties on the Copperbelt province. President Banda has disclosed that government through the ministry of mines is having discussions as to when government would nationalise the mines.

He said government will not nationalise mines with vibrant operations because its vision is to encourage the private public partnership spearheaded by the Ministry of Commerce, Trade and Industry in conjunction with the ministry Mines Ministry.

The President was answering questions from Journalists shortly before departure for Kasama, in Northern Province where he has gone for a four-day official visit.

I am speechless....

21 comments:

  1. According to the Lusaka Times, "President Banda says government is considering taking over operations of mines that are facing operation difficulties on the Copperbelt province." For years I have been trying to track down the story of a small company that operated in Portland, Oregon during the 1990's. I still cannot state with certainty that this is what happened, and so I will present my working hypothesis as, "The Fable of Portland Steel."

    Travel back in time with me to the 1980's, in the Pacific Northwestern United States, where in a time that american dominance over the international steel industry was being eroded by fast emerging Asian Tiger economies, a smallish local subsidiary of a giant multinational transformed scrap metal into steel plates at steadily decreasing profit margins . . .

    The giant tried job cuts, he tried cutting salaries, he did away with overtime pay, even held morale rallies. Try as he might, the plant just wouldn't pay, at least not the return he could get in Taipei. So the giant packed up, he paid the workers their severances, since no other giant would reopen the entrances. The workers were lost, and very confused, steel work was to them both lifeblood and muse. No steel work here, not anymore, the workers were told, "Retraining's the score. We'll teach to type, to transcribe and to file, you won't even notice a difference, after a while." The workers replied, "That just doesn't make sense! Or else there'd be piles of steel by the fence. Somebody out there buys all that we sell, so where does the profit go? Down some deep dark well?" "You don't get finance, you misunderstand, other workers are faster, in some foreign land. To make you as fast would take new equipment, and your jobs are not worth the cost of shipment." "If that's how you feel, it is good you that you leave, if only to short term profits you cleave. We'll pool up our resources, take second mortgages, whatever it takes to reopen those forges." And that's what they did, but they made a requirement, that each worker be shareholder, to save for retirement. If you wanted to work there, you had to buy in, take your share of the bank debt, together -- out on a limb. They elected a president, and wouldn't you know, he'd been pushing a broom just a year ago. They streamlined production, closed half the plant down, but in that second half they took it downtown. They shaved every second, lengthened each shift, each delay in the process was a payday they missed. Within a few months, the news got around, to the giant's surprise the plant was still sound. The company set records, able to boast, that empowered workers would give the most. And without the giant's great belly to feed, the workers realized the extent of his greed, for within a few years they all had enough, to lay on some beach, retire and stuff. If only they'd passed it down on their way, then steelers would become millionaires still to this day, but I guess in the moment they forgot their head, because they sold to a giant instead. And so the idea slipped away in time, to remain only in your imagination, and mine.

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  2. i have not posted here for some time.but i find this site quite educative and challenging for ones thinking.

    nationalising our mines is not the way forward. that is cheap talk from politicians who want to safe guard their positions.the mines are making loses at the moment not because of their operational costs but demand for copper has disapeared. the current economic climate leaves a few years for copper to pick up and for our mines to be resucistated.

    the solution is to make miners partners into the miners to "mine for stock pilling"for future use when the prices pick up. the miners have to have shares in terms of pay-cuts saved into stocks,to be paid back when the market is found.

    at the moment i have little faith in our leaders because they have a "GREED" syndrome. just like the bankers who are receiving allowances after begging for money to survive.

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  3. Is this really a surprise? Failing industries are being nationalized all over the world.

    What I am concerned with is that they only want to nationalize the failing mines, not the successful ones.

    If they get reprivatized under much better development agreements, that would be one thing.

    Or even better, the state can own the mines, but create or hire a privately owned mine management company to run them, get out of their way and collect profits.

    If there was an overhaul to improve the performance of parastatals, that would help too.

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  4. There is only one mine that has failed. And that is Baluba in Luanshya. The rest are okay. They are just cutting down on their costs in line with the depressed copper prices. They are doing this by partly reducing their workforce. This is normal. We should learn to accept the workings of a free economy. It is not possible to guarantee jobs all the time. Anybody who promises that is living in dreamlan. Mining in Luanshya has come to the end of its lifespan. The problem is that all successive govts have never prepared for this moment. It is time to think of other areas to which the govt can redirect resources in order to prepare workers who have lost jobs in Luanshya for new careers. For God's sake copper is a finite natural resource. It does not matter whoever is going to takeover the mining assets in Luanshya will be faced with an uneconomic orebody. RIP Luanshya.

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  5. Frank,

    I agree. Uneconomic ore bodies are always going to be a problem no matter who runs the mine.

    http://findarticles.com/p/articles/mi_qa5382/is_200803/ai_n25418369/pg_6?tag=artBody;col1

    That is why the American West is dotted with ghost mining towns. People moved on when mining became uneconomic or the ore ran out.

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  6. This comment has been removed by the author.

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  7. Happy 2009 Cho.
    First of all, the problems Zambia is facing are not new. Though the global economic crisis has somewhat of an effect, it's effect is marginal as it relates to our overall economy.

    Nationalization is not the answer and plus it's colonial. Why is it that everytime a third world government faces a challenge that actually forces them to think and create a free market (regulated) economy, they turn to ancient ideas that have not worked for our people. Nationalization cripples an economy and hinders wealth creation for the ordinary citizen.

    This is what I think needs to happen:
    Goverment should let unprofitable mines make sound financial decisions such reducing costs even if that means cutting some jobs. The economy operates on business pricinples or least it should. These companies have factored in losses into their business plans because historically copper prices have never been stable for a long time. They had to know that one day, maybe not so soon, prices will come down and reduce profits.

    President Banda must stay put and focus on implementing other cost saving and income building measures for government.
    This recession is actually an opprotunity to make some significant and long overdue changes to our economic sturcture.

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  8. Frank,

    It is my understanding that the Ministry of Mines is exploring a set policy which would determine the level of "operation difficulties" a given mine must face in order to justify nationalization. I agree that very few of the existing mine works in the country are as yet physically exhausted, but that all mining communities must be prepared for the consequences when they inevitably become so.

    My take on the problems being faced by most mining companies has to do with their debt positions. The lower price of copper makes it harder for these companies to obtain favourable refinancing of their often gargantuan debt loads. A large portion of the Copperbelt investment boom over the last several years appears to have been undertaken on the assumption that most of the capital would be raised through lenders rather than shareholders, often with just enough shareholder capital to provide collateral for loans. The ability of these companies to raise additional shareholder capital at this point in time is severely eroded by the crash in prices throughout the mineral sector. Their ability to borrow against copper stockpiles has only encouraged even larger stockpiles and even lower prices (OPEC style supply coordination would significantly reduce the effects of stockpile size on prices). If you had to borrow to build that stockpile, then the longer it sits, the more it costs you. With competing stockpiles and decreased demand, mining companies look less attractive to lenders, at a time when refinancing may not even be available at all. Without refinancing at terms which don't further damage the corporate outlook, these firms may have no choice but to cease operations and/or sell tangible assets.

    I don't necessarily agree with Campbell that, "These companies have factored in losses into their business plans because historically copper prices have never been stable for a long time. They had to know that one day, maybe not so soon, prices will come down and reduce profits." I agree that they ought to have known and done these things, however I doubt that many were prepared for such a dramatic price shift in conjunction with a serious contraction in available financial capital resources. For example, Equinox keeps just CA$25M in mandatory cash reserves, and as of the new year had only another CA$25M in cash they could actually deploy in the short term. This in comparison to over CA$400M in debt due before 30 Sept '09 (and even more due over longer term already, total debt exceeds total equity), which must be refinanced or paid in full. Equinox is small, and has most of its capital deployed in Zambia already. For larger conglomerates like Vedanta, the chance of sale and/or loss write-off is higher or lower depending on how the Zambian subsidiary venture was financed by the parent.

    I do agree with Campbell that the current situation represents an opportunity to restructure the mutually dependent relationships between the mining companies, the workforce, and the government as representative of the people and steward of collective resources.

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  9. Anonymous,

    I think that I like the sound of your idea, as a specific means of providing incentive for miners to defer compensation at the same time as reducing operating costs for cash strapped companies. I am curious as to your usage for the terms "shares" and "stocks", as it is unclear whether you refer to a percentage of copper ore stockpiles produced during a period where the company has no income from sales to cover production costs, and/or to a share of equity stock in the company as compensation instead of cash. The latter example has been employed extensively by such companies as Equinox already, in order to compensate the sub-contractors who have cleared land and installed infrastructure at and connecting to mine locations. I am not certain how happy those contractors are now, given the plummet in the market value of those securities recently, however the main source of return from mining equity has traditionally been in the form of cash dividends, so they may be unfazed. In the former case, I have more trouble predicting, though it may be less than acceptable to workers, as it is similar to the common form of productivity incentive currently in place, which is all about the quantity of ore produced in a given period of time, regardless of eventual market price. This gives labour and management competing incentives during production cutbacks (and I believe is equally inferior at delivering common incentive during times of production increase).

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  10. yakima

    my understanding of things at the moment is no calculation is yielding any results to offer hope for mining operations in the near future. my concern is the people that solely depend on the mines,and the fact that this gap created by there unemployment will affect other aspects of the economy.somehow like a domino effect.


    what i meant by shares being held by these miners,is a percentage of their wages to be held back for operations of the entity involved.this in it self will help reduce the operations costs,as extra money needed for other services can be channeled to more critical areas to keep the production going thereby safeguarding employment.

    as for stock ownership the same salaries could also have percentages for miners as to when the stock is sold for a profit in the near future.note not all stock has to be sold but only enough to meet operational needs.

    this also calls on government to be responsible enough and give back these lands to its people for their survival in the mean time,less or no tax at all charged.offering incentives to mine suppliers and mines to make their production cheaper.

    this whole process requires responsibility on all stakeholders as it is a matter of survival.

    this process of holding stocks can rebound prices abit as low supply of copper on the market.this is tricky as demand is too low at the moment.

    the whole idea is to use country resources for the survival of it's people but alive to the fact that it's an emergency measure which can be changed with change in cicumstances.

    people have to have some form income no matter how minimal,it's in gov. interest that people are able to spend something for them to have some form of taxes and reduce the budget defict.

    we have to come up with our local survival plan,as where our partners who fund our budgets are also tight for resources.we will come out of this worse than the rest if we are not careful.

    luboss boy.

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  11. Yakima,
    Why cant the Zambian govt urge the mining companies to list on LUSE inorder to raise capital locally?. Zambians havent shied away from investing in companies such as Celtel and Zanaco when given the opportunity. It is really disgusting for Zambia's biggest companies to list only in Toronto, London, Mumbai and Sydney to the exclusion of the country in which they are extracting the bigger portion of their wealth.

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  12. Interesting comments.

    It strikes me that this is another one of those issues where ideology may cloud debate.

    If you believe selling the mines was a mistake, this is an opportunity to take them back, regardless of the costs of doing so.

    If you believe selling some of the mines was okay, but government should have run its own mines..then this again is an opportunity to take a STAKE into the industry...

    If you believe privatisation was okay but government should have given them to local authorities and workers to run...again this is an opportuniy...

    If you believe the Zambian government cannot run anything....the thought of running the mines probably scares you...even if prices rebound...

    My view is that different mines are facing different constraints...so a one size fits all approach will not work...

    We need to look at the constraints of each mine...and devise solutions...

    Some of the constraints have already been mentioned...

    1. High mining operation costs....
    2. High infrastructural costs e.g. electricity, fuel costs, and so forth
    3. High labour costs i.e. unions who wont accept low wages and so forth...
    4. Low grade copper i.e. it would require larger deposits to make it viable at current prices...
    5. Lack of finance...some mines just have no cash...


    2 and 3 government can help
    4 is a no go....Mokambo is dead because it is not profitable..period...government or no government...

    5...the question is...if the private sector cannot raise cash..because financial markets are tight....where is Zambia going to get the money from..GRZ has no money...donors don't lend you a third of your budget just so that you have fiscal space to buy mines..

    The first question they'll ask...is why you want to buy the mines...and all the govt has at the moment for an answer is JOBS....we need to keep people employed...not very wise answer...

    On 1...that i believe is the market talking....and it is saying it wont be profit before 2011/12...GRZ or no GRZ...

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  13. Frank,

    It is a good question, and I think there are a couple of reasons why it doesn't work out that way in practice (not necessarily fair reasons, but there they are). First, there isn't enough capital currently floating around Zambia looking for an investment to cover the scale of operation being financed by the mining companies. Certainly it is true that money can, and does, flow into the LSE from overseas investors, unfortunately this is viewed as inherently risky simply because not many people have done it before (i.e. "emerging market"), and since most institutional investment funds are directed by people who trade on their reputations for both safe and lucrative trades, change tends to come slowly. I recall several years ago sitting at a breakfast meeting trying to help a low level broker with one of the major american banks convince his superiors to increase the percentage of their "emerging markets mutual fund" deployed in Africa from 0.75% to 1.25%. They were highly resistant, and while they did increase it eventually, most of that went into offshore oil exploitation on the Atlantic side. Anyway this leads to the second reason, which is that bigger exchanges mean more potential buyers and rating agencies looking at your product, therefore higher prices and/or volumes can be sold. Vedanta recently cancelled its listing in Hyderabad for example, because they were getting better prices in Mumbai.

    Cho,

    I think that you outline the nature of operating difficulties potentially being faced by mining companies in the country very effectively. You are quite correct that each mining location and company must be evaluated individually, regardless of ideological bent. My take on the four ideological belief-driven options are as follows:

    "If you believe selling the mines was a mistake, this is an opportunity to take them back, regardless of the costs of doing so." I think that nationalization "by force" would have disastrous consequences for the national credit, potentially placing Zambia into the same sort of forex crunch caused by loss of credit combined with negative balance of trade as experienced by Zimbabwe.

    "If you believe selling some of the mines was okay, but government should have run its own mines..then this again is an opportunity to take a STAKE into the industry..." It sounds good, except for the fact that this provides only the practical opportunity to buy back that portion of mines which is least attractive to the private sector, either due to high debt load, low copper grades, recent mismanagement or a combination. If selling any mines was a good idea then, surely it was these same marginal operations. If selling any mines was not a good idea, surely it was the ones not currently being offered on the market at bargain prices.

    "If you believe privatisation was okay but government should have given them to local authorities and workers to run...again this is an opportuniy..." Probably no surprise that I find this to be the most compelling scenario of the four, provided that the present workers don't simply become the next generation of exploiters, which can be avoided by buy-in/cash-out employee stock ownership programs. In practical terms this works best when the ownership shift is gradual (or initially implemented at the founding of the company), not least of which because it amortizes impacts on the market price of stock. In the present circumstance, while this is a good direction for labour negotiators to aim in over the long term, there is no short term fix here.

    "If you believe the Zambian government cannot run anything....the thought of running the mines probably scares you...even if prices rebound..." The past evidence is certainly not on the government's side on this one. I'd say such fears are well founded.

    "5...the question is...if the private sector cannot raise cash..because financial markets are tight....where is Zambia going to get the money from..GRZ has no money...donors don't lend you a third of your budget just so that you have fiscal space to buy mines.." Agreed. Outright purchase of the mines does not seem to be an option, nor would it be terribly attractive or advisable to borrow money for the purpose of doing so. However, if part of the high operating costs of the mine in question is due to the cost of servicing their debt (e.g. Equinox has a debt::equity ratio of about 1.3::1, at average annual interest in the region of 7%, creating an effective drag of around 10% on shareholder rate of return), then all the GRZ really needs is a better credit rating than the mining company. If GRZ can obtain a loan at a sufficiently lower interest rate than the mine, then there is potential to offer a better rate to the mines than they could otherwise obtain from commercial lenders, helping the mine reduce overhead costs and continue operating, and netting the GRZ whatever profit they can derive from the interest rate spread after administration and reinsurance costs. So if we imagine a 0.5% reduction in the interest rate paid by Equinox on their debt load, their shareholders can expect their return to improve by 0.8% per year, which ought to be worth something.

    So I guess my answer to the donor is, "We want to buy the mines because they are a super great long term investment with amazing potential. Unfortunately we cannot afford to buy them, nor can we effectively reduce their operating costs or taxes without risking starving the treasury and public utilities of crucial cash flow, nor can we afford the job losses and economic slowdown which would be caused by widespread mine closures. Therefore we are asking you for a bridge loan, at favourable interest, in order to provide Zambia with the fiscal space to re-lend the amount to temporarily distressed by fundamentally sound companies over the near term as a form of economic stimulus. We are prepared to accept reasonable conditions that this loan amount will be deployed for the stated purpose, including blind trust operation, full re-insurance of loans issued from the amount, and third party oversight and review of re-lending agreements and implementation."

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  14. Anon (luboss boy),

    I think that your perspective and mine are very close on this issue. In terms of near term prospects for mining companies I agree that they are looking more at limiting damage than reaping profits. However the big question for each mine is how much of their overhead can move, and how far does it have to move to make it worth more to continue operating (perhaps at a loss) rather than take a loss (or a bigger loss) and walk away?

    I have already talked about debt load as large portion of the overhead cost for the mines, however it should be pointed out that the existing debt is a fixed cost, not strictly an operating cost (though I find it beneficial to treat it as such occasionally from a planning perspective), in that it does not change with the amount of copper produced (not true for new debt taken to cover operating losses). Since the debt was accumulated primarily in the start-up phase of the mine, it can be viewed as the rent on the facility itself, and included with other fixed costs such as maintenance levels of utility service, security, compliance with government and financial accounting procedures, environmental impact monitoring, etc. Those costs are going to be there for as long as the mine is there, fully operational or not.

    Then there is the variable portion of overhead, which includes items often expressed in productivity terms, wages/tonne, tonnes/hour, power/tonne, transport/tonne, concentrate extraction/tonne, etc.. I strongly favour efforts by unions to negotiate compensation terms which would enable their membership to share in the upside of any long term shareholder investment to be derived from their labour (I think that they are already stuck with any fallout from the downside of investment risk), without compromising their immediate ability to earn a living wage. Depending on the spread between current wages and a realistic living wage, there may be ample room to reduce short term cash flow requirements with long term shareholder obligations.

    Then there are the proposals to government from the mining companies, which seem to be oriented at not just reduction in current operating costs, but also in long term investor confidence. One of their main requests is for indexing of copper royalties to the market price, specifically they are asking for a reduction to 1% royalty for copper below US$2/lb, 2% below US$3/lb, and the full 3% for copper only at or above US$3/lb. I would counter this with an offer to defer payment of the remainder of the 3% full royalty until copper prices are above US$3, at interest only a small increment above inflation. They have asked for reductions in power, fuel and road tariffs, I would counter with similar temporary deferment options for a portion of the amounts owed. They have asked for reduction or elimination of variable and windfall taxes, presumably in order to improve their long term outlook, and enable them to raise more immediate capital (or lose fewer investors) by issuing additional stock. There may be a case for the variable tax, I honestly don't know all the details of it, but in the windfall case it seems like an overly transparent way of saying they don't want to share the bulk of any potential upside. I see this as a denial of the risk being taken by Zambia and her people in the ability of these companies to not just make a profit for themselves, but to provide the best possible return to the country from the exploitation of her natural resources. I personally view any attempt to remove windfall taxes as a breach of trust in the fundamental purpose for doing business with these particular corporations in the first place.

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  15. yakima

    reading your post i could not agree more about my proximity to the investors view point in continuing operations.one thing we differ strongly with their idea is am more on providing EMPLOYMENT for locals than profits for coporations.

    am locallly bred and know what effects the mine closures has on people.condiering the current economic climate makes it very impossible for us to negotiate a better deal for ourselves,you have to be alive to the fact that most of these investors are going to be simply vultures with no mercy as the world finance shrinks.

    the idea is to keep employment for local people aswell as crawling the economies of the areas affected.gov. will have more people crying for any help they can get.

    a benefit analysis has to be carried out and the lesser cost to the gov. the better,overall some form of continuity has to be.

    yes the mines can be making losses in the mean time but maybe we can factor that in with the amount of reserves it holds and predict the value at the time of sale,loses incured during this time can be cancelled off with the amount of loses with the value at time of sale.

    the mines are still seating on land and scrap which can be offloaded for a value.especially when we maintain some activity in those areas.

    luboss boy

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  16. cho

    breezed past your post.

    the mines where actually dead before the prices started rising and investors where looking for making a quick buck. they never questioned much about the low grade,operational costs etc. and we gave them knowing that they had little value but to offer employment to our people.

    was it wrong to sale the mines no.it seemed right at that time and times change. you are better placed to understand that even the best brains can't figure what is going on with the current economic climate.

    do we have to buy back the mines,yes if it means maintaining employment for our people and creating some activity in our economy to provide some pulse for our survival.

    can we be borrowed money,well the climate does not loook too good for us,even with URINIUM we are meant to believe they can't get finance?this is our country and people we have to come up with a solution.

    one size fits all is a bit ou context,what we can do is just change variables and we will be dealing with a difffernt situation.they are all similar operations.

    what we have is unbalanced equation where one area of industry is laboring to meet deficits.energy is being used to raise tax.

    am yet still in my diapers with my economic knowledge.

    luboss boy

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  17. Anon (luboss boy),

    I am very pleased that you have taken the time to share your perspective with us, and I would be gratified if I can contribute to your understanding of economics in any way through my writing here. I also enjoy doing research and have lots of resources at my disposal in that respect. I especially hope to learn from your experience coming of age in a mining town (Luanshya is it?), as there is much that I cannot possibly learn through my own senses from so far away. This is where we have to make globalization work for us, and I welcome you informing me of things that would be obvious were I standing next to you, but I am blind and deaf with a head cold and no hands. Yet I still hope to prove useful to you if I am able.

    I wish I could tell you that I know a simple way through the prospect currently facing your town, but I don't know one. The options at the two extremes are predictably unpalatable: 1) Offer the town's labour force wholesale to outside investment in one or more new industries, accepting wage and benefit cuts, loss of seniority and continuity of collective bargaining, and export of a majority of profits from the area, or, 2) Go it alone, risk starvation, and try to leverage scant local resources into some kind of locally owned and (inter)nationally competitive operation(s) sufficient to employ as many or more people as the mines have/do. Not surprisingly the more preferable approach is likely to lie somewhere between the two.

    What is the status of land surrounding the town? Is it providing food? Is it is many hands or few? I am aware of some land to the north set aside for plantations of eucalyptus, pine, and other industrially desirable tree species. My understanding is that these were created primarily to service the needs of the local mining industry, so the departure of mine operations could create a surplus of wood suitable for furniture, construction, and even windmills and waterwheels if you've got suitable locations (low tech energy is still energy, enough for irrigation at least). Getting government or tribal authorities to set aside more land for tree plantations might also help attract investment for wood products manufacture.

    You have the rail connections created to service the mine, so that helps. Food processing might be a good direction to diversify into, especially if boilers associated with mining operations can be converted to serve as industrial heat pumps for large scale refrigeration purposes. Although the mountains of scrap or tailings from decades of mining are wholly unsuitable for farming, there is nothing preventing them from housing food plants grown in self contained systems such as earthboxes which require little maintenance or expertise. There are even programmes in place which might be able to get these to you in large quantities at or below manufacturing costs. It is certainly something that could be bargained for as an environmental compliance measure which the former mine operators are responsible for at least in part.

    There has been good success with algae based products that use brackish, saline, or otherwise polluted water sources to produce a wide variety of substances. This area is looking particularly promising in biodiesel and jet fuels. It might provide a safe use for standing water in defunct mining areas. I agree that your town and others need a survival plan that also hopefully leads to a sustainable future where survival plans are a thing of the past.

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  18. Prof Lungu welcomes plans to nationalise copper mines
    Written by Kabanda Chulu, Fridah Zinyama and Chiwoyu Sinyangwe
    Friday, January 09, 2009

    Read more...

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  19. A simple question; have they actually thought through it? Does the govt's numbers add up any more than they do for the current operators?

    Times are hard economically and we all know that, but this time around the govt must be put to task to provide evidence of number crunching which supports any proposed plans.

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  20. Zedian, you are right. While the idea of nationalization could mean protecting Citizens from losing jobs, the idea should be the last to consider. I wish the government could talk to some of the big mines for a buy out. We failed to maintain mines under ZCCM. What makes the government think we will this time?

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  21. Mwanza,

    What makes you think that 'we failed to maintain the mines uner ZCCM'?

    What I know is that there was a global economic downturn in the 70s/80s, just as there is now.

    The 'solution' of the present day mines, is to pack up and go. Or at least threaten to if they aren't exempt from paying taxes, etc.

    How is this somehow superior to management by ZCCM again?

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