Mineral royalties spark debate

The government has hinted that it intends reviewing the mineral tax following robust improvements in copper sales on the London Metal Market-reaching its high US$8,000 per tonne since the 1970s.

Key mining firms, such as Meterox of South Africa, Canada’s First Quantum and London listed Vedanta Resources, operating as Konkola Copper Mines (KCM), argue that they would resort to legal advice should the government review the mineral royalties, contrary to the development agreements signed.

Meterox, a base metal firm, said it would turn to legal advice when assessing their response to government when it formally informs them about their intentions.

Meterox Chief Executive Officer, Charles Needham, said one of the conditions of the privatisation of mines in 1997 was the stability clause that embraced a

0.6 per cent royalty for 15 years and reviewing royalties midway was contrary to these agreements.

“We would certainly have a long discussion about whether that prejudiced our rights under the privatisation agreement,” said Needham.

According to Needham, so far there has not been any official notification of changes to the royalties payable by mining companies.

Finance and national planning minister Ngandu Magande explained recently that the boost in copper sales on the LME, particularly to China and the Far East had prompted the government to review the royalty tax and require proceeds to be ploughed back into communities where investors are operating.

He said the country had no choice but to review upwards royalties for the national treasury to reap maximum benefits, noting that at the time of signing agreements, the price of copper fetched US$3,000 per tonne.

But Meterox said its mining assets in Zambia were substantial, added with the production of 8,000 tonnes of finished copper up to June this year at its Chibuluma South mine, lying 400kms north of Lusaka.

Toronto and Vancouver listed, First Quantum minerals Operations Limited director of operations, Matt Pascall expressed uncertainty whether the mineral royalty would apply to signatories of the royalty stabilisation agreement.

Pascall argued that lowering royalty taxes was one of the incentives offered to foreign mining investors to purchase the mines, and then under privatisation at the time the mining conglomerate, ZCCM was losing US$1 million per day as sustainability measure.

He explained that since then price of copper has buoyed threefold and the government was still benefiting. First Quantum too, would consider protecting its rights if the government were to change its position on the royalty.

“When we signed the agreements, there was a clear understanding that maintaining lower mineral royalty was one of the incentives and if there is a change of position, we’ll have to change our position on the matter,” Pascall said.

Vedanta Resources, equity partner in the Konkola Copper Mines-with 49 per cent shareholding warned the government against unilaterally reviewing the agreements to increase the royalty tax because they were protected legally.

Outgoing Chief Executive Officer Chadra Krishnan said although it was the prerogative of the government to undertake various measures to develop the industry warned against review of the tax because it was protected.

“We don’t mind the government reviewing various policies in the sector but the issue of mineral royalty tax is one of the issues agreed in our development agreements and it must respect that,” said Krishnan.

Critics argue that an increase in royalty tax would dent the government’s image of investor-friendly approach to the international mining firms and offshore investors.

The critics argue that investors were sensitive on matters that affected their business and prefer stable policies and an ideal environment than speculative.

“The government should dialogue with investors and explain thoroughly why it wants to review part of the agreements abruptly because such incentives prompted them to offload the money on the Zambian market,” said David Punabantu, a local researcher and economic commentator.

November 2006
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