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Sunday, 8 June 2014

Mining Developments (Production, Revenues, Taxation)

Zambia's copper production is expected to reach 1.5 million tonnes in 2016 due to investment in mining infrastructure and technology. Zambia Extractive Industries Transparency Initiative (ZEITI) says the increase will also be driven by the opening of new mining projects and increased foreign investment in the country. Zambia is currently the world’s sixth largest copper producer with around 0.8m tonnes [Source: Daily Mail]

Mining Minister Christopher Yaluma says there will be a serious improvement on mining tax collection this year due to increase in copper production. However he says that how much is ultimately collected on the processes GRZ has put in place. In his words, "if we are careless, we won't account for quite a good number of tax". Yaluma says givernment has rejected the introduction of a windfall tax because "it is [less] favourable to the government operation" [Source: The Post]

Charles Milupi [ADD] has attributed the Konkola Copper Mine Plc and Vedanta Resources saga to government’s failure to reintroduce windfall tax. Mulipi says, “Windfall tax works throughout the world, it taxes the windfall gain and that is why the structure of the windfall tax we had here in Zambia was a very straight forward issue....I dealt with windfall tax in details at committee stage in Parliament, it looked at the average production cost on the mine...I have been one of those few individuals who have been giving pressure on Rupiah Banda administration when the cancelled the windfall tax immediately after succeeding late president Levy Mwanawasa, I stood firm in Parliament and said it was wrong. I continued with PF come into power but it also refused to reintroduce the windfall tax" [Source: Daily Nation]

The Norwegian government is working with Zambia Revenue Authority (ZRA) special mining unit in up scaling capacity and competencies in the mine tax systems in Zambia. The project is allegedly aimed at ensuring Zambia "gets the right taxes to demand from the large mining companies". They are also working at establishing a system of how much is being processed to avoid double counting, by defining appropriate percentages of copper ore and other minerals. The data collected in the past has not been clear on how much ore is being churned out per year from different mines and ore bodies in Zambia. [Source: Times]

Britain's Consolidated Nickel Mining and Investments Limited is this month expected to start operations at the defunct Munali Nickel Mine in Mazabuka as the major shareholder. Mines Minister Christopher Yaluma says the firm has entered into an agreement with former owners Jinchuan Group of China to take over the mine. Operations at Zambia’s sole nickel mine were paralysed in 2011 due to the plummeting base metal prices on the global market [Source: Times]


Who is correct on mineral taxation revenues - Christopher Yaluma [PF] or Charles Mulipi [ADD]?

Chola Mukanga
Economist | Consultant | Researcher
Copyright © Zambian Economist 2014


  1. Check out the cash cost for KCM in the Vedanta annual report, and then check the cash cost in the FQM report. The KCM is an old and terrible costly operation. It may produce a lot of copper, but it will not produce huge windfall profits unless copper prices shoots up to its former peak.
    So a windfall tax will most likely not hit KCM at all, but it could hit some other companies hard. Unfortunately there is no tax on bragging and unpolite behavior in the Zambian tax code, which probably is fortunate for the Indians.

    1. Windfall tax will mostly hit highest copper producers irrespective whether they are highly or marginally profitable mines as it is based on revenue. Lets take an example of KCM and Kansanshi and make the following assumptions:
      1) Both KCM and Kansanshi produce same quantity of copper i.e 200,000 mt
      2) Kansanshi being low cost producer has full cash cost of $1.5 per pound and KCM, high cost producer has $2.2 per pound * 1 pound to about 2,200 tons.
      3) Copper selling price is $3.8 per pound or $8,360 per ton.

      Windfall tax would be ($3.0-$2.5= $0.5 x 90.9 (200,000 tons) @% 25) +($3.5-$3.0=$0.5 x90.9 (200,000tons) @50%) +($3.8-$3.5=$0.3 x90.9 (200,000tons)@25%) or simply $264 million for each mine bringing the total windfall tax for the 2 mines to $ 528 million.

      Please take note that this is not the final tax as we have not accounted for (1) mineral royalty (2) corporate and (3) variable profit taxes. since we have full cash costs for both mines below are the applicable taxes:

      Tax type Kansanshi KCM

      mineral royalty (6% of copper sold) 100 100
      windfall tax 264 264
      corporate tax@ 30% 303 172
      marginal profit tax@15% 132 65
      Total tax 799 601

      So there you go, kansanshi paying $ 799 million in taxes out of $1 billion profit representing 80% effective tax and KCM paying $601 million in taxes out of its $472 million profit representing 129% effective tax.

      Let me end here so that other people may look at this analysis and make suggestions.


    2. The Windfall Tax would be the only tax they paid.

      It is very efficient, and I haven't seen a mine with a cash cost per pound at or higher than the taxable levels.

      According to The Post, the Windfall Tax is a progressive tax that consists of the following levels:

      " For copper, the windfall tax was pegged at 25 per cent at a price of US$2.50 per pound but below US$3.0 per pound, 50 per cent for the next 50 cents increase in price and 75 per cent above US $3.50 per pound. "

      0,00 - 2,50 00% = $0,00
      2,50 - 3,00 25% = $0,125
      3,00 - 3,50 50% = $0,25
      3,50 - (4,50) 75% = $ 0,75
      (Total: $1,125)

      So if the copper price is $4,50 per pound, that taxes paid are $1,125 (=25% of turnover). Notice that at no time, taxes can be levied on the price below $2,50, which means that the cash cost is pretty much covered all the time.

      Cash Cost Per Pound

      In 2011, the Cash Cost Per Pound was

      $1,69 at Kansanshi Mine

      According to Boursorama"

      $0,90 at Kansanshi and
      $1,00 at Konkola

      As you can see, none of them come close to the $2,50 at which the Windfall Tax with even start to be applied.

      In fact the threshold could comforably be lowered to $2,00 per pound, and they would still be making a profit.

  2. Oh I see MrK, The Post says Windfall Tax would be the ONLY tax paid does it? And there we all were thinking that Royalty and Profit Tax still applied in addition.

    Whichever way round it is:

    I think we can all learn from this:

    Peru proposes new tax stability contract for big miners – Reuters

    Peru's President Ollanta Humala proposed a new tax stability contract for mining companies that would lock in taxation rates for 15 years on investments of at least $500 million, legislation published on Thursday showed. The measure is part of a package of reforms Humala is asking Congress to pass urgently to boost private investment in the Andean country as its economy slows on a drop in mining exports. The legislation broadens existing tax stability contracts as well to cover additional investments, such as mining expansions. Humala's ruling party usually finds support from opposition lawmakers in to push his economic proposals through Congress. Global mining companies rolling out big projects in Peru in the coming years, such as Southern Copper, MMG Ltd and Newmont Mining, would likely benefit under the new tax stability system, said Jose Miguel Morales, the director of Peru's main mining association. "It's a good legislative proposal that will promote investments," Morales said, adding that more should also be done to encourage local companies and smaller projects. Other measures in the reform package unveiled by Humala's government last week include redoubling efforts to reduce red tape, improving transparency and relaxing environmental regulations. The credit ratings agency Moody's Investors Service said earlier this week that the reforms were "credit positive," as they would put Peru on track to boost potential output without increasing spending. Peru's economy, which expanded by more than 6 percent during most of the past decade, grew by 4 percent in the first four months of 2014 from the same period a year earlier. The finance ministry and central bank, which initially predicted an economic rebound early this year, have said they now expect to see stronger growth in the second half of 2014. Mining makes up about 15 percent of Peru's gross domestic product and 60 percent of the Andean economy's total exports. The global copper, gold and silver exporter has a mining investment pipeline of more than $60 billion, according to data from the energy and mines ministry. (Reporting by Marco Aquino; Editing by James Dalgleish and G Crosse)


    1. " Oh I see MrK, The Post says Windfall Tax would be the ONLY tax paid does it? And there we all were thinking that Royalty and Profit Tax still applied in addition. "

      No they don't, it's implied. You cannot tax people more than their income, or they literally go out of business. The Windfall Tax only kicks in well after the mining companies break even.

      " I think we can all learn from this: "

      We can learn that neoliberal economics do not work.

      " reduce red tape, improving transparency and relaxing environmental regulations. "

      Translation: make what is now a crime legal, and externalise the cost of doing business to the taxpaying public in the most damaging and costly way possible, by polluting to your hearts content (like dumping chemical waste into the river).

      " Global mining companies rolling out big projects in Peru in the coming years, such as Southern Copper, MMG Ltd and Newmont Mining, would likely benefit under the new tax stability system, said Jose Miguel Morales, the director of Peru's main mining association. "

      Newmont Mining, where have I heard that name before. Oh I remember, Newmont Mining was one of the financiers of Anglo-American Corporation, when it was founded by Sir Ernest Oppenheimer and J.P. Morgan.

    2. Thats exactly the point, though, Mr K: the Windfall Tax was introduced in 2008 with all other taxes still applying. Even worse, it was made non-deductible when calculating profits for Profits Tax and Variable Profits Tax. The result of that was marginal tax rates when prices exceeded $3.50/llb were over 125%. As you say, not feasible to tax people more than they earn. Thats what the mines are frightened about now, that the same critical mistakes will be made and impossible tax rates applied.
      Its interesting to look at your calculation above, because Kansanshi would pay more under the current tax regime than under your Windfall Tax. If the mine is paying all of the taxes(and I know thats a big if) then the taxes on mining in Zambia are amongst the highest in the world.

  3. But that's exactly the point, Mr K. With the 2008 Windfall Tax, all of the other taxes still applied. Worse than that, the Windfall Tax wasn't deductible in calculating profit taxes. The result was that the tax payable at the highest level was more than 125%. You would simply never sell copper for more than 3.50llb whatever the market price was. That's why it was abolished so quickly, and it's why the mines are so negative about it now.
    Your calculation of Kansanhis taxes is interesting, because they would pay more under the existing regime. The taxes in Zambia are very high - if you're a mine that pays all of the taxes.

    1. " With the 2008 Windfall Tax, all of the other taxes still applied. "

      Well they don't have to be. Just as a windfall tax can be introduced, so other taxes can be (and frequently are) repealed.

      If that didn't happen at one time, it doesn't mean it cannot be done at another time.

      The argument still stands - the Windfall Tax is the most efficient, easily collected, and easily calculated tax.

      It will bring much more revenue to the state, and take a huge burden off the ZRA.

  4. Hey people, it appears obvious that many stakeholders especially those with the interest of ensuring that Zambia maximizes revenue from its mineral resources would rather go the route of windfall taxes.The challenge with the 2008 windfall tax was that mining houses would end up paying exorbitantly higher taxes (above 70%).This windfall tax was not "tax deductable" meaning it was a separate tax altogether and could not be used to reduce taxable income when computing corporate tax. Mineral royalty tax although revenue based just like the windfall tax is tax deductible meaning that before you compute your corporate tax one has to deduct the mineral royalty paid to arrive at a figure called "taxable income" upon which taxation is based.

    By the way the most expensive mine to operate in Zambia is lumwana mine which has a full cash cost(C3) not (C1) of $2.97 lb. Remember the owners(Barric Gold) recently shade off $3 billion from its assets which Equinox sold to them at an exaggerated price of $7 billion.


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