Plans by Zambia’s new president to reverse a hike in mining royalties may come too late to revive investment in the sector, with confidence among foreign mining companies shaken and neighbouring Democratic Republic of Congo looking a potential better bet.
Eager to fill a hole in its finances, the government said last year it would scrap a corporate income tax of 30 percent while hiking mining royalties for companies operating in Africa’s second-largest producer of the metal.
That policy, developed under populist former President Michael Sata, was inherited by newly-elected President Edgar Lungu of Sata’s Patriotic Front Party.
Lungu pledged to fight poverty and maintain the late Sata’s legacy but has since signaled an intention to scale back the royalties, which came into effect in January, after mining companies threatened to cut production and jobs in a sector that is the life blood of the country.
The government is also ready to negotiate another sticking point: the payment of $600 million in Value Added Tax (VAT) refunds, which the industry says it is withholding.
But with no clear plan in place yet to reverse at least some of the royalty hikes of 20 percent from 6 percent on open pit mines and of 8 percent from 6 percent on underground mines mining companies are unimpressed.
“In hindsight Zambia might regret implementing this tax change at the low point of the mining cycle,” said Ã…sa Borssén, resources policy analyst SNL Metals and Mining.
“There are benefits to implementing a royalty system in this kind of governance environment in developing countries but it has to be reasonable in comparison to other tax environments, otherwise they will lose out on revenue as companies will move their investments elsewhere.”
Already contending with a plunge in copper prices to 5-1/2 year lows that have slashed their profits, mining companies are unnerved by the swift policy change and are unlikely to invest more in projects in the country whatever the outcome.
“Mining companies are not going to put another dollar in there, whatever their final decision is, because the government has proved unreliable,” said a mining industry source.
This will hurt Zambia, where mining accounts for 12 percent of its gross domestic product and 10 percent of its formal employment.
SURVIVAL RISK
Taxing revenue rather than profit can work better in emerging countries with limited resources to check on collection and high tax evasion.
It should also bring more money for copper producers at a time of thinning profits, but it’s more punitive in a low price environment and it hits the highest-cost producers most.
Among the companies that would be worst hit are Glencore and Vedanta, with production costs for underground mines Nkana, Mufulira and Konkola at almost $6,000 a tonne and Barrick, with open pit Lumwuana’s costs at around $5,000, according to data from SNL.
Copper prices are currently around $5,700 per tonne.
Canadian company Barrick has announced that it will shut down its costly Lumwana mine.
Vedanta, which employs about 8,000 staff in Zambia has said the new tax regime would cost it $15 million in core earnings in the first quarter this year and has started a “deep review” of its mining operations Zambia.
“Our priority is to make sure that the business is viable, sustainable and generates positive cash flow We’ll look at all options,” Vedanta Chief Executive Tom Albanese said when asked whether job cuts were a possibility.
The uncertainty in Zambia could even drive mining companies to look at opportunities in neighbouring Democratic Republic of Congo, which became Africa’s largest copper producer in 2013.
“If companies start to see other countries as a better match for their investments then those will be moved to where the rate of return is the most favorable,” Borssén said. “And in the case of DRC it is just across the border.”
Source:Reuters
And now the want to increase electricity tarrifs.
If tarrifs are increased, then corp tax should be reduced to 15%. You can’t have it both ways.
It’s very costly to run a business in Zambia because of the many inconsistencies and conflicting policies aided by incompetent and corrupt officials. We need to put in place a good constitution and policies that will protect both parties with minimal to zero interference from corrupt government officials.
Looks bleak?RB will “advise’!
Why not leave minerals in the ground if mining companies want to maximise profits at the expense of poor zambian. Thèse resources are God’s gift to the people why should the investor make huge profit have subsidized electrcity and fuel. Want tax Holiday. If we have no good policies to benefit zambians let leave minerals in the soil for our future génération.
If you were the president, Zambia would be the poorest nation on earth. You go and tell the miners that we should just leave minerals in the ground and lose a huge amount of revenue downstream in the economy. It’s annoying to see ignorant people commenting on things they don’t understand.
@Changamoto, why would you come here and contribute rubbish. If you don’t understand economics, or anything to do with developing, please sit your black fat ass on the floor, than embarrass your self. You are just showing your self your level of education, it’s so painful when we are so desperate trying to build our nation and then a fool like you come out and say we should leave our minerals in the ground. Fools like you are the biggest mistakes we have in higher offices making wrong decisions, now DRC is even becoming the best option for investors to move over to. Few years from now DRC will be like South Africa and where does that leave our mother zambia, behind like always, all because of uneducated people like you and want to open their mouth to be heard. Shut up.
True some people are useless and where does he expect they people who work for the mines to go when the mines are shut, work on his ass
AND WHAT IS CHAKOLWA CHAGWA KALE LUNGU DOING? LOOK, HIS FELLOW DRANKARD IN AMERICA ENDED UP INJURING TWO AMERICAN COPS, WHAT A SHAME! GUYS, GET BACK TO BUSINESS! IT’S NOT TIME FOR PARTYING AND DINING. NONONONONONONO! WORK, THAT’S WHY YOU STOLE THE VOTES.
STOP-BLOODSHED…….”RB will advise”……hahahaha….thats very funny….good sense of humour, brother.
Changamoto…..so we leave the minerals in the ground for future generations, money from where????? what are we going to eat, grass?????????
I totally agree with Changamoto, lets shut down all the mines and save the minerals for our children. Maybe, them, they will be smart enough to handle the clever mine investors.honestly, at the moment, we are not benefiting anything. The mines are only contributing 5% to our national budget and less than 10% to formal employment. Only Kansashi mine has been paying income tax for the past 5 years. whiles others are pretending to be making losses. What ABC has done is the best to tax the mines based on revenue, rather than profits. they hire, the best tax accountants/consultant in Zambia and best auditing firms in the world. so as long as its profit based , they will never pay any income tax
If you were the president Zambia would be the poorest nation on earth. You go and tell the miners that we should just leave minerals in the ground and lose a huge amount of revenue downstream in the economy. It’s annoying to see ignorant people commenting on things they don’t understand.
Some zambians are disappointing. How can you support such a report? I sometimes work in the Congo so your assertion that the investors will go there is misplaced. The conditions are inhuman, electricity is non existent, entry and exist is a horrible experience. The only consolation is that there is no system to check what is being mined. May be that’s what you want here? Would it make sense to allow a tennant to sleep with your wife just because he has money?!
If these mining companies are not willing…….LET DEM PACK AND GO! OTHERS ARE LINING UP TO SEE CHAGWA IN MFUWE WITH INTENT TO TAKE OVER!!
Your comment is at variance with your name…those who read should go back to 1972 speech by KK at the time the mines were being nationalised…
That is why I keep repeating that Zambia is full of emotional and largely ignorant inhabitants. You can not have archaic fiscal regimes and expect high value projects to be sustainable.
Sometimes a little growing up is all we need.
It took 27 years for Zambians to be disappointed by KK and has taken just 2 weeks and most Zambians are already disappointed with Edgar Lungu.The Kwacha is now trading at 6.7 to a $ and over 10 kwacha to £ and €.UTH has run out of pain killers…whilst Hon Edgar is sipping whiskey on rocks in Mfuwe.From Mfuwe it’s non stop to Angola for some more back room deals with one of the most corrupt president in Africa.
Anyway what can we say “ifintu ni Lungu” this is what you voted for…..
Which zambians?
@Hamuntu, what a shame, you agree with changamoto what planet do you live in? Leaving the minerals in the ground and what’s going to feed your belly. If the mines are only contributing 5% to the national budget, how much is your father contributing, where are you getting those figures, please shut up you are so ignorant. @Zambianwatch dog,it took 27years for KK and now 2weeks for Edgar, please haters how on earth can you even be disappointed with Edgar when he is only starting. I wonder how long you would have been disappointed with HH if he was elected. Please wake up the elections are over and it’s time to get to work. It’s over for HH you might as well start getting used. You want Lungu to change the exchange rate, do you even know what it takes for those figures to drop down. Shut…
Yep! We voted for this. And guess what? We’ll vote for it again in 2016 – that’s next year in case you forgot! In the words of one blogger, if your annoyed, go hug an 11kv transformer!
#Alexander, you can get the information from ministry of finance for free. on average the mines contribution has been 5% for the past 10years, except in 2013 when it went up to 18.8%. You can also buy the book, zambia: the first 50 years by andrew sardanis and get all the information about mines dealings in Zambia, since 1896. after that , then we will be at the same level to discus as two enlighten Zambians ( who understand that we have been selling our birth-right for free, the same way our forefather sold mineral rights in exchange for blankets or a gun.)
The tax structure should be revised based on effective policies.Overhaul of policies should start with the ministryof mines and all stakeholders involved with resource mmanagement. Start with benchmarking with countries with similar resource reserves and GDP. South America is on a good track with this.Then again mining companies should be ethical in their financial reporting.
I agree with Hamututu and Changamoto. And back off Alexander! If we are not yet properly equipped to negotiate a good piece of our own pie, we hide it. Until we are able to negotiate. We don’t sell our birthright for a bowl of soup. Meanwhile, we eat the food we grow above ground – retrain those mining engineers to work our combine harvesters. Above ground.
Thank you guyz. I agree with you as well as Changamoto. Let them go if they want…..
Guys,
Be aware of the recent Norwegian aid to the Zambian government covering advice on mining. I got insider information that they will try to tell the government that their policies regarding:
1) Mineral royalty
2) VAT refund, and
3) Tax holidays
ARE NOT CONDUCIVE FOR THE MINING INDUSTRY IN ZAMBIA.
Since November last year, the EU has been recruiting “suitable” candidates to execute this program. The personnel they have brought to Zambia are those sympathetic to the multinational mining investors…..BE WARNED. There are traitors on board!!!
@Dankiedankie, you really believe in your self. You agree with those fools to leave the minerals in the ground you are such a blind follower, could that be a better solution in your mind honestly and that’s enough thinking, and i Should back off because you have a point and your point is to leave the minerals in the ground, I would suggest you go back to primary and start from social studies then when you pass that, then you can do civics, then later on you can have a little bit of understanding, because I wouldn’t go straight to ask you to learn some economics yet your little brain has not grown yet, it will be a waste of more time. You are chaps who keep on failing to pass grade seven and your parents keep on repeating you over and over,instead of send you to start back from grade four
#Alexander, the current tax structure and Mine policies in Zambia are not beneficial to Zambians. Yes, if the mines shutdown, then u and me will think out of the box and become more innovative and creat our own wealth, rather than looking for jobs.you can get the information from ministry of finance for free. on average the mines contribution has been 5% for the past 10years, except in 2013 when it went up to 18.8%. You can also buy the book, zambia: the first 50 years by andrew sardanis and get all the information about mines dealings in Zambia, since 1896. after that , then we will be at the same level to discus as two enlighten Zambians ( who understand that we have been selling our birth-right for free, the same way our forefather sold mineral rights in exchange for blankets or gun
I can assure you Mr Alexander that I am smarter than you, your father and all your children put together! I have never failed an exam. And especially not economics. In universities in the diaspora by the way… not south africa or namibia but the real Diaspora that gave you the language you are trying to communicate in right now. Taught directly by people whose names you only see on textbooks. So be careful before you rant! hehehehe. 🙂
Let the mines shut down. That’s when some drunkards will wake up from their slumber.
“Ifintu ni Lungu ” that’s some funny slogan. Zambia is in a reverse gear now…..I can’t wait for next year.
1. the mines wont shut down – maybe their operators (esp in the case of Barrick at Lumwana) will change.
2. Don’t let this irk you so much; check your global starts and you will find that in one country called Guatemala, mineral royalty tax is charged at 35%!!!!
The point in all this is simply how do we maximize benefits from the mining sector: ?
Ans – ZAMBIANS must OWN the mining industry :as Individual private businessmen: that way the wealthy will spread among zambians:
Look at the likes of one ALIKO DANGOTE his village is well developed and wealthy.
Do not be cowards – Let the foreign investors leave: Zambians are ready to take over the mines.
@ Warrior Rubbish, Zambians have owned the mines before. What will they do differently this time.
Government just needs to create a conducive environment for business to strive whether foreign or local.
In third world countries investors dictate or impose their terms on ways of conducting their business. This is the case especially when they realize they are dealing with a weak government. Very crafty to do whatever is in their power to maximize their profits at the expense of locals.
In some past government regimes they got the mines for a song and were given tax free incentives to plunder the minerals of the country. They never raised their voices as long as it benefited their corporate greed.
Currently Zambia’s raw mineral resources are transported and processed in neighboring countries to further avoid paying a fair amount of tax on finished mineral products.
I stand to be corrected but this is appalling and Zambia must come up with a tax structure to counter this…
CONT:
type of corporate greed.
They would rather their is turmoil in Zambia so that there is no government regulation whatsoever so as to help themselves to the mineral resources at very minimum cost.
That’s what they do inDRC they don’t pay anything just bribe tu Kaboke! And no one cares about development in DRC! Is this what we want?
Ask FQM what happened to them at the Frontier mine in Sakania near Ndola.Balebepa ati we shall go to DRC!They were kicked out because they wanted to take the rubbish from here of arm twisting the Government.Their licence for Frontier,Lonshi and Kolwezi were cancelled!
Ifintu ni Lungu. Ngati chakubaba, chizakubabilako mu 2016!!!
Its time we follow South Africa and Zimbabwe on empowering locals in every sector of the economy. Saying Zambians had failed to run the mines before is nonsense because we have better institutions in place and more trained and experienced personnel. Just employing a few people and a few corporate responsibities is neither here nor there! These “infestors” are making a lot more money and dont even want to share through decent taxes. This is why I fully suppport Changamoto that if the current generation can not get a decent deal out of the mines, then let us leave the minerals where they are and maybe continue with chitemene!
Government should seriously consider empowering and supporting capable Zambians to run these mines. These so called investors are not special “BEINGS” with anything exceptional than we have. We should not bend for them to turn us into “uncle Toms” and kick us whenever they wish. Its time to take the bull by the horns and pay the piper and call the tune. Its time to plan on long term than be myopic and focus only on what to eat now at the expense of our future!
Let them go to Congo and live on jungle rules. That should open our eyes on what to do with our resources. Its not only Europeans or Americans with capital to invest in our country. Lets look to the East and most importantly, lets seek to empower locals, local is laka!!!
These “infestors” came in and stripped the mines for “scrap metal”,walk in our banks, because of pigmentation, use our very resources for collateral and amass huge “capital”. ZRA should be on the watch to get meaningful tax on any equipment exciting this country. Government should ban anything been “exported” as scrap.Enough with crooked minds, LOCAL IS LAKA!!!
Remember the Precious Metals Plant in Ndola.
The only one in Zambia from which Gold, Silver, Platinum, Palladium, Selenium and Tellurium were made.
Binani stripped it to get the contained scrap copper.
The president of Zambia at the time approved it.
Electrical Superintendent Chanda Kaka was fired for opposing the scrapping of that national asset.
Please let Vedanta go to Congo. Actually let them all go. We can then wait for new investors who can cope with the Royalties. Give business loans to Miners so they try to earn for themselves, with support from the business sector.