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Wednesday, 12 August 2009

Mine Watch (Tanzania)

An interesting news item from Tanzania. The Tanzanian government plans to include a clause in its new mining law allowing it to own shares in firms extracting what it considers strategic minerals. The mining sector is Tanzania's second largest foreign exchange earner after tourism, having earned $1.08 billion in 2008. The new law will also compel mining firms to buy goods and services locally when they are available. Critics have long complained that benefits from the lucrative sector were not benefiting the common citizen. The law currently allows the government to hold no less than 25 percent in companies mining gemstones like diamond, tanzanite and rubies, but is silent on other minerals. In the new law, the government will have the authority to take shareholding even if it is 10 or 15 percent in minerals that the government deems strategic.

10 comments:

  1. I was just thinking. Shares give a shareholder a right to a share of the profits, called dividends.

    What if a share gave a shareholder a right to a percentage of turnover?

    No need for taxes, no need to find out what profits really are.

    It would be perfect for the extractive industries.

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  2. MrK,

    Interesting idea, but the reason it is a % of profits as opposed to % of turnover is that 100% of profits can be zero or negative (meaning one not only is able to collect profits, but is also responsible for an equal share of debts). If shareholders were entitled to 100% of turnover, there would be nothing left with which to pay workers, utilities, equipment costs, etc.

    I appreciate your desire to secure a greater share of mining revenues for the domestic economy, however radical rewriting of ownership rights/responsibilities is unfortunately likely to shrink the size of the pie itself even as the relative size of the Zambian slice grows. We should not forget that it is possible to extract minerals (or operate any other kind of business) in a way that does not actually turn a profit.

    I am reminded of a circumstance a friend of mine went through in Poland during the 90's, where he was trying to set up a restaurant for a coalition of US and Polish investors. The Poles were putting up 51% of the capital in local currency, and the Americans were putting up 49% in dollars, which was fine until the Polish currency crashed and lost 90% of its value before the deal could be done, property acquired, construction completed, etc. (all the things a restaurant needs before it can start making sales). The Poles got very angry with my friend when he told them that there was no longer enough money, and they would have to find more domestic funding in order to bring their share back up to the required 51%. They expected the original deal to stand, and even wanted the Americans to make up the missing 45.9% of capital while accepting the same 49% stake. They refused to believe that the US investors would not be interested in the same share for nearly double the price, after all it would still be the same restaurant. Needless to say, it never got built.

    Now if mine workers were being paid by the tonne instead of by the hour at a decent rate, then not only would their personal buying power improve, but so would PAYE collections. It would be relatively easy for mining companies to adjust their business models to accommodate labour as a cost per tonne rather than per hour of operation, and the incentive to the workers would be to increase productivity wherever possible. Win-win instead of lose-lose.

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  3. Yakima,

    Interesting idea, but the reason it is a % of profits as opposed to % of turnover is that 100% of profits can be zero or negative (meaning one not only is able to collect profits, but is also responsible for an equal share of debts).

    However they are already paying the royalty tax, which is just that - a tax on revenues/turnover. The royalty tax is not adjustable either.

    What I am suggesting is raising that tax, and dropping all other taxes.

    So why not put that in the form of special shares, which can be sold back to the company, or even traded publicly?

    There could even be a reverse trigger, where payouts would stop or be reduced, if for instance oil prices went over a certain price level, to protect the companies from fluctuations in the cost of fuel.

    Now if mine workers were being paid by the tonne instead of by the hour at a decent rate, then not only would their personal buying power improve, but so would PAYE collections. It would be relatively easy for mining companies to adjust their business models to accommodate labour as a cost per tonne rather than per hour of operation, and the incentive to the workers would be to increase productivity wherever possible. Win-win instead of lose-lose.

    I once read that a South African goldminer makes his company $17,50 per hour, but is paid $0,50 per hour. Now if he earned $10,00 per hour, and the government collected $5,00 in taxes, that would be a very different economy.

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  4. MrK,

    I think I see the thrust of your intent, it is just that some of the mechanisms may be more complex (and therefore costly and inefficient when compared to alternatives) than necessary. If I may, I will use another restaurant analogy:

    Restaurants pay taxes in myriad forms, most of which are in play in most jurisdictions worldwide to varying degrees. Different products are sold in varying quantities and at different mark-ups based on demand and competition, and with different types of taxation applied. Thus it is conceivable, even likely, that a restaurant will earn a higher % operating profit off the sale of a $1 cup of coffee than a $50 dollar bottle of fine wine, precisely because there are per bottle "sin taxes" attached to the wine and not the coffee, but the consumer will not absorb the difference at a higher price point in sufficient volume to warrant storage costs.

    If you could somehow get a significant percentage of all copper producers worldwide to apply similar per tonne royalties rather than compete with each other to increase sales volumes, then perhaps a massive increase in royalties might simply push copper prices higher without reducing demand for Zambian copper in particular. To return to the restaurant, it would be as if establishment A had to pay 50% of the sale price (or alternately the purchase price) of a bottle of wine as tax, while establishment B on the next block only pays 10%. The owner of A must consider the cost to procure the bottle, store it, serve it, and clean up after, and then add a 10% profit margin (let's say this comes to $50, $25 of which is the purchase price of the bottle, making profit per bottle of $4.55). These considerations are identical for owner B, but then the consideration of the additional royalty tax must be added to the sale price.

    Owner B can simply raise his price to $55, pay $5.50 in tax and keep $4.05 in slightly reduced profits (alternately pay $2.50 in tax, requiring increase to $52.50 in order to maintain $4.55 profit). Owner A has bigger problems, @$50 price point $25 are owed in taxes, but raising the price to $75 means that now $37.50 are owed, so really the price on the bottle has to go all the way to $100 in order to pay the taxes and still turn the original profit (alternately $12.50 is added, forcing the price up to $62.50). Unless there is some massive physical barrier preventing customers from getting to Restaurant B, it is doubtful that many of them will choose to pay Restaurant A $45 more (or even $10 more) for the same product.

    Zambia has a lot of copper, for a country of its size, but not necessarily in absolute terms. In fact if Zambian copper producers went out of business tomorrow, it would be to the net benefit of every other copper mine in the world. Any unilateral Zambian solution has to take into account the external reactions to such policy changes. Put together a OCEC coalition with comparable copper market share to OPEC's oil share, and such a thing might be feasible (only Chile has the capacity to threaten such a thing unilaterally, and even that would be risky). Then sober decisions could be made as to how high copper prices could be pushed before alternate materials achieve price viability.

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  5. Meanwhile in Bolivia:

    http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/8201058.stm

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  6. Kafue,

    Good find! The Bolivian Lithium percentage is almost as strategic as the Botswana/S.A. Manganese advantage (estimated 80% of total world supply), though the Bolivians seem to have a much better idea of what they've than our Southern neighbors do (which is surprising given their experience with diamonds).

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  7. Besides needing lithium for batteries, electric cars should also increase the demand for copper as it is needed for their motors. This should offset the decrease in demand from other uses such as telephone wire cables as fibre optic cables play a greater role.

    http://www.copper.org/publications/newsletters/innovations/1998/02/ev_intro.html

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  8. However there are environmental concerns regarding the mining of lithium in Bolivia:

    http://www.inthesetimes.com/article/4360/salt_of_the_earth/

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  9. Great stuff!Strategies for resources and the domestic management is primary, for the nation to benefit.Cautious and the knowhow of treaties we engage in.

    Copper,is still profitable, but how did we manage the profits? 5 Years budget spent on State House security? Botswana had a multiparty forum to check and balance reinvestment and socio-political and economic trends.

    Nawakwi regrets agreeing with the IMF that copper wasnt going to be profitable anymore in the near future has robbed us of todays copper profits as we gave away the mines cheaply.

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  10. By the way thanks for the link Kafue001.

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