Zambia dispute reflects unease in African mining

 

Zambia is the latest country in the region to become embroiled in disputes over natural resource regulation with companies operating within its borders.

Tensions between the government and the lucrative copper mining industry are high due to uncertainty around changes to the country’s mining code – including royalty hikes and an ongoing dispute with corporates over VAT refunds – at a time when prices are sinking quickly.

With the end of the high prices of the commodities “supercycle” of the past decade, miners globally are looking to trim an estimated $20bn in spending over the coming year according to some estimates – with Africa primed to take the biggest hit. Copper prices, for instance, fell 12 percent in the first half of January 2015, after declining 14 percent throughout 2014 – while refining and treatment costs rose 30 percent in 2014 globally.

These trends appear to be at odds with the Zambian government’s efforts to take a greater share in mining profits.

“The government has hiked rates at precisely the wrong time as the copper price has slumped to the lowest it’s been in five years,” David Manley, economic analyst at the National Resource Governance Institute, tells This Is Africa.

The new regulations, which were passed in December during the interim following the death of former president Michael Sata in October 2014, were slated to come into force in January 2015. The reforms would have seen royalty rates increase from 5 percent to 8 percent for underground mines and 20 percent for open-pit mines.

Following January’s presidential by-election, the new government of President Edgar Lungu has made statements indicating it may be rethinking the rate hikes – further contributing to uncertainty within the sector. However, the other bone of contention remains far from settled: mining companies claim that Mr Sata’s administration withheld $600m in VAT refunds due to companies through a creative interpretation of the country’s legislation.

The government denies this. According the Africa Progress Panel, Zambia is losing $2bn per year in mining revenues to corporate tax avoidance. Copper accounts for 60 percent of Zambia’s exports, yet the country only collected $240m in taxes from the sector in 2011 – the equivalent of 2.4 percent of revenues from mineral exports. The royalty hike was instituted in part in order to try and recoup these shortfalls. Companies have cried foul, and the country’s mining industry association claims Zambia could face losses of up to $1bn in export earnings and 12,000 job cuts as fallout from this latest dispute. Often such threats from the sector are overblown. In the case of Zambia, uncertainty has been such a long-standing feature of the landscape that analysts are “not sure that there has been a significant change in the country’s perceived riskiness – simply because investors are actually already wary of Zambia”, according to Mr Manley.

 

Reopening contract

 

Zambia’s timing might be ill-chosen, but disputes like these are not uncommon across Africa. Governments have often tried in the past few years to take a greater share in their countries’ resource wealth by reopening contract negotiations, often arguing that companies did not negotiate fair terms with predecessors. Miners, for their part, seek to maximise profits in what they argue are often highly risky and unpredictable investment environments.

However, the balance of these conversations might now be shifting. During the supercycle, governments often had the upper hand in contract renegotiations. 

The potential profits to miners were so high that they were willing to tolerate higher levels of risk and uncertainty in order to hold on to their concessions. 

As prices fall, that calculus – and the balance of power it entails – may no longer apply.

“Zambian leaders may have underestimated the extent that investors demand a reliable policy partner in government. In the current environment, companies may be more willing to mothball operations and sell marginally performing sites in a bid to maintain profitability,” says Charles Laurie, head of Africa at risk firm Verisk Maplecroft.

Companies have incurred real losses. First Quantum, which operates Zambia’s highest output mine, is likely to see their share prices drop by between 21 and 43 percent, according to analysis by Barclays Bank. Vedanta Resources, which has two mines in Zambia, saw profits from Zambian operations cut by nearly $100m in 2014, and is in the process of reviewing its operations in the country on the back of a 23 percent price slump.

Up until now, threats by companies to exit Zambian operations have proved hollow. However, “the damage done from this dispute and previous ones in terms of new investment has not been measured and may be significant”, according to NRGI’s Mr Manley. However, with copper prices as low as they are, this time “threats may be more genuine”.

Early indicators are First Quantum’s decision to suspend plans to double investment in their Zambian smelting operation. 

In October 2014, both Glencore and First Quantum suspended Zambian copper operations, holding back investments worth some $2bn due to the ongoing tax disputes. Barrick Gold is shuttering the Lumwana copper mine.

These signs reflect a wider pattern of divestment away from African metals by major global mining companies. BHP Billiton, the world’s largest mining company, is working to spin off its African holdings into a new subsidiary called South22.  Anglo-American PLC plans to sell of strike-hit platinum mines in South Africa after losing nearly 40 percent of its profits in 2014.

After relying so heavily on extractives to generate growth, many African economies are looking to diversify over the long term. Short term, however, attempts to squeeze extractives companies for greater revenues are often responses to more immediate needs. 

This is the case in Zambia, where overspending by the government has allowed public debt to balloon to 31.8 percent of GDP.

However, despite their fiscal difficulties, pressuring the mining sector too hard now may be imprudent.

“Investors in Zambian copper are reeling from sagging commodity prices and a turbulent policy environment. 

In the eyes of some mining companies these factors are making the Zambian government look increasingly unattractive as a partner,” Verisk Maplecroft’s Mr Laurie warns.  – This is Africa

March 2015
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