Zambia seeks to milk, not kill, mines

Governor Caleb Fundanga said although the intention to review mineral royalties upwards was a gain to the country, it should be done cautiously and avoid frustrating the existing and prospective investment destined for Zambia in the mining industry.

Fundanga said he favoured the government’s intentions to review upwards to about 3.5 per cent from 0.06 per cent slapped in mineral royalties because the country needed to earn “real returns” while the price is high.

“We should not rush into taking injurious actions but ensure that we all benefit from the high copper prices because investors have obligations to pay their loans.

The government must look at the long term effects of such an action so that the relationship is maintained,”

The government has announced it seeks to review the mineral royalties upwards and plough the returns into various sectors like health, education and agriculture.

Finance minister Ngandu Magande said recently, the decision was being reconsidered because the base metal has gained grounds on the metal market, surging to an average US$8, 000 per metric tone with increased demand from China and the Far East.

The government was also reviewing other taxes, which firms were exempted from paying when they received mining licences and that mining companies had been informed about the impending increase before the end of 2006, according to Magande.

The government was reviewing what was agreed upon hence the need to go back to the negotiating table with mining firms and other parties involved, changing things to suit the current environment.

Magande noted that prevailing mineral royalties in the world averaged between 2.5 per cent to 3.0 per cent and that the review would be done in the interest of all players to harmonise the situation.

He said a number of factors had been taken into consideration before deciding to review upwards the mineral royalties but that time had come to review development agreements in line with the current trends in the Zambian economy.

He defended the decision by the then government authorities over the mineral royalties noting that if the decision was not taken the economy would have collapsed.

In the aftermath of privatization of the mining conglomerate, Zambia Consolidated Copper Mines (ZCCM), the price of copper on the international market had slumped to an all time low of US$3, 000 per metric tone, prompting the government to initiate a recovery period to last until 2007.

The mining labour movement has supported the government’s decision on mineral royalties arguing that there is need for the communities and various sectors like health and education to benefit from the high earnings from the base metal sales.

Mine Workers Union of Zambia (MUZ) Rayford Mbulo said at the time of signing contracts, copper prices and production levels were low. The increased copper prices prevailing compelled the government to renegotiate contracts to get a fair deal.

“These investors should show good corporate citizenship by investing in infrastructure development, as was the case with ZCCM,” said Mbulo.

Under the existing mining agreements, the government ‘could only renegotiate the contracts’ after the stabilization period in December 2007.

However, some foreign mining firms operating in Zambia are concerned at the planned decision to revise upwards the royalties arguing that the current prices on the international market were not sustainable.

London listed Vedanta Resources Plc and Toronto listed First Quantum mining Plc while supporting the intentions cautioned the government to recognise the terms under which the agreements were signed, some of which had not been brought to finalisation.

Vedanta Resources, 51 per cent equity partner in Konkola Copper Mines (KCM) and employs more than 10,000 sustentative workers and 4,000 contract

labourers, said a review upwards should not affect their contract and profitability.

“It should not make any material difference in our operations of projects,” said Vedanta Resources and KCM Chairperson Navin Agarwal.

He claimed their ‘contract’ with the government was protected under the shareholders agreement, which should be respected and honoured.

First Quantum, having invested more than US$15 million in Zambia since 1997 and employing a labour force of more than 9, 000 said the proposed revision of mineral royalty tax was uneconomical and a threat to development of the sector.

Other players urged the government to instead put up a new foreign management policy to ensure Zambian copper was bought in local currency to retain the value.

The chamber of mines contends that reviewing upwards the mineral royalty was unjustified because the new investors had changed the face of the industry with their increased levels of investment and modern mining methods, leading to increased production and subsequently high sales.

“These mines initially incurred a loss of US$85 million after they (investors) brought US$1.4 billion leading to some of the investors to pull out,” said Fred Bantubonse, head of the chambers of mines.

“The government should be cautious and not just change the law because there is some money at the bank because these prices may rise or fall.”

July 2006
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