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Wednesday, 15 October 2014

A new mining tax regime

Finance Minister Alexander Chikwanda last week delivered the Budget Statement 2015. As the Post newspaper already revealed, government is reducing its share in ZCCM-IH to 60%. Chikwanda also appeared to signal that the contentious VAT rule is here to stay. The big one of course is the redesign of the tax regime for mining operations by replacing the current two tier system with the following mining tax structure:

(a) 8 percent Mineral Royalty for underground mining operations as a final tax;
(b) 20 percent Mineral Royalty for open cast mining operations as a final tax.
(c) 30 percent Corporate IncomeTax rate on income earned from tolling; and
(d) 30 percent Corporate Income Tax rate on income earned from processing of purchased mineral ores, concentrates and any other semi-processed minerals, currently taxed as income from mining operations

Effectively what the measures do is increase underground mining royalties to 8 percent from 6 percent. It has also introduced a 30 percent corporate processing and smelting tax. Another 30 percent tax would be applied to income earned from “tolling”, industry-speak for an agreement to process another producers raw materials.

The measures are clearly intended to increase Government income from the mining sector. It is also aimed at increasing transparency in the sector and achieve a "more equitable distribution of the mineral wealth between the Government and the mining companies".

The expected additional revenues, in 2015, as a result of these new measures are estimated at K1.7 billion. Mineral royalty taxes will generate K5.9bn in 2015. So the new proposals roughly accounts for around 30 - 40% increase in mineral taxes.

The changes to the mining tax regime will however not apply to mining of industrial minerals. That is geological materials which are are not sources of metals. They are used as additives in a wide range of applications (e.g. limestone, granite, kaolin).

The new mining fiscal regime will need to be studied carefully - unfortunately there has been no consultation again. So what we have is a PF policy proposal rather than a Zambian one. We would question whether such an approach will bring stability to this area.

What Zambia needs is a cross party approach. Only through producing a Green Paper on mining and allow wider public consultation can we find a lasting solution to this thorny issue. We need a comprehensive debate and policy. Not least because there are wider issues in mining such as policy on ZCCM-IH, indigenisation and industrialisation that require much thorough debate.

In the mean time the PF proposals do raise issues that we need to think about. For example, Chikwanda has eleminated the "windfall" element that was partly built into the "profit variable tax", albeit unsuccessfully. So in the event that copper prices were to rise substantially, Zambia would now be even in a worse position to capture such super normal rents. The new measures will definitely not make the debate on restoring the windfall tax go away.

Another area which needs careful debate is the likely impact of the new regime on greenfield investments. Open cast mining operations would now be subjected to a 20 percent mineral royalty as a final tax. This seems to be based on the lower cost of open-pit mines relative to underground mines. But no information has been provided on how Chikwanda has settled on this figure, and what analysis he has done on the likely impact of the new measures on medium and long term investment. Are we sailing in the dark?

We will pick up on the ZCCM-IH proposal and the macroeconomic issues in due course, as well as one or two interesting sectoral issues flagged up in the Budget.


What are your thoughts on the new fiscal regime for mining companies? Is this likely to stand the test of time?


  1. Dear Editor
    Thanks for this thorough analysis. Can I just add a couple of comments?
    You ask if these measures will endure: I think its unlikely. At current prices, my guess is that Lumwana will be distressed (negative cashflow) by these measures, and so will some of the underground mines. In an election year, PF won't want to be talking about large scale unemployment and so my guess is that there will be a compromise.
    If the price of copper goes down, which is quite possible at the moment, then most underground mines, and probably more of the open pits than Lumwana will be distressed.
    As you note, if the copper price goes up, these measures don"t address the windfall.

    Secondly, incremental investment in the sector simply won't happen. These are punishing tax rates, and on the face of it, don't allow an investor to recover his costs. The inflexibility noted above if the price rises or falls is inherently dangerous, as investors will see it as a source of instability. Investors always have choices and so will go somewhere else. Add to this the mis-management of VAT, which is something investors always look closely at, and you will see Zambia putting up a "Closed for Business" notice. Its a shame and doesn't need to be like this, but its not enough to continually blame the ZRA's capacity. Policy is critical!

    Finally, absolutely agree with you that a proper study is needed to arrive at a stable solution which is good for all parties. Such a study should involve foreign experts as one of the problems here is that the necessary expertise is not readily available in Zambia. The Hon Minister promised a review when he first took up his post, and apart from some work by the Bank of Zambia which consulted nobody, there has been nothing. He also talked about milking the cow, but not killing it. The cow is now badly at risk, and going through with these measures could well finish it off.

    Ironically, I would guess that a version of the Windfall Tax might have done it, with a stepped royalty (different rates at different prices) abolish VPT which wasn't doing what it was meant to do, and increase Profit Tax to 35% - but royalty must be deductible against Profit Tax, otherwise you end up with marginal tax rates over 100% as last time. That way, you get some mixture of progressive and regressive taxes, access to any upside, and some protection for the mines when prices fall. There are other options like this. Pure royalty, with a high fixed rate, is crude, dangerous and doesn't work for Zambia or for the investors.

  2. I am late to this thread as I have been busy mourning the collapse of Zambia as an attractive Foreign Direct Investment jurisdiction following the quite disastrous 2015 Budget speech by ABC some days ago now.

    I was bracing myself to explain to the readers of this blog as to why the proposed MRT only tax regime was such a disaster for Zambia when I stumbled across a quite excellent piece that some of you might have already read on the Zambia Reports by ‘Reasonata’ last week.

    It explains very eloquently why Zambia’s mining sector will now decline, at pace. I am in no doubt we are on the brink of seeing Barrick Gold’s Lumwana open-pit copper mine close, with the loss of countless jobs.

    In a nutshell:

    To illustrate why this tax doesn’t make sense let us work out the current profit margins of the mines. Respected financial reports give the world average cost per tonne from $5000 to $6000 for both open and underground. I will take the minimum cost of $5000 per metric ton for my computation. Then let us ascertain the current LME prices now standing at $6900 per metric ton. The net profit before tax is ($6900-5000=1900). Take this net profit of $1900 as a percentage of sales will give 30% Net profit on sales.

    If one now introduces a 20% royalty tax, we would have ($6900-20% Rt) = net sale of $5520. The new net profit will now be ($5520-5000) = $520. This represents a drop of profits by an incredible 66% – a sufficient amount to have any normal mining company running fast away from Zambia. The net profit percentage on sales will now be a mere 10%. It is worse for those at $6000 per tonne. And poor Konkola Copper Mine (KCM) has a whopping $7100 cost per ton, according to accounts year ended 31 march 2014.

    Well, there you have it. But it isn’t just this. The proposed tax system actively discourages capital expenditure on new and existing projects – the engine room that creates jobs. There is no way that investors will be incentivised to invest in capital projects when there is no prospect of clawing back their outlay. Why would they come to Zambia when everywhere else in the World puts in place mechanism to facilitate this?

    Please can someone ask the last foreign investor to turn the lights out when they leave?


  3. KAMPALA Uganda-- Barrick Gold Corp. may be forced to close down its Lumwana Copper Mine in Zambia if the government goes ahead with a plan to more than triple mineral royalties, the company said on Thursday, in sign that relations between mine investors and the government of Africa's second largest copper producer are worsening.

    Zambia's parliament is now considering a hike in mineral royalties to 20% from the current 6%, starting from January next year.

    A Barrick spokesman said that should the hike go ahead Lumwana would become unviable.

    "If enacted, the most likely outcome would be a suspension of operations at the mine, regrettably leaving thousands of local people without employment," the company said in a statement.

    Barrick's statement comes amid a dispute lasting nearly two years between the government and mining companies over tax rebates amounting to $600 million which has compelled miners such as First Quantum Minerals and Glencore PLC to put on hold expansion projects worth more than $1.5 billion, a glaring example of how much has gone wrong with the government's three-year push to squeeze more revenue from the mining industry.

    The development comes less than a week after the Chamber of Mines, an industry lobby group, representing Zambian miners, warned that the new royalty regime, which is charged on miners' gross revenue regardless of profitability, would force several mines to close down. Lumwana is a low-grade operation, which cannot afford royalties higher than the current 6%, company officials say.

    Barrick said in a report Wednesday that while Lumwana had contributed 75 million pounds out of the company's total global production of 131 million pounds of copper during the third quarter, the application of the new tax regime would challenge the mine's economic viability.

    The death of President Michael Sata this week has raised renewed uncertainty for foreign miners in the country. But investors hope that a change in leadership could bring a more investment-friendly tax structure, analysts say.

    Zambia's Finance Minister Alexander Chikwanda said in a budget report earlier this month that the government aims to achieve a more "equitable distribution of the mineral wealth between the government and the mining companies" with the royalty hike. Government officials couldn't immediately react to Barrick's concerns.

    Over the past five years, mining companies including China Nonferrous Metals Co., First Quantum Minerals, Glencore, Barrick Gold and Vedanta Resources have invested more than $6 billion in Zambia, breathing new life in the country's hitherto struggling mines. But recent tax measures and fiscal policies have rattled investors already grappling with spiraling costs of production, grappling with spiraling costs of production, driven by steep rises in the cost of electricity, fuel and labor, according to analysts.

    "The new tax regime is entirely unsustainable" said Jackson Sikamo, president at the Zambia Chamber of Mines "Our sincere appeal to the government is that the industry needs to be nurtured so that it continues to generate revenues to diversify our economy."

    Write to Nicholas Bariyo at


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