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Thursday, 10 February 2011

Mining Sector : An Industry Perspective

An industry perspective on recent mining developments. Naturally, a lot of praise for Zambia's low fiscal regime, but also an "insider" hint (?) about a potential new Mining Act. Not sure whether that is intended to a pre-election give away or a post-election reward (as was case in 2008 with the abolition of the windfall tax) :


All jurisdictions have their issues and difficulties that mining companies need to take into account when making their investments. In general, it has become a bit harder to do business as a mining company in many parts of the world. That means those jurisdictions which do provide a reasonably friendly mining policy and regulatory environment give themselves a great advantage over other places where narrower interests hold sway.

It seems Zambia is heading in the right direction, and is giving itself a very good chance to sustain itself as one of the world’s major producers of copper. Zambia’s chamber of mines general manager Frederick Bantubonse recently told my colleague Lionel Williams, who has done the series of articles in this edition featuring that country and mining companies operating there, the signs are good that the Zambian government is about to implement an investor friendly Mining Act. This will open the door to further foreign investment that has been sitting on the fence watching potential outcomes.

Copper is a good place to be at the moment and Zambia is Africa’s largest copper producer. It produced 730,000 tonnes of the metal in 2010, a large increase over the 656,000 tonnes of 2009. And there are big investments in the pipeline and coming on stream. These should see Zambia producing more than a million tonnes of copper a year within a few years and increasing output further beyond that.

Vedanta’s long evolving Konkola Deep project is one of the drivers of the expansion. Konkola Deep, by accessing the rich orebody that lies beneath the area of current operations, will more than double copper production from under 200,000 to 500,000 tonnes a year within three to five years.

Zambia is also the site of one of China’s flagship mining ventures in Africa, this being Non-Ferrous China Africa, and that group is increasing production following large investment. There is Vale of Brazil’s presence in the country with its 50:50 joint venture with African Rainbow Minerals of South Africa. Their Konkola North project will be commissioned in 2012 with production ramping up to 45,000 tonnes a year and then increasing to 100,000 a year as a second module is put into place.

Also illustrative is the comparison Canadian based First Quantum Minerals must be making, the company having had its assets in the Democratic Republic of the Congo just across the border seized after investing US$1.1 billion in that country.

In comparison, the company’s Kansanshi mine in Zambia, which already produces 240,000 tonnes a year of copper is planned to expand to 280,000 tonnes a year over the next three years. In addition to established and planned projects, Zambia is still showing great exploration potential. The Japanese International Co-operation Agency (JICA) is involved in an exploration programme for the 45% of Zambia that has not been explored, and this initiative is making progress.

An exploration company such as Mukuba Resources is applying new technology to uncover mineralisation and generate new copper targets some 110 km southwest of Ndola. There has not been a new discovery on the Copperbelt for some time, with past discoveries made by targeting mineralised outcrops. Undoubtedly there are more major copper and other mineral deposits to be discovered in that country.

What also helps Zambia gain advantage over its competitors for mining investment is that it has an effective grid power network serving its mines on the Copperbelt. Like other parts of the world there have been problems with power shortages and outages but a strategy is in place to ensure medium and long term power supply security.

It helps too that Zambia has a long history in the mining sector. It experimented disastrously with nationalisation in the past and learned hard lessons. When the boom before the recent global economic crisis led to political opportunism and disastrous policy being implemented, even then a lot of people in the system there knew this was a very bad idea. Subsequently the Zambians have demonstrably listened to reason, and rapidly reversed what would have been unmitigated disaster for a country that bases a large part of its economy on mining.

Unscrupulous fools exist everywhere, definitely in the political process, some of them arrogant, cunning and ruthless, and very willing to sacrifice everything and everybody on their own toxic alters. Zambia seems to be proving that approach need not prevail everywhere and all the time, and seems to be making decisions that should benefit everybody, not just mining companies let it be pointed out. Without doubt, mistakes were made in the recent past of that country’s mining sector, but prudence and common sense seem to be winning out now.

It suggests that if Zambia continues along this track, increasingly it will be bracketed with countries such as Chile rather than with its neighbours Zimbabwe and the DRC.

3 comments:

  1. Interesting !!!

    http://www.scribd.com/doc/48512375/Pilot-Audit-Report-Mopani-Copper-Mine-Summary

    ReplyDelete
  2. Is privatization of the mines justified?

    The history of Zambia is about copper because without copper Zambia has no history. Copper production was on a steady rise from 1932 to 1971. Somewhere, in the early 70s, KK embarked on a partial nationalization of the mines in order to break the social classes and insure equitable distribution of wealthy. The endemic poverty in Zambia was and still is so because the majority of people have no assets and if they do, it is not the wealth creating assets, and worse still, they do not believe they can acquire them because of historical and cultural constraints. Money was in the hands of a few white foreigners. It was against this background that KK made the Mulugushi reforms. The colonial government neglected the manufacturing sector development. Most finished goods came from Southern Rhodesia and South Africa. However, after Independence, the new Zambian government introduced policies that were intended for encouraging the manufacturing sector. Unfortunately, the KK government viewed with suspicion the private sector as it was dominated by white foreigners. Now we have learnt a lesson that It’s not by confining one’s neighbor that one is convinced of one’s sanity. Regrettably, large scale non-mining enterprises were nationalized through Mulungushi reforms of April 1968 where government equity holdings were peg at 51% in a number of key foreign-owned firms. By January 1970, Zambia had acquired majority holding in the Zambian operations of the two major foreign mining corporations. This coincided with decline of production of the early 70s. To add salt to the injury, copper prices on the international market went down in 1974 until LPM era.

    What is interesting is that there was a further steep decline in copper production in 1982 with complete nationalization forcing the government to start subsidizing the mines to overcome low mineral revenues against a huge mine labor force. Against such phenomena, there was no reinvestment in mining infrastructure. This lead to World Bank and IMF demands on the Zambian government to privatize the mines as a precondition for foreign aid.

    Now the mines are privatized and copper production is again increasing. From the statistics given above, it’s clear that low production was directly related to nationalization. Thus the best way to run the mines is to let them be in private hands.

    But how do we insure that the Zambians benefit from the mining sector? Well you might say that the mines should be paying taxes. It’s shocking that this economy whose foreign exchange earnings mainly comes from the mining sector has mines paying less than they ought to. I have data that shows that Zain (now Airtel) paid more tax than any organization in Zambia in 2009 and 2010 financial years. The mines drag their feet to pay tax. If you don’t believe me read this:

    Mining companies have agreed to pay tax arrears and have pledged to start making the payments this year, Finance and National Planning Minister Situmbeko Musokotwane has said. Speaking in Parliament when he presented a ministerial statement on the status of mining taxation, Dr Musokotwane said that the tax arrears arising from the changes that were introduced in 2008 stood at K1, 426.16 billion. Of the tax liabilities, he said the Government expects that it would collect K458.5 billion by the end of the year while the balance of K967.6 billion would be settled next year. “The Government will ensure that all arrears are paid by June 30, 2011,” Dr Musokotwane said. [By State House on Friday 26 November 2010 http://www.zambia.co.zm/article9962]

    Those of us who advocate for reintroduction of Windfall tax know that the mines evade tax by way of arrears and the cost of the amount overdue (interest) is not accounted for and worse still they can even cook figures to avoid paying correct amounts. Living in tax arrears for this long is like borrowing money from government at interest free. Listen, the mines don’t have to agree to pay tax. They have an obligation to pay tax.

    ReplyDelete
  3. Privatization of the mines is not yet justified regardless in increase in copper production and reinvestment in the mining sector. Now copper price per ton has hit over US$10,000 while the exchange rate of the Kwacha is still stack at K4,800 per US1$. In those LPM days of windfall tax, the Kwacha would correlate with copper price per ton. The greater the price of copper per ton, the lower the exchange rate. My wild but educated guess would peg the Kwacha at K2500 to US$1 at the prevailing copper prices. This means we are not getting anything tangible from the mines. Remember this is an import based economy meaning more value for the notes and thus a higher purchase power for an average Zambian. I would have managed to do a side business or some farming while being in formal employment. I would have managed to buy a tractor and other high tech agriculture machinery. I would have been an employer and this would go well in diversification of the economy. Please let’s take advantage of the favorable high copper prices.

    I repeat, privatization of the mines is not yet justified. But by no means should we reverse privatization. However, it is a challenge on the part of government to make sure the mines pay appropriate tax and do their corporate social responsibility. The government should not be content with the current new tax measures through which it anticipates that the mining sector would contribute a meager 7% of the GDP while only contributing 2% to total ZRA collection. I would be proud of these figures if our manufacturing and agriculture sector were vibrant. I know that the Zambian government should introduce programs aimed at stabilizing the economy and restructuring it to reduce dependence on copper. But these low figures are not because of diversification of the economy but mainly due to an improper tax system. This proves that we are overburdening the middle income group through excessive income tax, VAT etc while we let the mines off the hook. And by the way, what is the future of Zambia when we finish mining copper while as at now we get literally nothing from it? Shouldn’t we be getting income from the mining sector and channel it to agriculture sector and value addition on all our exports? What should be government’s proper entrepreneurship policy to achieve wealth creation? How equitably distributed is our current US$12.7 Billion GDP?

    No, privatization of the mines is not yet justified, but can be justified if and only if we put in place mechanisms that force mines to contribute significantly to the national treasury and to the well being of Zambians and strategize by reinvesting what we ought to earn from the mines into other sustainable sectors of our economy.

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