The position taken by the Zambia Chamber of Mines, regarding the new taxes proposed in Zambia’s 2019 national budget, is patently flawed. Mining policy changes are global, and they are just beginning. Zambia is not alone in this regard. It is not getting any easier in any mining jurisdiction, the world over. The mining industry’s capital allocation will obviously react to these new business threats, and a new equilibrium would be reached. To characterize the potential new equilibrium in the global mining business as Zambia being ‘un-investible’ is tantamount to economic treason.
Earlier this year (2018), The Democratic Republic of Congo (DRC) signed into law, mining policy changes that include a sliding scale on mineral royalties, higher taxes and removal of a 10 year stability period that made mines exempt to policy changes for a decade after passing said changes into law. This is similar in substance to what Zambia is planning to do. To postulate that recommended changes to Zambia’s tax code are not seen anywhere else in the world is professional dishonesty. Granted, the mechanics of taxes, royalties, ownership requirements and other value retention methods may differ slightly from country to country. The gist of the conversation is sustainable long term value maximization for host nations in the mineral resource sector. Does it have to be feasting for shareholders and famine for host communities? Is there a sustainable happy medium, somewhere?
One noteworthy event that occurred in the mining industry in September 2018 is what happened in Indonesia. Through their parastatal mining entity (PT Indonesia), the Indonesian government reached an agreement with Freeport McMoran and Rio Tinto for the host nation to take a controlling stake (51%) in the Grasberg mine joint venture. The controlling stake ownership will commence after Indonesia pays the two global miners $3.9 billion. Freeport, as you may know, is the number 2 copper producer in the world after the Chilean parastatal Codelco, and the Grasberg mine itself is the second largest producing copper mine in the world, after BHP’s Escondida mine in Chile. In return for the concession, Freeport’s license to mine in Indonesia will be extended to 2041. This event sets the stage for new relationships among mining multi nationals and host nations.
According to Informine.com, The Lower Chamber of Chile’s Parliament has begun studying a project that would set a 3% mining royalty for all companies operating in the country, which is the world’s top copper producer and the one with the largest known reserves of lithium. The idea is to have miners contributing part of their profits to the regions where they operate, Radio Universidad de Chile reported (in Spanish). The last time Chile increased its mining royalties was in 2010, following an 8.8 magnitude earthquake that left the government scrambling for additional funds to rebuild the devastated areas. At the time, mining taxes went from between 4 and 5 percent to 4 percent to 9 percent of sales on a sliding scale. You may note that this tax is a percent of sales, not profit. The royalty rose again early this year (2018) to between 5 to 14 percent. Closer to home in South Africa, the minister of mines Gwede Mantashe is finalizing a draft charter that increases black ownership of mines from 26% to 30% in 5 years. One third of said black ownership should be granted free of charge to communities and qualifying employees.
The four examples given above, DRC, South Africa, Chile and Indonesia are just few instances highlighting that changes to Zambia’s mining policy are in line with other mining jurisdictions. Also, Zambia’s new tax code is not as overreaching as other nations are going, to maximize the share of mineral resource profits retained in host nations. In as much as some capital may flee these proposed changes, there is potential for new capital to flow in from alternative sources. We shall not mention the Asian elephant in the room. Also, there is a new form of capital in business, that is more open to equitable profit sharing. This form of capital is called ‘Just Capital’, because it has some elements of social justice to it. Think of it as corporate social responsibility embedded inside of the business itself, and not a mosquito net donating side show. The Zambia Chamber of Mines is on the wrong side of history, in their analysis of the proposed changes in Zambia’s 2019 budget. No surprises on their position, considering their source of funding. It appears imminent that the Minister of Finance, Honourable Margaret Mwanakatwe, might cave in on the proposed changes to the tax code, and end up on the wrong side of the argument as well, when all is said and done. I hope to be proven wrong by the Honourable minister.