Some analysts have questioned the US$7.9 billion tax bill that Zambia Revenue Authority has slapped on First Quantum Minerals describing it as unrealistic.
ZRA this week handed First Quantum Minerals Ltd. a $7.9 billion tax bill and said it’s planning an audit of other mining companies going back six years.
FQM’s shares fell as much as 13 percent in Toronto, the most in almost two years, when its stock was halted ahead of the company’s statement.
The Vancouver-based company said in a statement that it received a letter from ZRA dated Monday “noting an assessment for import duties, penalties and interest on consumables and spare parts.”
“The company unequivocally refutes this assessment which does not appear to have any discernible basis of calculation and will continue working with the ZRA, as it normally does, to resolve the issue,” it said.
First Quantum, which operates the Kansanshi and Kalumbila mines in the country, accounted for more than half of Zambia’s copper production last year and is the biggest individual taxpayer.
But Stephen Walker, Head of global mining research at RBC Capital Markets said the proposed tax assessment is unrealistic.
“We would not rule out a potentially larger political motive behind the ZRA announcement,” he wrote. “With the fiscal deficit and debt position still worrisome, this could push the government to find alternative methods to raise revenue and repair the government’s fiscal position.”
The Zambian government has struggled with fiscal deficits in recent years and failed to secure a $1.3-billion bailout from the International Monetary Fund.
That could be behind the tax assessment, Deutsche Bank AG analyst Patrick Jones said in an emailed note.
Zambia’s tax bill to First Quantum is likely an opening parry in a negotiating process to obtain greater revenues — “a high-ball first offer,” according to David Manley, an economist with the Natural Resource Governance Institute in London.
“This also feels very much like the Tanzania-Acacia dispute,” he said in an email, referring to a dispute that began last summer when the East African nation sent a US$190 billion tax bill to Barrick Gold Corp.-subsidiary Acacia Mining Plc., and which remains unresolved.
“The government accuses a company of a very high, seemingly impossible amount, then a protracted battle across many fronts develops,” Manley said.
Manley suggested that ZRA likely know that they won’t receive US$7.9 billion.
“Perhaps the final bill won’t be as high as ZRA is asking, but it at least signals a determined desire from the government to get more money for Zambians,” he said.
BMO Capital analyst Alex Terentiew said while there are a ‘lot of unknowns,’ preliminary assessment suggests the company’s operating costs in the country could rise by as much as eight per cent.
“A hard push by the government could risk future investment,” Terentiew told clients in a note, but added that the risk of a significant “cash grab” by the government was low.
And FQM Chief Executive Philip Pascall jumped on a hastily arranged conference call on Wednesday to soothe investors about the tax bill.
Mr. Pascall rejected the US$7.9 billion figure which is more than two-thirds of the company’s US$9.5 billion market capitalization.
He declined to describe the worst-case scenario for the company, which derived 83.5 per cent of its revenue in 2017 from mines in Zambia and is hoping to develop a third mine in the country.
The company said its annual tax payments to the country vary, but claimed it pays $200 million in annual royalties.
“We do have cash available to pay what we would expect to pay, if at all,” he said to one question about how First Quantum might finance a payment of even several hundred million dollars to Zambian authorities.
The company has US$1.29 billion of cash in hand, according to its latest filing.
Mr. Pascall said the US$7.9 billion fee included a US$150 million assessment, US$2.1 billion in penalties and $5.7 billion in interest.
He estimated four to six months to review the bill.