Is the mining sector healthy?

A number of stories over the past few days raise the question, is the mining sector healthy? One question of interest, particularly for those of us who advocated for greater taxation and regulation of the sector is whether the new tax regime had an impact on a sector previously described as 'booming'? Even if we worried about the distribution of benefits from that boom, the continued general health of the sector is clearly a precondition for significant benefits to flow to workers, communities and the Zambian state. Obviously, mining companies don’t like paying taxes that would otherwise increase their profits. Their standard propaganda line is that the costs incurred do not come out of profits and dividends to shareholders, but out of investments, and thus damage job creation and the wider economy. So, should we accept that argument?

The Daily Mail reports claims from the Chamber of Mines, the industry body representing multinational mine corporations in Zambia, that some of their members have put on hold projects involving considerable capital outlay pending assessment of their operations to take into account the new mine taxes. A trustworthy correspondent also assures me the mines investors have told him they have hired attorneys and were waiting until after the taxes had been imposed to strike a legal blow, judging that only once it had happened the contracts had in fact been breached. I remain sceptical any of them will calculate that a hostil relationship with the state is a price worth paying for an uncertain legal process. Still, most of these projects seem to be ‘pending review’, which may simply mean the firms are still trying to milk maximum pressure on the government hoping for a late concession. At the same time, the Mail quotes Mufulira Chamber of Mines president, Shadreck Musozya, saying that that although capital projects were under consideration, nothing much had changed. It is unsurprising that firms continually calculate likely outlays and profitability ahead of making significant investments. Of course the questions they ask themselves are not answered simply in relation to tax.

So how else could we assess the health of the sector? The Lusaka Times notes that Zambia earned $886 million in copper exports in the first quarter of 2008. This represents an increase of 3.2 per cent compared to $858 million earned in the fourth quarter of 2007. Cobalt export earnings increased to $108 million from $79 million in the same period. This represents an increase of 36.9 percent. In each case, these increases were achieved with lower total output from the mines as a result of increasing copper prices. However, Cho visits these statistics in his blog, questioning the price models used by the Bank of Zambia. However, these statistics are for the period before the new taxes kicked in so they don’t tell us much either.

We can see, from the Daily Mail that Equinox Minerals Limited, one of the companies that has suggested the government’s unilateral imposition of taxes did untold harm to their faith in the policy environment, and would weaken future investment, has projected to spend over US$232.2 million on the Lumwana uranium project following a postive outcome of its uranium feasibility study. The study told them they would make a high return on investment. The ‘policy environment’ suddenly looked less scary, I guess. The company will this month submit an Environmental Impact Assessment (EIA) report to the Environmental Council of Zambia (ECZ) on the uranium project. There's clearly plenty of good news around with stories of new Chinese and Indian investements flowing frequently.

On the other hand, The Post reports that dividends declared by mining companies to ZCCM-IH in the second half of last year reduced to K18.180 billion compared to K26. 53 billion in the corresponding period the previous year. Again this is before the taxes kicked in.

ZCCM-IH company secretary William Musama attributed the rise in turnover mainly due to the increase in metal price participation income of K70. 757 billion, of which K12. 089 billion was for the period of six months to December 31, 2006. “However, this higher income was dampened by the reduction in dividends to the group for the period of December 31 2007 compared to K26. 53 billion in the corresponding period of December 2006,” Musama announced. “The reduction arose from one of the associate companies declaring a lower interim dividend in the period to December 31, 2007 compared to the period to December 31, 2006.”

Musama also announced that ZCCM-IH reduced its operating expenditure to K54. 73 billion for the half year ended December 3, 2007 compared to K70. 562 billion for the corresponding previous year. He attributed the reduction to what he termed ZCCM-IH’s operational efficiency. “As a result of the above, an operating profit of K54. 173 billion for half year ended December 31, 2007 compared to K70. 562 billion for the corresponding period to December 31, 2006,” stated Musama.