MAC: Mines and Communities

Zambia's bold move to rein in mining

Published by MAC on 2014-12-21
Source: Statement, Financial Post, Globe & Mail

Or is it foolhardy in the extreme?

It's hardly surprising that Barrick Gold is leading the charge against the Zambian government's decision to boost its royalties rate - from the
current six per cent to eight percent in the case of underground oeprations, and up to 20% for open-pit mines.

Along with Canada's First Quantum Coporation, Barrick warned of the consequences of doing this two months ago. See: Miners threaten Zambia over royalty hike

We've heard similar protestationss from Barrick before - threatening to close down mines, and even quit a "culprit" country (see for example: Tanzania: when the going gets tough)

Nor is it surprising that at least one industry pundit have come out in support of Barrick, dubbing the proposed legislation "toxic".

What's being ignored is the government's justification for this action.

Zambia's finance minister describes the current mining tax regime as being "open to all forms of tax planning schemes" - for which read evasion - "such as transfer pricing, trading through shelf corporations and tax havens", which "the country's revenue administration could not easily detect".

Mr Chikwanda goes on to say that "provisions on capital allowances and carry forward of losses in the current tax regime eliminate potential taxable profits".

He points out that "only two mining companies are currently paying company income tax, as most of them are claiming they were not in tax paying positions.

"The envisaged... changes would increase revenue collections from the mining sector to achieve a more equitable distribution of mineral wealth between the Government and mining companies.

"The regime [is] easy to administer by the revenue authority as it would focus on production levels and content of minerals instead of basing revenue collections from the sector on profits which had mostly not been recorded by mining companies".

Whether that will prove true in practice remains to be seen.

Meanwhile, Barrick alleges that the innovations would throw thousands of workers onto the scrap heap, robbing the country of vital revenues.

That's distinctly ironic, coming as it does from one of the leaders of an industry that has done its best to do exactly that for many years.

Nevers Mumba asks Lumwana mine owners to wait before closing it

20 December 2014

Movement for Multiparty Democracy President and Presidential candidate Dr. Nevers Mumba has made an impassioned appeal to Barrick Gold, the Canadian owners of the US$8 Billion investment Lumwana Copper Mine in North-Western Province to wait just a few weeks for the MMD to get back into government in January 2015 before they proceed with placing the mine on care and maintenance which is likely to result in laying off thousands of workers and untold hardship.

Speaking at a Press Briefing this yesterday, Dr. Mumba told reporters that during his term as Zambian High Commissioner to Canada, he had been heavily involved in the negotiations which had resulted in Barrick Gold bringing the huge investment to Lumwana, one of the biggest mines in Zambia on assets. He said if Barrick Gold pulled out as they are threatening, the impact on the economy would be catastrophic and result in a huge loss of revenue for the country and loss of employment for many workers. Dr Mumba was addressing the briefing fresh from the landmark Supreme Court ruling on 18th December 2014 which dismissed the suspension that had been slapped on him by a purported MMD National Executive Committee meeting and which in turn had adopted former President Rupiah Banda as MMD Presidential candidate.

Dr. Mumba said the MMD introduced and championed the introduction of private-sector, free market driven policies back in 1991 after the disastrous failure of the UNIP socialist policies which had left the mining industry on its knees. The MMD introduced new policies which immediately jumpstarted the economy and kept it on a firm footing until handover to the PF government. He said the MMD’s history through the years has been for a clear and stable investor-friendly investment policy framework which attracted global players to invest in Zambia resulting in a middle-income country by the time it was leaving office in 2011.

He said the PF Government neither has the vision, the skill-set nor clear policy direction to run the economy efficiently in a stable manner and hoped that Barrick Gold will give the MMD an opportunity to engage with them upon coming to power, to sit down and maturely negotiate a “win-win” arrangement that will benefit workers, the investors and the country at large.

He said the MMD platform on running the economy is well spelt out in the MMD Manifesto and successive MMD presidents have achieved successes because of the clear policy framework and have not deviated from the vision of the MMD founding fathers of the MMD, that of a prosperous and progressive standard of life for all. He said MMD back in Government will take an urgent and thorough review of all the PF policies which have created a hostile investor climate and put the country back on the path to prosperity which it left just 3 years ago.

Barrick Gold Corp to suspend Lumwana mine in Zambia amid huge royalty hike

Peter Koven

Financial Post

18 December 2014

Barrick Gold Corp expects to begin reducing the workforce in March, and to finish shutting the mine down in the second quarter. That leaves plenty of time for the government to change its mind and scrap the royalty hike before Lumwana goes offline.

Barrick Gold Corp. announced Thursday that it plans to suspend its Lumwana copper mine in Zambia because of a massive royalty hike introduced by the government.

The Zambian parliament passed legislation that eliminates corporate income tax but increases the royalty rate on open pit mines to 20% from 6%. Toronto-based Barrick has warned for months that this legislation, which takes effect in January, would make Lumwana unsustainable.

“The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana,” co-president Kelvin Dushnisky said in a statement.

“Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20% gross royalty, particularly in the current copper price environment.”

Barrick’s move puts pressure on the government to reverse its course. The company noted that the mine supports about 4,000 direct jobs and bought almost US$400-million of goods and services from Zambian suppliers last year.
“We sincerely regret the impact this will have on our people, as well as the communities and the businesses that depend on Lumwana, and we remain hopeful that the government will consider an alternative solution that will allow the mine to continue operating,” said Jim Gowans, Barrick’s other co-president.

If the new royalty regime isn’t changed, Barrick expects to take a writedown on Lumwana in the fourth quarter. The current carrying value of the mine is US$1-billion.

The company expects to begin reducing the workforce in March, and to finish shutting the mine down in the second quarter. That leaves plenty of time for the government to change its mind and scrap the royalty hike before Lumwana goes offline.

The announcement is yet another setback for Lumwana, which has been a disaster for Barrick. The company overpaid for the asset when it spent $7.3-billion to buy Equinox Minerals Ltd. in 2011. It then ran into huge operating problems and took a US$3.8-billion writedown on the operation last year.

Barrick did eventually make improvements at Lumwana, though 2014 has been a difficult year because of a production disruption and a difficult rainy season. The mine produced 75 million pounds of copper in the third quarter at cash costs of US$1.84 a pound.

TD Securities analyst Greg Barnes noted that a potential Lumwana shutdown would be “yet another hit” to 2015 copper supply, on top of recent production downgrades announced by BHP Billiton Ltd. and Rio Tinto Ltd.

“We believe that rather than a surplus for 2015, the copper market is moving closer and closer to a deficit, which should be supportive of the copper price,” he said in a note.

Copper prices traded at multi-year lows on Thursday of below US$2.85 a pound.

Tax hike, copper prices force Barrick to shutter Zambian mine

Rachelle Younglai, Mining Reporter

The Globe and Mail

18 December 2014

Barrick Gold Corp. said it will suspend operations at its Zambian copper mine and record an impairment charge after the African country’s government more than tripled its mining royalties.

The suspension is the latest setback for Barrick, which borrowed heavily to acquire the Lumwana mine in 2011, when copper prices were soaring.

The royalty on open pit mining in Zambia will jump to 20 per cent from the current 6 per cent, under a new law that will go into effect Jan.1.

“The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana,” Barrick’s co-president Kelvin Dushnisky said in a statement.

Barrick, which employs 4,000 workers at Lumwana, said it would start cutting jobs in March after giving the Zambian government the mandatory two-months notice. The mine will be idled by the middle of the year.

It is unknown whether Barrick will be able to renegotiate rates with the government before it shutters the mine.

Copper is Zambia’s main export. Other companies such as Canada’s First Quantum Minerals Ltd. and Swiss-based Glencore PLC also operate copper mines in Zambia. Both companies have already postponed investments in the country.

Although Lumwana is an open pit mine, it is one of the country’s more expensive operations. Barrick’s production costs averaged around $2.98 (U.S.) a pound so far this year. That is higher than the current copper price, which has been trading below $2.90 a pound due to weaker demand from China and a surplus of the metal.

“Lumwana cannot support a 20-per-cent gross royalty, particularly in the current copper price environment,” said Mr. Dushnisky.

At one point, Lumwana was seen as critical to Barrick’s growth. Now it has become a cautionary tale of an acquisition gone wrong. Since the day Barrick acquired the mine through its $7.3-billion (Canadian) Equinox Minerals purchase in 2011, it has been a headache for the company.

The acquisition pushed up Barrick’s debt levels and forced the company to raise equity to alleviate some of the burden.

Shareholders were confused over the gold company’s foray into copper, and drove Barrick’s stock down. The company has had to write down $3.8-billion (U.S.) in costs related to Lumwana.

The fresh impairment charge, which will be recorded in the fourth quarter if Zambia’s law remains in place, is expected to wipe away the bulk of Lumwana’s remaining $1-billion value.

Barrick has undergone drastic changes since the heady times of the commodity boom.

It has sold mines, suspended a key gold project in the Andes and whittled down production to deal with the 30-per-cent slump in bullion prices.

Under Barrick’s new chairman, John Thornton, nearly every executive has been replaced and the board of directors has been revamped.

The company, which had once aspired to be a diversified Canadian mining giant, is now focused on a handful of mines in Nevada and the Americas.

Mr. Thornton has said he wants Barrick to be a leader in copper, though it is unclear how much of a role Lumwana will ever play.

Earlier this year, Barrick had warned that it would stop production if Zambia’s government imposed the higher royalties.


Zambia tax changes may help First Quantum Minerals Ltd
Jonathan Ratner

Financial Post

23 December 2014

The new tax laws in Zambia might turn out to be a good thing for First Quantum Minerals Ltd.

The country’s finance minister proposed a revision to the mining tax scheme in his 2015 budget on Oct. 15 that would require open pit miners to pay a 20% mineral royalty tax. However, there was little detail about how the new taxes would be calculated.

The budget was passed on Dec. 17 and First Quantum’s stock has come under pressure since roughly 40% of the company’s operating base is located in Zambia.

CIBC World Markets analyst Tom Meyer thinks it’s too early to try to quantify the impact of the changes. He also noted that a presidential by-election on Jan. 20, 2015, could lead to further revisions to the tax code as the recently passed laws aren’t sustainable since Zambia sees less benefit as copper prices rise.

The analyst noted that high-cost producers will be the first to close, assuming the new tax regime is left in its current form. As a result, he’s not surprised that the process has already begun with Barrick Gold Corp.’s Lumwana project.

“As a low cost producer in Zambia, First Quantum could be a net beneficiary of the new system,” Mr. Meyer told clients. “Comparing the effective tax rates under the two systems shows that the new system is increasingly favourable for the miners when the copper price is rising.”

His hypothetical tax model shows that a copper producer is a net beneficiary of the new tax regime with copper prices at US$2.95 per pound and higher, assuming cash costs of US$1.80.

Copper prices of US$4.15 or higher would be required in order to benefit a miner with cash costs of US$2.50.

However, Mr. Meyer doesn’t think Zambia will end up deviating from its past practices since the country remains dependent on foreign direct investment and it will likely remain willing to adjust and strike a balance when “unintended side effects develop from misguided policy changes.”


Mpande urges govt to be steadfast on mining fiscal regime

By Stuart Lisulo 

Zambia Post

27 December 2014

THE government needs to remain steadfast in implementing the new mining fiscal regime in the mining sector because taxation is not negotiable, says Dr Mathias Mpande.

Barrick Gold Corporation announced last Thursday that it was suspending operations at its Lumwana mine in Solwezi as it could not sustain operations at mineral royalties of 20 per cent for open pit mining, up from six per cent, following approval of the 2015 national budget by Parliament.

The government said the suspension of Lumwana’s operations is not the best solution, and have offered to dialogue with Barrick Gold, challenging them to provide a business case justifying how the new mineral royalty tax will affect its operations. 

But Dr Mpande, who is a mineral economist and former dean of the School of Mines at the University of Zambia, said the new mining fiscal regime should be implemented and urged the government to be steadfast on the proposed tax changes on open pit mining to be effected on January 1, 2015.

“The government should just be steadfast; Barrick Gold are doing that for the third time in the world; they intimidated the Tanzanian government where they had a gold deposit and ran away, but the [Tanzanian] government never changed their mind. The new [entity] who bought that operation is operating on similar lines and [running it] very well. If I was the finance or mines minister, I would tell them to go away, cancel the license and sell it to other people” he said in an interview. 

Dr Mpande, who is also chief Mpande of the Mambwe people of Mbala, said he sympathised with mines minister, Christopher Yaluma, but insisted that he should remain steadfast on ensuring he gets the best deal for Zambians.

“I sympathise with Honourable Yaluma’s position; he is acting diplomatically. But does a minister of mines or finance negotiate how they are going to tax the Zambian people? They implement what they think is right, so why should they negotiate with anybody? Taxation is not a negotiable issue, the government has done their calculation and they think it is all right,” he said.

 Dr Mpande further advised the government that the prospects of sourcing new investors other than Barrick Gold are possible in view of the rich copper deposits.

Zambia mines minister says won't reverse mining royalty hike

By Chris Mfula


30 December 2014

LUSAKA - Zambia will hike royalty rates on open pit and underground mining from Thursday, its mines minister said on Tuesday, despite industry fears of shaft closures and up to 12,000 job losses.

The decision to increase royalties for open pit mines to 20 percent from 6 percent and those for underground mines to 8 percent from 6 percent has rattled unions and miners and there had been hopes that the government would soften the plan.

But Mines Minister Christopher Yaluma said on Tuesday the government would implement the new royalties system as is when it comes into effect on Jan. 1 because it was in the best interest of the country, Africa's second-largest copper producer.

"It will be negligent of the government to undo what we did. We applied our minds when coming up with the new rates and can't just change because of an outcry," Yaluma told Reuters.

He added that mining companies should come up with clear models showing how their businesses would be hit by the royalties for the government to consider any revision.

Zambia's Chamber of Mines said this month the new royalties would result in shaft closures and 12,000 jobs losses, and may make a number of other operations economically unviable.

The plan has already prompted Toronto-based Barrick Gold Corp. to suspend operations at its Lumwana Copper Mine, which supports nearly 4,000 direct jobs in the area.

Barrick would start closing down Lumwana, which produced around 118,000 tonnes of copper in 2013, on Jan. 1, Mine Workers Union of Zambia President Chishimba Nkole said, adding his 25,000-strong union was deeply concerned about job losses.

"There must be flexibility on the part of the government and they must act very swiftly because we don't want our members to lose their jobs," Nkole told Reuters.

Mining accounts for 12 percent of Zambia's gross domestic product and 10 percent of formal employment.

Mopani Copper Mines, owned by Glencore, and Canadian firm First Quantum Minerals both have big copper projects that could also be at risk, the Chamber of Mines said.

First Quantum, which operates Zambia's largest copper mine, Kansanshi has said the plan is a "massive disincentive" for investment if it does not come with some form of capital relief.

Other mining companies operating in Zambia include Vedanta Resources and Vale.

The new royalties were passed into law in the 2015 budget.

(Reporting by Chris Mfula; Editing by Ed Stoddard and Susan Thomas)


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