By Victor Kunda Mwaba, MBA Business / Mineral Resource executive
The proposed conversion of ZCCM – IH’s right to dividend in FQM’s Kansanshi Copper Mines, to right to royalty, is ill-advisable. Since royalties are tax deductible, that is, they get subtracted from revenues before taxes are computed, such a conversion would take away some much needed tax revenues from ZRA. ZCCM – IH should not start participating in tax gimmicks that take away funds from public coffers. The people of Zambia expect better from their parastatals.
The fallacy that royalties are ‘guaranteed’ whether a company makes profits or loses is patently false. Royalties go up and down, depending on levels of production. Also, when the price of the commodity being mined goes down, royalties, like every cost item on the profit and loss (P&L) statement, are subject to re-negotiations, postponements or even cancellations. In reality, royalties may also face the same subjectivity dividends face in times of economic uncertainty. Trust me on this point; I’m speaking from experience!
At a press conference this week of December 5th, the Minister of Finance, Dr. Situmbeko Musokotwane made mention that ZCCM – IH’s cash inflow from FQM would more than double under the royalty model, if converted, compared to the dividend model. The honorable minister needs to realize that, there is no such a thing as free lunch. There is no such a thing as free dividends either! The lack of corporate financial literacy, and the lack of bargaining experience, is what keeps Zambia continue to sign agreements in the mining sector that do not serve the best interest of the republic!
ZCCM – IH should not be fixated on which one of their investees pays out a dividend, and which one does not. Dividend payment is a matter of subjective policy. What ZCCM-IH should focus on, is which investee is growing in value. It would interest readers, that one of the best stocks to invest in on the New York Stock Exchange, Amazon, has never paid out dividends ever! Did you know, that Tesla, has never paid a dividend either, but it is one of the best enterprises to invest in? The idea is to invest in potential growth, not in a dividend or royalty policy. There are various ways to extract liquidity out of an investment, apart from dividends or royalties.
ZCCM-IH needs to stop obsessing with dividends or royalties. She needs to focus on value creation, growth, efficiency and operational excellency. Part of the efficiency strategy should be tax transparency. This entails putting in place best in class mechanisms, outside of a mare financial audit, that prevent transfer pricing, base erosion, and other questionable accounting practices. It is concerning the level of simplicity the honorable minister of mines, Mr. Paul Kabuswe, is approaching this sophisticated matter with. Bally needs to fix this transaction, by pausing it, and offering a robust counter offer. I have confidence in him. I always have always had, for decades!