MINING: The Honeymoon is Over

Government is pushing local platinum producers to establish local refining facilities
Government is pushing local platinum producers to establish local refining facilities

Darlington Musarurwa – Business Editor

The mining sector is feeling restive.

Just last week, platinum mining giants Mimosa and Unki whined about a 15 percent tax on all exports of ore.

And the export tax, which came into effect through the Finance Bill published on January 9, is only a portion of the full array of fiscal and regulatory measures meant to harvest the maximum possible benefits from the extractive sector.

Zimbabwe has the second largest-known platinum deposits in the world after South Africa.

Aquarius, a joint venture partner of Implats in Mimosa, which operates in Zvishavane, noted last week that there currently exists a proposal to render royalties payable by Mimosa non-deductible for income tax purposes.

The Johannesburg Stock Exchange-listed miner claims that the financial impact of the non-deductibility of royalties was US$4,2 million for the financial year to June 2014 and US$2,6 million for the half-year to December 2014.

Mining houses are also griping about the corporate tax.

The Finance Act (No. 3) 2014 introduced an Aids Levy of 3 percent on corporate tax for mining companies, effectively increasing the corporate tax rate to 25,75 percent.

Notwithstanding the statutory obligations, mining companies also have to renegotiate how they will cede a controlling stake (at least 51 percent shareholding) to locals.

Engagements are on-going.

Government is pushing local platinum producers to establish local refining facilities
Government is pushing local platinum producers to establish local refining facilities

The Indigenisation and Empowerment Act, which was enacted in September 2007, makes it mandatory for companies involved in the exploitation of non-renewable resources to sell the majority of their shares to locals.

This phenomenon, dubbed resource nationalism, is not peculiar to Zimbabwe.

Companies in neighbouring Zambia are fretting over new regulations scrapping a corporate income tax of 30 percent and hiking royalties.

Mining companies in Africa’s second-largest copper producer now pay 20 percent royalties, up from 6 percent, for open pit mines; while those operating underground mines are now paying 8 percent from 6 percent.

The new rates apply to production of all base metals, of which copper makes up around 90 percent of Zambia’s production.

Just as in Zimbabwe, where mining is the lifeblood of the economy, the sector contributes 12 percent of Zambia’s GDP, and accounts for 10 percent of formal employment.

Threats

Conscious of their financial clout and critical role in the economy, some local mining companies are threatening to mothball their operations if Government doesn’t reconsider its new tax, which is mainly meant to force them to establish a platinum refinery in Zimbabwe.

Experts believe that the export of un-beneficiated platinum is haemorrhaging the economy.

A discussion paper generated by Mimosa a fortnight ago indicated that the platinum mine could suspend its planned 30 percent expansion project – expected to create 200 jobs and add US$25 million to the fiscus – if Government insists on the new tax.

“From a fiscal point of view, there is also no benefit in the 15 percent tax in the short term. The minute the shareholders understand that the company has had to pay 15 percent tax, Mimosa will be forced to go on closure.

“In any case, the proposed 30 percent expansion brings in greater revenue to the State,” reads part of the paper.

Anglo Platinum Mines (Amplats), which wholly owns Unki in Shurugwi, is also threatening to “stop” some of its investments.

Chief executive officer Mr Chris Griffith was quoted by international news agencies as saying the new tax will cost Amplats more than US$10 million per year.

“The impact is about $10 million (in lost earnings) but in a mine that has just been investing and putting capital in and that needs to start making money back because we have been investing very heavily in building houses too. Those things will stop, many of the programmes (will stop),” Mr Griffith was quoted last week.

Likewise, mining behemoths Vedanta and Glencore are playing the same card in Zambia.

UK-based Vedanta owns Konkola Copper Mines, while Anglo-Swiss multinational Glencore controls Mopani Mines.

Bad corporate citizens

The whining of some of the mining companies is unlikely to be taken seriously in view of lingering allegations of fudging their accounts in order to pay less to host nations.

Apart from being penalised for polluting a major river near a copper mine in Zambia that sickened residents, Vedanta was investigated by the Armenian government in 2007 on suspicions of submitting false production reports relating to royalty payments.

A preliminary notice of penalties amounting to US$50 million was served on the company.

Similarly, there were allegations in 2011 that Glencore’s Zambian subsidiary, Mopani Copper Mines, was manipulating financial and accounting records in order to evade taxation.

Chartered accountants Grant Thornton estimated that Zambia was being prejudiced of millions of dollars through transfer pricing and cost padding.

The companies denied the allegations.

In Zimbabwe, Government has always questioned the sincerity of miners as their contribution of royalties to the fiscus remains low.

In 2013, a report jointly produced by the African Development Bank and Washington-based think tank Global Financial Integrity indicated that Zimbabwe lost US$12 billion in the last 30 years through illicit financial outflows ranging from secret deals, tax avoidance and illegal commercial activities.

Africa lost more than US$1,4 trillion in that period, with resource-rich countries being the most affected.

Zimbabwe’s Government is determined to rein in errant miners.

Last week, Mines and Mining Development Minister Walter Chidhakwa said a policy review was unlikely – and the stance has already paid dividends.

In April 2013, Zimbabwe banned the export of chrome ore in order to force players to beneficiate the mineral locally.

And investors jumped at the opportunity to increase local chrome-smelting capacity, with Chinese firm Afrochine commissioning a US$25 million facility to that end. The firm is scouting for an additional US$100 million to open more smelting plants.

Learning from Indonesia

Developments in the local chrome industry mimic the success registered by Indonesia in attracting investment in value addition after the country banned exports of raw mineral ores in January 2014.

Though the Indonesian Association of Mineral Entrepreneurs and companies with mining business licences filed a request in the same month to seek revision of articles in the 2009 law that formed the legal basis of the ban, the Constitutional Court upheld the ban on December 3, 2014.

Indonesia has been able to attract about US$18 billion in investment pledges for processing plants, especially from China.

It is understood investors are planning six alumina refineries and 30 nickel smelters through 2017.

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