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Thursday, 18 April 2013

GRZ and New Mining Investments

Government is allegedly plans to leverage its land and mineral ownership to negotiate a shareholding of not less than 25% in all new  mining projects. In an interview with Metal Bulletin, Mines Minister Yamfwa Mukanga says government has no intention of nationalising the sector. Rather it hopes to see its shareholding in future mining projects rising to 35%, but its role in the mining sector will be limited to being a minority shareholder and regulating the mining environment.

I have long argued for this and I am glad the minister is thinking bold and taking this forward. Taking a 25% - 35% on all new projects is a step in the right direction. Presumably through ZCCM-IH. This idea is actually not that new. The MMD had previously hinted at taking a 25% in an effort to "have a stronger influence in decision-making". But that rationale was weak because as the current Minister notes 25% is a minority interest. It is better to see a minimum stake of this sort as predicated on increasing revenue and encouraging general national control over scare resources.

The Government proposed approach is similar to Angolan mineral resources model. Typically, a mining company in Angola is expected to fund 100% of the capital expenditure although owning only around 40% of the mine. The rest of the equity is held by the Angolan government through Endiama and by nominated private Angolan investors all of whom are entitled to a “free carry.” Once completed, the developer has priority over revenues until the capex outlay is recovered but may still get only about 80% of the initial revenues because of profit share agreements with the Angolans. It is therefore no surprise that Angola is benefiting greatly and growing at a faster pace than Zambia. These resources are paving the way for significant investment in infrastructure.

I see no reason why Zambia should not implement this idea of owning 25% - 35% in all new  investments right away. It is a smaller ask than what the Angolans demand. If any investors refuse they can go elsewhere. We don't have to mine these minerals at price. What we need is a new law that now specifies this – presumably this will need to be a new legislation. 

In general we are seeing a positive transformation of the mining sector. The government is to be applauded for its efforts. Many investors will cry aloud and speak of the dangers of lack of investment if this was taken forward. But I do not think we should worry too much about that. The medium and long term demand for copper and other mineral is strong. Most importantly, this is not nationalisation. It is about recognising the boundary of new investments. Even countries like the USA have sectors where ownership is restricted e.g. the airlines industry. This is the way forward. It avoids the politics of existing investmentments and ensures future investments give Zambians a greater stake. 


  1. While it is heartening that the Government is seeking to take a larger share of mining proceeds, I wonder if all the consequences of an increased minority shareholding are being considered.
    I cannot get access to the article you quote, but the first question we should ask is: how the 25% will be paid for? There are three typical options for governments that have done this, each of which imply trade-offs that will affect the welfare of Zambians:

    1) Buy the shares outright with government funds (what is called ‘paid interest’). Government may also be liable for cash calls when the project requires additional funding (something that has got Nigeria into a lot of mess) – the trade-off here is that these funds cannot go to other projects such as roads, housing or hospitals;

    2) Take a ‘carried interest’, which effectively means the mining company loans the government the money to buy the shares, with the condition that it is paid back in reduced tax revenues – the trade-off here being that Zambians in the future will get less tax revenues (an inter-generational concern you recently highlighted in another article);

    3) Take a ‘free interest’ which means the mining company gives 25% of the project to the government for free. This sounds like a great idea for the government, but also involves trade-offs: a free interest means the company is putting in 100% of the cost of exploration and development, but gets only 75% of the return. This is effectively a large tax on the company. This is fine, but the effects of this should be considered alongside any analysis of the tax regime. One of the questions here is it better to get the money through the ZRA or get it through ZCCM-IH. Which do you prefer? And trust?

    There are more concerns, including the timing of revenues, and the rights of minority shareholders in influencing company decisions (often seen to be disappointingly poor), but lets at hope that some of these are considered carefully.

  2. MMD Mwale, PF Simuusa, and now PF Mukanga...

    a lot of talk but zero action

    In any case, what is the point of getting stake in mines if international mining companies pursue tax evasion, tranfer pricing and keep mining revenues ?

    I just see this bullshit going on as being smokescreens, really.

    Just an example ZCCM-IH hold a 20% stake in Kansanshi Mining, the most profitable Mining Company in Zambia. The ZCCM-IH stake in Kansanshi currently represents $550,4 million in undistributed profits attributable to the Zambian holding, a sum that increases by more than $100 million per year. However the majority owner First Quantum Minerals (FQM) insists on conserving this money as a legal reserve and only distributes derisory dividends to ZCCM-IH in spite of having made more than $2,5 billion in net profits in recent years and having totally recovered its investment in the mine.
    Through a financial trick, the polling cash, FQM is using Zambia's money to build the world's largest mining corporation by buying other mining companies outside Zambia.


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