Miners threaten Zambia over royalty hikePublished by MAC on 2014-10-18
Source: Bloomberg, Reuters, Business Report (2014-10-16)
Previous article on MAC: Zambian government seeks a better mining deal
Barrick Says Zambia Royalty Threatens Mine’s Viability
By Matthew Hill
16 October 2014
Barrick Gold Corp. said plans by Zambia, Africa’s second-biggest copper producer, to more than triple royalties for the company’s local unit will threaten the viability of its Lumwana mine.
The southern African nation’s finance minister told lawmakers last week he planned to replace corporate income taxes for mines with higher royalties from Jan. 1. The current rate of 6 percent for all mines will rise to 8 percent for underground mines and 20 percent for open-pit operations, Alexander Chikwanda said.
“Lumwana is a low-grade, open-pit operation with constrained margins,” Andy Lloyd, a spokesman for Toronto-based Barrick, said yesterday in reply to e-mailed questions. “Applying a 20 percent royalty rate on Lumwana would seriously challenge the economic viability of the mine.”
Zambia wants to ensure it receives more revenue from mines that government officials and charity groups have accused of avoiding taxes, claims that companies operating in the country have denied. Charging a higher royalty on sales and removing profit-based tax will ensure money is more equitably shared between mining companies and the government, Chikwanda said in his budget presentation.
Barrick, the world’s biggest gold producer by output, acquired Lumwana when it bought Equinox Minerals Ltd. in 2011. The copper mine has disappointed, prompting Barrick to take a $3 billion writedown in 2012 after costs were higher than expected.
Double the Tax
While Barrick has said it saw improved performance at the mine last year and is targeting further gains, processing of ore was interrupted this year for about three months after a partial collapse of a conveyor belt.
If the Zambian royalty was applied to top-line revenue, it would reduce Barrick’s estimated net asset value by about 3.7 percent, Greg Barnes, a Toronto-based analyst at Toronto-Dominion Bank, said in a note on Oct. 14. At current copper prices, the proposed royalty would almost double the tax burden on Lumwana, Barnes said.
The Lumwana mine, in Zambia’s Northwestern province, produced 260 million pounds of copper last year.
First Quantum Minerals Ltd. (FM), which got 52 percent of its revenue in 2013 from Zambia, according to data compiled by Bloomberg, has also warned that the new tax system will hurt mines in the country. Glencore Plc and Vedanta Resources Plc also have mines in Zambia.
Barrick “is hopeful that the Zambian government will carefully consider industry concerns as part of the budget consultation process now under way, to arrive at a solution that maintains the viability of Lumwana mine and allows for further investment in the country’s mining sector,” Lloyd said.
The government will follow a process before the tax changes are implemented, and “the window is still open for discussion,” Kayula Chimfwembe, chief budget analyst at Zambia’s Finance Ministry, said in a speech this week in the capital Lusaka.
Zambia’s biggest foreign investor warns on royalties
15 October 2014
Zambia’s largest foreign investor, Canadian mining group First Quantum Minerals, warned yesterday that the decision to raise mining royalties from 2015 would discourage future ventures and hit jobs.
Zambia would increase underground mining royalties to 8 percent from 6 percent from next year as part of an effort to revamp the industry’s tax system, Finance Minister Alexander Chikwanda said in his 2015 budget speech last week.
“On the face of it, the new system doesn’t incentivise investment in new capital projects,” First Quantum Minerals Zambia government affairs manager John Gladston told Reuters.
Gladston said the new tax system in Africa’s second-largest copper producer – affecting both underground and opencast mining – would inevitably lead to fewer new jobs and less opportunities for wealth creation for Zambians.
First Quantum had already delayed investment projects worth more than $1 billion (R11bn) in Zambia due to uncertainty over the fiscal regime, a director said in June.
“The budget address served to confirm the sagacity earlier this year of First Quantum’s postponement of additional major capital projects in Zambia,” Gladston said.
First Quantum would wait for the actual implementation of the 2015 budget in order to analyse the full impact of the new tax system, he said.
Zambia’s Chamber of Mines said last week that the hike in royalties would have a negative impact on operations, as the mineral royalty tax was on gross revenue, not on companies’ bottom line. That meant it did not take into account operating costs, which had risen sharply for the sector.
The new system aims to collect revenue from the industry at different stages of the production pipeline by introducing a 30 percent corporate processing and smelting tax.
Another 30 percent tax would be applied to income earned from “tolling”, which is industry-speak for an agreement to process another producer’s raw materials. Opencast mining operations in Zambia would also be subject to a 20 percent mineral royalty as a final tax.
Zambia’s mine tax system was already in focus as a result of a simmering row with producers over VAT refunds. Zambia has been withholding $600 million owed to mining firms after companies failed to produce import certificates from destination countries.
The Finance Ministry has since said it planned to waive the requirement because it was impractical, but no refunds have been made yet.
Zambia to change mining tax, lift underground royalty to 8 pct
10 October 2014
LUSAKA - Zambia will increase underground mining royalties to 8 percent from 6 percent as part of an effort to revamp the industry's tax system, Finance Minister Alexander Chikwanda said in his 2015 budget speech on Friday.
The new system he outlined aims to collect revenue from the industry at different stages of the production pipeline by introducing a 30 percent corporate processing and smelting tax.
Another 30 percent tax will be applied to income earned from "tolling", industry-speak for an agreement to process another producers raw materials.
Open cast mining operations in the southern African nation will now be subjected to a "20 percent mineral royalty ... as a final tax," Chikwanda said.
The tax system in Africa's second largest copper producer has been in the spotlight amid a simmering row over VAT refunds.
Zambia has been withholding $600 million in VAT refunds owed to mining firms after companies failed to produce import certificates from destination countries.
The finance ministry has since said it plans to waive the requirement because it is impractical, but no refunds have been made yet.
Chikwanda said the government wanted "an amicable resolution" to the VAT spat.