Zambia has long been regarded as the safest place in sub-Saharan Africa in which to invest and operate. It seems set to remain so in the years ahead, despite the headwinds that currently beset mining in general, as well as problems specific to the country itself. Rod James reports.

Zambia copper

Mining is a major contributor to Zambia’s economy. Copper is responsible for around 80% of the foreign earnings, and despite the metal’s low prices, BMI Research forecast a real GDP growth of 6.0% in Zambia over 2015. BMI’s report, published in July, concludes that private and government consumption are likely to remain key drivers of that growth, and a resilient domestic demand, coupled with a stable inflationary environment, will help offset any export weakness.

Challenges to come

However, the report also makes clear that Zambia will face some challenges along the way. The country’s “current account” will end 2015 significantly further in the red, having almost doubled to $711m, as the deficit as a proportion of GDP grows to 3.3%, up from 1.5% the previous year. Though this will drop to 2.4% in 2016, it will not be in the black for another two years. The sharp decrease in global prices for copper, which has seen it trading close to its support level, has been a significant factor in this, and so too has falling production. But of late, the Zambian mining sector has had two quite different concerns altogether – politics and power.

Mineral policy

The country’s president, Edward Lungu, won a narrow victory in January 2015, having stood on a populist manifesto which supported earlier moves to scrap corporate income taxes but force royalties of 8% on underground mines and 20% on open-cast operations. The threatened hike in royalties brought widespread warnings of closures and huge job losses before the standoff was eventually broken by the reinstatement of income tax and a major reduction in royalty rates – though both at slightly higher rates than before.

Some have speculated that the next presidential election, due in 2016, might see taxation and mineral policy again feature strongly in the campaign as it has elsewhere across the continent, with governments attempting to get a greater share in their natural resources. However, Zambia perhaps more than most is unlikely to want to bite the hand that feeds it. Mining accounts for 12% of GDP and 10% of employment, and according to industry figures, from 1997 to 2013 it drew $12.6bn of foreign investment, helping to turn the country into one of Africa’s top performing economies.

Common sense prevails

“Zambia is keen to encourage more mining, and with the sector key to the economy the government can ill afford to discourage mining,” says John Meyer, analyst and partner at SP Angel.

Meyer says that the royalty rate hike was specifically aimed at stopping Vedanta, and possibly Glencore, from taking advantage of transfer pricing, but the unintended consequence was for an unsustainable rise in taxes for all miners, even though the government claimed some miners might be better off. With the issue now resolved, he says that they do not expect to see any further radical changes over the next few years. “Zambia is a sensible economy,” he says.

It is a sentiment broadly echoed by Jeremy Wrathall, head of Global Natural Resources London, and mining team leader at Investec Bank.

“The Zambian Government have always shown themselves to be pragmatic – that’s always been their way – and certainly since privatisation in 2001 they have tried to impose ridiculous taxes. They haven’t worked, and they’ve responded to the industry.” Wrathall does not think that there is anything to suggest that they will stop listening in future.

Underpowered

Unfortunately, no amount of political pragmatism is a match for the vagaries of nature, and with water levels at the country’s hydro electric plants perilously low after drought, the country’s miners have been forced to confront the prospect of restrictions of supply. It has already seen the power allocations to First Quantum Minerals’ Kansanshi and Sentinel operations cut by almost a quarter, leaving both operating at reduced capacities and facing significant potential cuts to production.

The immediacy of the situation should, of course, be remedied once the rains come, but it highlights a more persistent legacy of decades of underinvestment by the state-run Zambia Electricity Supply Corporation that has left capacity insufficient, transmission losses high and reliability low.

Now, however, there are major moves afoot to combat the shortages and improve and extend the network infrastructure, with a number of new power stations being developed and a range of projects planned, including a 2,300km interconnector to bring energy from Kenya to Zambia. While there is clearly still some way to go – transmission and distribution losses currently amount to over 16% and are not predicted to fall below 13% until 2024 – BMI take the view that “the outlook for Zambia’s power sector is generally positive” which, by extension, is good for mining too.

Future prospects

There will, nevertheless, be some changes for the industry. Wrathall feels that the copper prices we are seeing now will be here to stay for at least the next three years, and that this will put pressure on grade, rendering some of the particularly low-grade ore bodies effectively uneconomic.

“The copper market is probably over-supplied for the next couple of years, but not massively.”
He thinks that with many of the existing operators curtailing exploration, and the financial climate unfavourable for another Sentinel or Konkola deep to be developed, the focus will be on smaller deposits. This will, he suggests, be the pattern the world over, and it will have major implications for copper mining in general and for Zambia in particular, since he believes that it will be the making of the next cycle.

“The copper market is probably over-supplied for the next couple of years, but not massively, and nothing like the same as iron ore or coking coal or aluminium or nickel. Copper’s fundamentals are pretty attractive still and if you get companies pulling in their horns, not pre-stripping, and cutting cap-ex, and not building these mega-projects, then the copper market will become under-supplied quite quickly2019/20. So it starts to look very attractive and the market will start to think about that in 2016/17,” Wrathall predicts.

Investment potential

So what does that mean for future investment? Jackson Sikamo, country manager at Chibuluma Mines, is upbeat on that question.

“Foreign direct investments will continue to play a major role in the mining industry,” Sikamo says. Looking beyond today’s commodity price and power supply problems, he believes that the medium to long-term prospects are bright.

Wrathall agrees. He says that when people start looking to invest in new copper mines, they will look to Zambia.

“In my view, it still remains one of the most attractive places to do business, because the government is sensible; they’re accommodating. It’s a very, very safe country to work in. It’s still geologically prospective. So yes, I think it’s still a great destination, probably one of the best destinations in Africa, if not the best for base metals.”

Source: mining-technology.com

The new proposed changes to the Mineral Royalty Tax (MRT) regime will enhance the collection of mineral revenue by the government rather than compromise it, Chamber of Mines president Nathan Chishimba said recently. Chishimba was reacting to a media statement issued by a consortium of civil society organisations advising government not to implement the new proposed Mineral Royalty Tax regime on the grounds that it is “investor-led” and will “not maximize revenue in times of commodity price booms”.

Chishimba praised the government for the new proposed MRT regime, saying it recognized the need to balance increased tax revenue with continued employment and investment in new mining ventures. “One cannot separate mining tax revenue from mining investment, because it is the mining investment which ultimately produces the tax revenue,” said Chishimba. “A good tax is one which balances these two competing objectives.” Commenting on the civil society’s statement that “we need to make the most of what we have while we have it”, Chishimba said this short-term thinking was not necessarily good for the Zambian economy.

“The largest amount of tax revenue is always generated over the longer term, and this can only happen if mining companies are incentivized to invest over the longer term.” On the view that the new proposed MRT regime will “not maximize revenue collection in times of commodity price booms”, Chishimba said this reflected a misunderstanding of the role of MRT in the overall tax mix.

“MRT is a tax on production, not profit. It is pegged at a relatively low rate, and is not designed to maximize revenues in times of commodity price booms. Governments collect most of their revenue in times of commodity price booms from profit-based tax, which is much higher.”

Chishimba said the government was on the right track with the proposed MRT regime, and urged civil society to view it in the larger perspective of ongoing investment, employment and economic development.
“One has to balance taking as much as one can now with having a thriving industry into the future, and the government has at last recognized this,” said Chishimba.

Source: Mining News Zambia

The Zambia Chamber of Mines welcomes the changes to the new 2015 Mines and Minerals Development (Amendment) Act which was passed by parliament last Friday.

The Chamber maintains its position that the question of having an equitable fiscal regime that promotes the competitiveness of Zambia’s mining sector is not a zero sum choice between Government on the one hand and the mining industry on the other. Rather, it is one of making appropriate and well thought out choices that will result in a vibrant and competitive Zambian economy that promotes overall growth in the long term for Zambia. Given the pivotal importance of the mining industry in promoting long term diversified economic growth, the mining industry supports the forward thinking policy shift by Government, which will no doubt bear fruit in time to come.

We also note that the Government’s decision marks a significant shift in outlook towards the sector, and it can only be of benefit to the industry and the economy in the longer term.

However, given the intense competition we face as a country from other mining jurisdictions in the world, more needs to be done to ensure long-term competitiveness and renewed investment in the mining sector, which is key to securing growth. We are sure that if the country maintains the same momentum as exhibited by the outlook that resulted in the most recent change to the fiscal regime, this should be achievable in the next few years.

We believe the prevailing low price environment continues to present significant challenges for the mining sector over the short to medium term.

The gesture by the Government is a good lifeline that will provide much needed relief. The simplicity, stability, predictability, and ultimately the attractiveness of Zambia’s minerals fiscal policy environment and taxation regime, is vital to providing the assurances these investments require, especially given that copper mining in Zambia is a high cost business.

For the mining industry, this is critical: the instruments used within a taxation regime, and the rates at which taxes are set, together establish the incentives and disincentives a mining company faces in deciding whether and how much to invest, how many workers to employ, and what ore to extract – which in turn can affect the life-span of the mine.

If Zambia is to attract this needed investment its mining taxation levels, particularly Mineral Royalty Tax, must at the very least lie within global norms. Given Zambia’s specific production conditions, many would argue that an even bolder approach is necessary.

Since 2000, on the back of rising copper demand from China, the Zambian copper mining industry has led the nation’s development, spurring GDP growth and helping to achieve annual growth rates of 7% to 10%. The industry has ploughed more than US$14 billion into new mining ventures and trebled the country’s annual mining output to around 800 000 tonnes. This mining growth has been key in taking government tax revenue from less than half a billion Kwacha in 2000 to a peak of K8 billion ten years later.

“We are the basket which holds all the proverbial eggs. Working together we have to create a high-growth, diversified economy which spreads risk and opportunities across the economy creates more jobs and widens the tax base,” said Mr Nathan Chishimba, President of the Zambia Chamber of Mines.

“As we are seeing in the current crisis, Zambia should not be relying only on mining for its future,”Mr Chishimba said.

We commend the government for this new spirit of dialogue and cooperation, and we look forward to continuing to work together to solve these and future challenges.

Source: Mining News Zambia