Will Africa’s biggest copper mine be up for sale?
The big mineral companies have long been laying golden eggs for the Sadc region, but, with the exception of Botswana, governments are rewarding them only with higher taxes and policy uncertainty
Africa’s biggest copper mine may be up for sale if Zambia’s mining tax impasse isn’t resolved soon.
Mineral resources giant Barrick Gold made the announcement about Lumwana Copper Mines, in the country’s North-Western Province, last month. The decision comes in response to the government’s change to the tax regime last year: an increase of 1.5 percentage points in the 4%-6% sliding scale for mining royalties and the introduction of a 10% royalty rate when copper prices rise above $7,500 a ton.
Barrick is not the only international miner in the country mulling cutbacks. First Quantum Minerals, the biggest individual taxpayer in Zambia, is transferring its long-serving Zambian chair to Panama, a move that signifies a shift in priorities.
The company will continue to operate its two mines, which together accounted for about 473,000t of the country’s 862,000t copper output in 2018, but it announced late last year it would lay off 2,500 staff (it has temporarily shelved this plan, given ongoing talks with the government).
Nor is Zambia the only government in the Southern African Development Community (Sadc) to come into conflict with large international mining houses. In Tanzania, for example, Barrick is in negotiations with the government to resolve a long-running tax dispute that began when the government slapped its subsidiary, Acacia Mining, with a $190bn tax bill in March 2017. Acacia’s operations have effectively been shuttered; it has been unable to export gold during the row.
In the Democratic Republic of Congo (DRC), First Quantum ran into trouble in 2010 when the government attempted to renegotiate contracts with foreign mining companies. The seizure and resale of First Quantum’s properties in the country — including two operational mines and another on which construction had nearly been completed — caused the miner to shut its operations there two years later.
The disputes highlight the tension between the attempts of governments to benefit from their mineral wealth by tinkering with taxation and ownership on the one hand, and their efforts to attract investment with a stable economic and regulatory environment on the other.
In part, the problem arises because most of the big mining companies are international, which means a large proportion of their profits is externalised.
To mitigate this, a number of countries have tugged the regulatory reins. The DRC, for example, raised royalties on minerals across the board last year, ignoring the protests of key mining companies, which said this would deter investors — not only because of the increase in costs but also because the new regulations amounted to a breach of titleholders’ rights.
Tanzania passed three laws in 2017 that, among other things, hiked taxes on mineral exports, mandated a bigger state stake in some mining operations, and ordered the construction of local smelters to move Tanzania higher up the mining food chain. Takeover bids and exploration plans were cancelled as a result, and workers were laid off. A number of firms listed in Australia, the UK, SA and Canada took a beating as the value of their Tanzanian investments tanked. London-based Tremont Investment immediately cancelled a bid for Australia’s Cradle Resources after the laws were passed; and Shanta Gold cancelled a takeover bid for Helio Resource Corp shortly thereafter, also citing the laws.
In Zimbabwe, the indigenisation law introduced in 2008 — which required 51% local ownership of foreign companies and was considered a major reason for investment drying up — has only recently been repealed, though indigenisation requirements remain in place for diamond and platinum miners.
In Zambia, the government has changed the taxes levied on mining companies nearly every year during budget presentations, bar a brief period of stability from 2015 to 2017. But last year — after assurances that the tax regime would remain unchanged — a cabinet reshuffle brought with it a new minister, and new regulations. The government hopes the increased royalties will raise mining companies’ contribution to state coffers from $250m to $340m.
The increase will make Zambia’s tax regime particularly onerous. According to a report released by the Zambia Chamber of Mines, which compared Zambia’s present and proposed mining tax regime with those of 11 other copper-mining countries, it will have by far the highest tax burden of the 12 — including copper giants such as Chile and Australia, and Zambia’s own peer group in Africa: the DRC, Botswana, SA, Angola and Tanzania.
Mining companies are up in arms. "We had a tax measure that was working 18 months ago," says chamber president Goodwell Mateyo. "If that was maintained, we demonstrated and showed government that it would have received an extra $280m … by creating the right conditions for mines to increase production."
Indeed, some mining experts argue that rather than turning to mining companies, governments should consider other means of raising revenue. Zambia Chamber of Commerce & Industry president Michael Nyirenda, for example, says: "There is a saying that Africa tries to tax itself into prosperity, which is not the correct way to go. We need to create more taxpayers rather than just look at one taxpayer, which is the mines. We need to create people who will work for themselves."
But the central issue isn’t necessarily the taxes themselves — it is the uncertainty that such changes build into the system.
Anthea Jeffery writes in the SA Institute of Race Relations report, "Back to the Drawing Board on Mining Law", that the nature of mining — the time-consuming exploration process and substantial upfront expenditure required, for example — makes stability critical. Because it takes years for a mine to begin production and offset these costs, mining companies are vulnerable to "obsolescing bargain risks".
"In other words, the more an investor spends on establishing or expanding a mine — which, by definition, cannot be moved elsewhere — the more that investor becomes a captive of the host government," Jeffery writes. "That government may then be tempted to change relevant tax and other rules, especially if mineral prices have risen sharply in the interim, or particularly valuable mineral deposits have been found. The investor thus needs confidence that the government will refrain from changing the policies that applied when the decision to invest was made."
The chilling effect on investment decisions is clearer when one considers the numbers. The Fraser Institute, a Canadian think-tank, produces an annual survey of mining and exploration companies that assesses investment decisions in light not only of mineral potential, but also of "public policy factors", among them taxation, regulatory uncertainty, infrastructure, land claims, the strength of the legal system and political stability.
For example, the DRC ranks highly as an attractive investment destination in terms of straight mineral endowments: 75% of those surveyed for the most recent study, released a year ago, said the country’s mineral potential would encourage investment if best-practice policies were in place (a world-class regulatory environment, political stability and competitive taxation, for example). On this measure, the country ranked 11th out of 91 jurisdictions in the survey. But on the "public policy" measure, it ranked 87th (of the Sadc countries, only Zimbabwe was worse, at 89), leaving the DRC with an overall ranking of 51st, despite its vast mineral wealth.
Of all the factors inhibiting investment, most responses for SA, Tanzania, Zambia and Zimbabwe coalesced around regulatory uncertainty. A combined 65% of respondents either would not invest in SA due to regulatory uncertainty, or would consider it a strong deterrent to investment. The figure was 76% for Tanzania, 47% for Zambia and 84% for Zimbabwe. Other deterrents included political instability, trade barriers (including restrictions on profit repatriation and currency restrictions), and the legal system. In the DRC, regulation accounted for 72% of respondents being strongly or completely deterred from investing, but most responses coalesced around security and the country’s legal system (83% each).
Mukula Nshipa, an independent legal consultant based in Zambia’s Copperbelt, places the blame squarely at the door of the region’s populist leaders. "We have a situation where leaders are trying to make themselves liked by saying that they will get money from the mines to change people’s lives, instead of encouraging entrepreneurship and other means of self-sustenance," he says. "Look at Tanzania — [John] Magufuli is a populist; [Robert] Mugabe in Zimbabwe was a populist; in the DRC, [Joseph] Kabila was walking that path also."
As a counterpoint, he cites Botswana, a country whose regulatory regime would encourage investment — or at least not deter it — in the view of 91% of the category respondents in the Fraser survey.
"Politicians [in Botswana] have left the business of taxation to experts," he says. "I think the way forward … is to learn from Botswana [and] come up with stable policies and tax laws that will not work against the foreign investment [African countries] are trying to promote. This can only be done if African leaders take politics out of business and leave the investment policies and taxation laws to experts who know better."