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Friday, 2 October 2009

Security of mining developments..

The first of the unbalanced pieces from the latest ZIPPA Journal. In this entry, Grant Gatchell fails to construct a balanced assessment of the current mining regime. The article moves from the incoherent (e.g. it fails to recognise that stability is built on "public acceptability") to the ridiculous (e.g. shockingly suggests that we need to give mining companies more incentives) :

Security of Mining Developments - the Key to Future Investment, Grant Gatchell, ZIPPA Journal 2009, Commentary:

What is special about 1st of April 2008? People who are concerned about Zambia's mining industry regard this day as of crucial importance, but for completely different reasons. This date marked the enactment of the Mines and Minerals Development Act, 2008. The Act repealed its predecessor of 1995, scrapped the Development Agreements made under it, introduced a new mining tax regime and included provisions which aimed to promote the involvement of Zambians in the industry. The country as a whole congratulated itself on the withdrawal of what were seen as overgenerous benefits, which had been conceded too easily to foreign investors, and on the projected revenues to follow. But most foreign investors in the industry responded by cancelling or deferring capital expenditure and by slashing exploration programmes. Why did they respond in this way?

It was not due to spite or resentment, nor even to reduced profitability, but because this unnegotiated, unilateral cancellation of their contractual rights shattered their confidence in the dependability of the Zambian Government. When assessing a country's attractiveness for investment, the key ingredients of a mining policy fall into three main categories:

1. Stability of legislation.

2. Security of tenure of mining rights.

3. Incentives and guarantees for investment.

Let's look at the status of these three ingredients.

Stability of legislation

The Mines and Minerals Development Act of 1995 was amended by subsequent Acts no fewer than eight times, and finally replaced by the 2008 Act. This new Act has already been amended twice. By these frequent changes Zambia has shown the international business community that it cannot safely rely on stable legislation.

Security of tenure of mining rights

Security of tenure lies at the core of any assessment of a country's attractiveness to investment within a competitive environment. This is particularly true for exploration, which is the future of Zambian mining. Create uncertainty here, and serious investors already in the country will cancel or curtail their exploration programmes.

Many potential investors will go ahead only if they are confident that licences obtained will remain in their possession as reliable concessions to explore for the commodities stated.

The 2008 Act has a number of problems. Probably the most contentious provision allows for applications for mining rights within an existing right, subject to consent from the holder of the right.

Furthermore, consent cannot be unreasonably withheld and, in the event of denial of consent, the applicant has the right of appeal, but there is no provision for appeal by the holder of the mining right.

Imagine the situation where a portion of your mining licence where you have invested, say, USD500 million has been awarded to another company resulting in compromised security and integrity of your operation. Having suffered this, would you expand existing operations or develop a new mine elsewhere in the country?

In exploration the situation is even worse, as many mining rights have actually been granted within prospecting licence areas without consent from the holders. This has been going on since around 2004, even though the legislation was passed in 2008.

Administrative opacity is a problem worthy of a paper on its own: it is one of the greatest threats to security and to building trust. The 2008 Act removed the entitlement of the holder of a prospecting licence to the grant of a mining licence following successful exploration. This entitlement is an important internationally recognized pre-requisite for exploration. Indeed, why would one risk millions of dollars in an already high-risk business if one is not entitled to a licence to mine what one finds?

The requirement for the holder of a mining licence to possess an annual operating permit may seem innocuous. However, the potential for separating ownership of a resource from permission to exploit it is very worrying. In practice, it would be (and actually has been) a small legal step to nationalize the resources of an established mining operation while relegating the current owner to contract mining and mineral processing.

The requirement to obtain written access agreements from traditional rulers and legal occupiers of land is also disquieting, as the relationship between surface and mineral rights can be difficult to determine. No access agreement means no right of entry to your mining right and, once again, there is only limited recourse to appeal. This has led to situations where explorers have been held hostage by individuals looking for a large financial return before the first borehole is even drilled. Even worse, access agreements have been arbitrarily cancelled after millions of dollars have been invested.

Incentives and guarantees for investments

At the time of privatization of the copper mines, the Government and its advisors considered it essential to provide binding Development Agreements in order to instill sufficient confidence for the large investments required to revitalize the sector. The 2008 Mines and Minerals Development Act cancelled the agreements and removed the Minister's power to enter into any agreement for the grant of a mineral right. From the industry's perspective, by unilaterally canceling the Development Agreements, Zambia has shown the international business community that it may not be able to rely upon legally binding agreements. Sadly for Zambia the current Mines Act contains no provisions governing incentives and guarantees for investment. In a highly competitive world where it is essential to actively attract investment, this is a glaring omission.

Conclusion

Current mining legislation contains many provisions which entail uncertainty. The greatest offenders concern security of tenure, while the greatest omission relates to investment guarantees. Both are features essential for the development of a vibrant mining industry, and they require urgent review, benchmarking against international best practice. Without such a review trust will not be rebuilt. Until this is done, do not expect responsible large-scale, high-cost, high-risk exploration, which is desperately needed in order to find deposits that can replace the aging, high-cost mines of the Copperbelt.

11 comments:

  1. http://findarticles.com/p/articles/mi_qa5382/is_200907/ai_n35631051/

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  2. It was not due to spite or resentment, nor even to reduced profitability, but because this unnegotiated, unilateral cancellation of their contractual rights shattered their confidence in the dependability of the Zambian Government.

    And had nothing to do with the global collapse of the world economy, because of deregulation, privatisation and free capital?

    And the recovery of the global copper price I guess has to do with the refound 'confidence' in the Zambian government after the scrapping of the Windfall Tax? They certainly coincide, don't they. :)

    This sounds like a typical piece of pro-corporate, pro-chambers of commerce self-justification.

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  3. The new shaft at Mopani was canceled the day the taxes went up breaking the development agreements, exploration focused outfits like Zambezi couldn't raise any more money from the Jan budget despite the highest copper prices ever - all of which might have something to do with confidence or did these people know about the economic crisis 8 months early?

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  4. The loss of confidence in the Zambian government came not from global deregualtion, privatisation and free capital, nor from some prescient feeling in April last year on the part of the mining companies that copper prices may fall but simply from the fact that the Zambian government did not stick to its deal! Now whether that deal was fair for Zambia or not is another BIG issue - but we must hold our government to account for that, not the mining houses.
    The copper price recovery had nothing to do with the scrapping of the windfall tax in April this year(which did not coincide with the price pick-up incidentally which started in February). The price has risen because of increased demand/consumption or Chinese hedging/stock piling or whatever you choose to believe - but certainly nothing to do with Zambia, which produces about 4% of the world's copper - compared to Chile's 35%.
    Our governement has to attract mining investment (foreign or local), by providing incentives and guarantees commensurate with other copper producing countries, always bearing in mind that Zambia is a high-cost producer - of course that does not mean we have to be exploited, but neither can we be uncompetitive, naive, churlish or untrustworty.We must do the sums and we must keep our word.

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  5. "a typical piece of pro-corporate, pro-chambers of commerce self-justification."
    That's an interesting comment. In order for Zambia to develop in any way, an injection of foreign capital must take place. This cannot happen if the laws are not favourable towards the mining industry, as it is the main industry in the country. If there are no incentives to attract foreign investment it just won't happen.
    Why? Because everybody else has them.

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  6. The person who posted this article on Zambian Economist calls the article "incoherent" - Mr Gatchell's language is impeccable. And yes, sadly in the business world stablity depends on the security of a deal, not on public accountability - it is up to the Zambian people to demand accountability from their goverment and to stop blaming others. As to incentives the mining compnaies do not want MORE incentives, they have NO incentives since the development agreements were scrapped - they merely want some incentives back.

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  7. Anonymous, 07 October 2009 15:01,

    That's an interesting comment. In order for Zambia to develop in any way, an injection of foreign capital must take place. This cannot happen if the laws are not favourable towards the mining industry, as it is the main industry in the country. If there are no incentives to attract foreign investment it just won't happen.
    Why? Because everybody else has them.


    Why? What is this obsession with foreign capital, as opposed to domestic capital?

    We have lost many years, trying to chase after foreign investors, instead of developing the domestic economy.

    Foreigners are not the only source of liquidity, the government has a treasury that can print up money too. Certainly this could lead to a little inflation, but if investments are made in a strategic manner, in capital investments and infrastructure, there can even be a long term deflationary effect. In fact some or all (or even more of the original investment) of the money can be recouped by slightly higher taxes.

    In fact, there is absolutely no point in attracting mining companies when they share no profits (they are champions in hiding profits) and pay no taxes because they bribed government officials. And no, you cannot just blame the government for that, the mines paid the bribes and benefited massively by not paying taxes. They must be held to account for any corrupt deal they have made.

    For instance, the government can start building irrigation projects to put more agricultural land in production, like areas up to markets, and put more arable land under cultivation (only 20% is utilized).

    Then, the only source for foreign capital is not simply foreign corporations setting up shop in Zambia. Zambia is a major global exporter of copper, it exports over $4 billion per year, none of which gets taxed. I would say that would be the primary source of foreign exchange.

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  8. http://www.chinamining.org/News/2009-08-28/1251440323d28672.html

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  9. MrK, Zambia is a very minor copper producer - 4% of the world's copper. And many of the mining companies have not only paid hundreds of millions in royalties and corpoarte taxes to ZRA (do check your facts, please) they have also paid dividends to our government, millions also - via ZCCM-IH. Best not to put all the mining companies into one basket, jusy because some dubious ones have special privileges. As to printing money, just look at our southern neighbour!And Zambia did invest in its own mines 0 then privaitised them.

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  10. Sam,

    MrK, Zambia is a very minor copper producer - 4% of the world's copper.

    At one time it produce 25% of the world's copper, and over half the world's cobalt. So much for privatisation.

    And many of the mining companies have not only paid hundreds of millions in royalties and corpoarte taxes to ZRA (do check your facts, please)

    A few have paid the windfall tax - once. The corporate tax is mainly evaded, and the royalty tax was 0.6% for most of the decade.

    It the year 2004, the mines exported $4,000 million in copper and cobalt, made I estimate $2,400 million in profits, and paid $ 6 million in taxes.

    " they have also paid dividends to our government, millions also - via ZCCM-IH. Best not to put all the mining companies into one basket, jusy because some dubious ones have special privileges. "

    Like I said, the total amount of tax paid by the mines in 2004 was $ 6 million.

    As to printing money, just look at our southern neighbour!

    Actually I know more about what happened to Zimbabwe than you do. So don't use Zimbabwe as a negative example of anything, until you know what you are talking about.

    Zimbabwe opened the printing press to compensate for the fact that their credit lines were illegally frozen in early 2002, through a law called the Zimbabwe Democracy and Economic Recovery Act of 2001. They were also, through this law, specifically passed by for HIPC, which cancelled Zambia's debts, in exchange for western ownership of it's mines.

    What I have suggested is for the government to print enough money for an infrastructure project that directly stimulates trade, and then recoupe that money through taxation.

    And Zambia did invest in its own mines 0 then privaitised them.

    The mines in Zambia were privatised under coersion, as a pre-condition for IMF 'help' (including HIPC) back in 1999.

    Under privatised ownership, Zambia has lost out on over $10 billion of untaxed profits from the mines, since 2004. Edith Nawakwi was lied to by the IMF as their analysts insisted that 'copper prices would not rise in her lifetime', a few years before the biggest boom in copper prices in recent history.

    And low and behold, just before copper prices recover, the government scraps the windfall tax, because it was 'onerous on the mines'.

    This is why you are here advocating for the mining industry, and against the interest of the people of the country.

    If Zambia would increase it's output of copper under the present conditions, it would not benefit from it. More money would be lost to western corporations.

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  11. Mr K it is good to see you are still on form. I remember reading your comments in April when the the government said it wanted to increase its stake in mining companies. Someone responded by saying you wanted to take Zambia back to the stoneage...

    Yes Zambia was a major copper producer before, and for the first few years of, nationalization after which production declined from a peak of 750,000 tonnes to about 250,000 tonnes per year in the late 1990's. At the time of privatization ZCCM was losing $1,000,000 EVERY DAY. Zambia was paying for the privilege of mining her own copper and could not afford to keep doing this. Sale negotiations were tough as the mines were so undercapitalized and run down that they were a liability but especially because the copper price at the time was the lowest it had been in real terms for decades. Bad timing. If they had been sold in 1997 as they should have been, they would have gone for a lot more. Three years less asset stripping to take into account as well.

    Nine years later and over $4 billion of foreign investment, Zambia will produce 650,000 tonnes of copper this year with potential for a million tonnes in a few years. As you rightly said, so much for privatization.

    Why does Zambia now produce less than 4% of the world's copper? Because in the 1960's to 1990's most countries with lots of copper and other minerals adopted stable investment codes and mining laws which attracted investment both local and foreign. Zambia did not until 1995. So the mining industries of some of these countries grew enormously while Zambia's parastatal industry collapsed. Same happened in Zaire/DRC. We are nearly back to our historical peak of production but instead of produceing 25% of the world's copper, we produce less than 4%. The rest of the world has left us behind and we have a lot of work to do to catch up.

    You talk about Zambian capital. The government is not, and should not be, the only source of money. But it is impossible to raise capital on the Lusaka Stock Exchange through an IPO of a new company because the LUSE regulations do not allow it. Small scale miners cannot access funds from CEEC because the CEEC does not recognise a mining right certificate as collateral. When things like this change we will see Zambian capital in the industry.

    When you talk about government revenue from the foreign mining companies, you obviously do not have access to the facts. They have paid much more than $6m. You should find out how much tax was paid between 2006-8 when new, lower cost mines came into production and had paid off their debt. I would be interested to read your opinion on revenue collected from small scale and gemstone miners. Some people estimate Zambia exports about $500,000,000 worth of gemstones every year. It is impossible to tell if this is true as most small scale miners do not keep records and avoid taxes and royalties. Small scale licences and gemstone trading permits can only be held by citizens. Foreign mining companies bring money in, build new mines or revamp old ones and, yes they take money out. One or two even pay ZCCM-IH a dividend. Most small scale operators, if they are producing something worth selling, only take money out and very few pay their dues to government.

    You need a more balanced view of the mining industry - it is not just about copper and foreigners. And do not forget that the law applies equally to everyone so the whole house needs cleaning up.

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