It’s been around just six months since the Zambian Chamber of Mines president Nathan Chishimba told the media that the country’s ‘future as a copper-producing nation is in peril’. His dramatic words in December serve as an indication of how the world’s plunging commodity prices have hurt Zambia.
Chishimba described the problems in the mining sector as a ‘national crisis’ that impacted on the country’s future growth. ‘We all need to come together and agree [on] the conditions that best promote the growth both of the mines and the broader economy,’ he said. ‘As an industry, we are ready to create dialogue on this vital strategic issue on which the future of our nation depends.’
Zambia relies massively on mining for employment of its workforce, as well as about three-quarters of the country’s forex earnings and nearly 30% of government revenue, as reported by the Financial Times.
Zambia and copper have a long history – the mineral was first mined commercially there in the 1930s when the famed Copperbelt lured many young men, black and white, to seek their fortunes.
In the 1960s, Zambia produced around 15% of the world’s copper. However, following a period of nationalisation after independence, production plummeted until privatisation was relaunched in the early 1990s.
Zambia is Africa’s second-biggest copper producer after the DRC but its mines are now mostly old, which means productivity is falling as companies have to seek the ore deeper and deeper.
The current drought, which has curtailed hydroelectric operations (Zambia’s main source of power), has also hit production through electricity shortages.
The main reason, however, for the ‘national crisis’ has been China’s slowing growth as it realigns its economy from a heavily resources-driven model to a more consumer-orientated focus. Copper prices, traditionally considered a bellwether for the health of the commodities market, have dropped from around US$4/lb in 2011 to below US$2/lb in early 2016.
The Financial Times pointed out in 2015 that the mineral was trading way below the estimated US$5 500 a ton marginal cost of production of the country’s mines.
Populist government policies in recent years have also rattled investors. In late 2014, the government eliminated corporate tax on mining and raised mining royalties, with the royalty on open-pit mining increasing from 6% to 20% of revenue, for example. However, after an outcry from the industry the government relented and, in mid-2015, it cut royalties for underground mines to 6% from 8% and readjusted those of opencast mines to 9%. Corporate tax of 30% was reintroduced.
In December last year, a new tax ranging between 3% and 9% (calculated using the global price of metals) was mooted. This was followed by government passing the 2015 Mines and Minerals Development (Amendment) Act in early May 2016 – a move welcomed by the Chamber of Mines.
‘The government’s decision marks a significant shift in outlook towards the sector, and it can only be of benefit to the industry and the economy in the longer term,’ Chishimba said in a subsequent press release.
‘However, given the intense competition we face as a country from other mining jurisdictions in the world, more needs to be done to ensure long-term competitiveness and renewed investment in the mining sector, which is key to securing growth.’
He added that the ‘simplicity, stability, predictability and ultimately the attractiveness of Zambia’s minerals fiscal policy environment and taxation regime’ would be vital to providing assurance to investors. ‘If Zambia is to attract this needed investment, its mining taxation levels – particularly mineral royalty tax – must at the very least lie within global norms,’ he said. ‘Given Zambia’s specific production conditions, many would argue that an even bolder approach is necessary.’
Although the government appears to be addressing industry concerns, analysts BMI expect mining royalties to remain a political ‘hot topic’ for the presidential elections later this year.
Copper mining takes place in two main areas: Zambia’s Copperbelt and North-Western provinces. From 1997 to 2013, mining reportedly attracted US$12.6 billion in foreign investment. Spurred by this, Zambia recorded growth rates of more than 6% from the early 2000s, and even hit 7% between 2010 and 2014, according to the World Bank. However by last year, the declining copper price had begun to impact mining operations. Several mines were mothballed and 7 700 miners lost their jobs. GDP growth fell to 3% in 2015.
Yet not all is doom and gloom. In March 2016, commodities giant Glencore announced plans to invest around US$1.1 billion in its Mopani copper mining complex over the next two years to sink three shafts using new technology that will extend the mine’s life by around 25 years. This will return Mopani’s output to 110 000 tons a year by 2018 plus reduce costs, according to a Mining.com report.
Glencore announced that the plan will allow it to ‘take advantage of the potential for a gradual recovery in copper prices over the next three to five years’. It has spent US$3 billion on Mopani since buying it in 2000.
Mopani, with a workforce of 4 500, is expected to produce around 47 000 tons this year. In September last year Glencore said it would suspend operations at the mine for around 18 months. The news of the investment has been welcomed by analysts.
Mining.com reported that ratings agency Moody’s estimates Mopani could push the country’s real GDP growth to at least 5% in 2018, by adding around 0.5% of GDP in that year. In 2014 Mopani, at full production capacity, was responsible for about 15% of Zambia’s total copper production.
‘Increased copper production will also raise government revenues, contribute to fiscal consolidation and return public finances to a sustainable path. Additionally, Glencore’s decision to invest now, when Zambia’s economy faces challenges, sends a positive signal of investor confidence,’ according to Moody’s, adding that Glencore’s investment ‘marks a positive turnaround for the mine and Zambia’s entire copper sector’. With Mopani onstream, Zambia could hit a total copper output of more than 800 000 tons by 2018. It produced about 711 000 tons last year.
Mopani is a joint venture between majority shareholder Glencore, First Quantum and a subsidiary of (state entity) Zambia Consolidated Copper Mines. Other major companies in Zambia include London Stock Exchange-listed Vedanta Resources, Barrick Gold and China Nonferrous Mining Corporation.
First Quantum operates Kansansi, Zambia’s biggest copper mine, and in 2010 it acquired the Sentinel copper project, near Solwezi in the North-Western Province. Sentinel, which officially opened in August last year, is part of the Trident project, that covers several prospecting licences spread over 2 300 km2.
Apart from copper, Zambia also has extensive coal deposits. In a 2013 report, KPMG said it viewed coal ‘as a key growth sector’ for the country. ‘Despite currently being one of the smallest coal producers in Southern Africa, Zambian coal output is forecast to experience rapid growth from 281 000 tons in 2012 to production in excess of 2 million tons by 2017,’ it said. Much of the coal could be used for electricity generation (coal-fired power plants have been planned).
The bulk of coal comes from the Maamba mine, an opencast operation near Lake Kariba that has been in operation since the late 1960s and is undergoing a rejuvenation following major investment from majority shareholder Nava Bharat (Singapore). It has reserves of around 140 million tons. The nearby Chinese-owned Collum mine is the second-major producer. While other coal deposits have also been found recently, the fall in the coal price has, like copper, curtailed development.
Zambia also has some deposits of gold, with several mines conducting more small-scale operations as well as uranium, although only limited exploration has been carried out concerning the latter.
Yet it is copper that analysts say will remain the mainstay of the Zambian mining sector for the foreseeable future. And with prices of the commodity forecast to remain soft until around 2018 – as supply exceeds world demand – Zambia will need to speed up and consolidate its mining reforms in order to allow the country to remain attractive to existing – as well as prospective – investors.