Zambia’s Mining Policies Remain Erratic
Posted by Cheryl Rutledge on 7/14/2015 10:38:19 AM
By Alexander Collen, Taylor Jackson and Kenneth P. Green
Zambia’s government looks set to roll back contentious taxes that have led to a standoff between itself and industry in the midst of falling copper prices. Foreign miners including Glencore PLC and Barrick Gold Corp. could benefit significantly as Africa’s second largest copper producer reverts back to lower levies. The change may also see Zambia benefit from higher employment and tax revenues provided by more profitable miners. However, the recent inconsistency in policies may create uncertainty that potentially reduces the region’s investment attractiveness.
The Extractive Industries Transparency Initiative estimates that mining comprises approximately half of Zambia’s economy and 67 percent of its exports, but only contributes 30 percent to tax revenues. In an attempt to address the current national budget deficit, Zambia suspended corporate taxes but forced open-pit mines to pay up to 20 percent of their revenues in royalties, up from six percent previously, while underground mines must now pay eight percent, also up from six percent.
In response to the increases, Glencore and First Quantum Minerals Ltd. cancelled US$1.5 billion worth of expansions and Barrick threatened to close its Lumwana Copper mine. Zambia’s central bank estimated that annual copper production dropped by 10 percent in the first quarter of 2015. On July 1st, the Zambian government will revert to a 30 percent corporate tax plus royalties of nine percent and six percent on open-pit mines and underground mines, respectively. Mines Minister Christopher Yaluma has since emphasized his willingness to cooperate with miners regarding these issues.
However, Yaluma also recently disclosed plans to ban the export of any unfinished mineral products in an attempt to ensure all exports be beneficiated within Zambia. Such a policy may create major complications for miners. Yaluma says that a lot of copper is being exported without being processed and that this is “denying Zambians jobs that would have been created if mining firms invested in processing plants.”
To add to the recent turmoil, the Chamber of Mines of Zambia has added that major copper miners are owed nearly US$800 million in valued-added tax refunds dating back to 2013. Issues such as these represent a lack of stable and predictable legislation, which may lead to increased uncertainty amongst investors, thereby potentially reducing Zambia’s investment attractiveness.
The Fraser Institute’s 2014 Annual Survey of Mining Companies shows that despite ranking 18th of 122 jurisdictions in the Best Practices Mineral Potential Index (a measure of pure geological potential based on the perception of executives), Zambia ranked 54th of 122 in the overall Policy Perception Index.
In the same survey, 35 percent of respondents said that uncertainty regarding the administration, interpretation, and enforcement of existing regulations was a mild deterrent to investment, whilst four percent said it was a strong deterrent. The taxation regime was perceived to be a mild deterrent to 35 percent of respondents and a strong deterrent for 13 percent.
Although the impact of the export ban has not yet been observed, figures from the 2014 Survey of Mining Companies show that trade barriers were perceived as a mild deterrent for 20 percent of correspondents while five percent were strongly deterred. Socioeconomic agreements and community development conditions mildly deterred 43 percent of respondents and strongly deterred five percent.
These events highlight recent inconsistencies in Zambia’s mining policy. The results of the survey suggest that such inconsistencies may be increasing uncertainty for investors and could therefore be having an adverse impact on investment attractiveness in the region.