A most unpredictable development in the mining story is reported in The Post today. Michael Sata, firebrand leader of Zambia's main opposition movement the Patriotic Front, has apparently changed his position on Zambia's mining taxes just as the legislation is signed with the raucous backing of his own MPs and strong arguments made in favour of the government's position by Sata himself and his key parliamentary allies Given Lubinda and Guy Scott.
It had seemed to me perfectly sensible to analyse the Government's increased determination to win a better deal from mining as a response to the electoral gains made by the PF in the 2006 elections and since, because the PF was willing to criticise 'investor friendly' policies of the ruling MMD and the costs to the country of those policies. However, The Post's report claims that Sata recently reversed his position and wrote on March 19 to finance minister Ng'andu Magande and President Mwanawasa asking them to abandon the windfall and variable taxes. The claimed content of the letter seems to me so counter-intuitive that it's probably worth waiting a few days to see whether some strange political machinations lie behind the story.
Apparently Sata stated that PF was concerned that if mining companies were not allowed to build up enough capital for reinvestment and if the international community perceived Zambia as a country that could not honour its agreements, jobs would be in jeopardy, as expansion plans and new investment projects would be shelved. However, Sata stated that PF was in favour of a royalty tax that was free from manipulation. Asked why he had changed his position when he initially supported government on the new fiscal regime, Sata said government should be more subtle in the manner it handles the matter to avoid the sad experience of Zimbabwe.
Magande responded "It is surprising that Mr Sata today is telling us not to implement the windfall and variable taxes imposed on the mining companies. He was one of the people who supported government when it was earlier announced that a new tax regime would be put in place," Commenting on the threat by mining companies to use legal means to block the government from implementing the new mining fiscal regime, Sata previously said mining companies should get out of the country if they did not want to pay taxes."This government should be as bold as Dr Kenneth Kaunda. We don't need to nationalise the mines but if they don't want to pay, they must get out of the country. We shall go to Chile and get people who know how to run the mines," Sata said. "We shall back government and fight them and make sure that if they don't pay tax, it will be impossible for them to run the mines." Sata said this was the right time for Zambia to get as much from its mineral wealth especially that copper prices were very high. He said the mining companies were making too much profit and that it would be immoral for them to refuse to pay the taxes "They know that they have contributed enough to the MMD and if they threaten to take legal action, they feel some cowards in government will back down," said Sata. "Why should they refuse when unborn babies are subsidising them? Who are they?"
And PF vice president Guy Scott, during an extended sitting of the parliamentary committee on estimates when Chamber of Mines council member Jeremy Allen made submissions, threatened that he would personally lead demonstrations on the Copperbelt against mining companies once they take legal action after new taxes take effect in April. "The government heard the voices of people who wanted a fair share of resources. It is now time for the mines to pay taxes like others have been doing," said Scott. "This is the time for the government to make hay while the sun shines when there is still a boom in copper prices on the international market."
Odd, very odd! Anyone got a suggestion of what's going on here?
7 comments:
Its probably not as odd as it reads. There are two separate issues here:
1. whether the govt is right in the course it has taken?
2. whether the govt has gone about it the right way?
Most people are sure about the second question. Government has NOT consulted anyone on this measure. Even if the answer to the first question is YES, its approach to the issue has been undemocratic.
It is therefore possible that Sata is simply asking government for more INFORMATION. What assessment has the government done to reach the conclusions it has reached? Where is the analysis?
There is a genuine perception that the government rather than developing a broader approach to the mining issue that is all encompassing, it has tried to rush things. Yes Zambia is in a hurry to develop, but surely that includes developing the way you govern and engage with the people?
Its probably not as odd as it reads. There are two separate issues here:
1. whether the govt is right in the course it has taken?
2. whether the govt has gone about it the right way?
Most people are sure about the second question. Government has NOT consulted anyone on this measure. Even if the answer to the first question is YES, its approach to the issue has been undemocratic.
It is therefore possible that Sata is simply asking government for more INFORMATION. What assessment has the government done to reach the conclusions it has reached? Where is the analysis?
There is a genuine perception that the government rather than developing a broader approach to the mining issue that is all encompassing, it has tried to rush things. Yes Zambia is in a hurry to develop, but surely that includes developing the way you govern and engage with the people?
Maybe someone has finally twigged that the underground mines are very expensive and will have substantial parts of their operations pushed into a loss making situation. Rumours say the new shaft at Nkana has been cancelled and shaft sinking teams repatriated, Muf decline cancelled, central shaft in Kitwe will be loss making, KCM - is an even higher cost producer, hmmmm, could be trouble ahead?
Increased taxes are not a problem, taxes on income before expenses are deducted is a huge problem!
ok, the second issue one can talk about, that is, how the new taxes impact the economics of mining. The thing is that the mines won't release these calculations for public consumption, so we can merely speculate.
But two points here:
1. Sata hasn't really done this analysis for himself. He's probably been convinced, by whatever means, by the Chamber of Mines (or a particular member) into giving that statement. It is, without doubt a u-turn.
2. On the economics, if you look at the copper prices even in the last month or so, they've risen further. And in comparison to say even 2001-02 have risen by more than 500%. Look at FQM, its PROFITS from Kansanshi were $195 million. But wages are very low--hence the recent troubles--and their total expenditure on the community through Kansanshi Foundation is only about a million dollars. That's 0.5% of the profits. The situation is ridiculous, and Sata is being disingeneous. Ok, underground mining is expensive, but the fact is that the feasibility calculations (at profit=0) for most mines have been done with copper price $1/pound. When i last checked it was $3.9.
Now, I've been in Solwezi, and people are very pissed off at Kansanshi. One reason, of course, is that workers there do 12 hour shifts, most are on 2-yr contracts, and some have to pay for their transportation and meals. And their wages are on the low side too, this despite the fact that FQM shareholders are making something like $8 per share earnings in 2007. It was less than $3 in 2005. Now, i don't know what windfall is, if it isn't this.
Thanks Rohit,
Good to hear from you. Tell us more about Solewezi. Feel free to post any comments on the blog as Dan Haglund sometimes does. Just email me and I'll send passwords.
Alastair
Rohit is correct Kansanshi would be able to operate with the taxes as it is the lowest cost producer in Zambia, one of the consultants Silane Mwenachenya said that the calculations for the new taxes were based on knowledge of Kansanshi's costs. I would say cost estimates per pound of copper produced Kansanshi $1.25 - 1.40, Mopani 2.40 - 2.90, KCM 2.70 - 3.00.
With the windfall tax, Gross Profit Margin Tax, Increase in Royalties, reduction in Capital allowances, Increase in basic income tax and witholding tax, the latter two mines look to be in trouble.
On the subject of mine wages, they are higher than any other company in Zambia by a huge margin. The government and rest of the private sector cannot compete. The copperbelt actually has a case of 'Dutch Disease' at the moment, with skilled people abandoning old employment to join the mining industry. So they can't be that bad?
A whole lot of my friends who are expats have just been fired at Mopani, they are being sent home. They think around 40% of the expat team has been made redundant. Will see what the day brings for the rest of us.
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