Tax, production and profits - what is the relationship?

The Post reports that Finance minister Ng’andu Magande has said the government is likely to net the projected US $415 million (about K1.3 trillion) extra income from mining taxes as copper prices remain bullish on international markets. In other words, the new tax regime does not seem to have decimated production, investment and jobs as the critics suggested it might. Companies that had threatened legal action all now appear to be paying up. Presumably they will say we haven't waited long enough to make an assessment and no doubt there's something in that.

Some mining companies recently made their initial payment of windfall taxes to the government, with Kansanshi Mines, owned by First Quantum, one of the companies that had threatened rebellion, declaring a disbursement of US $30 million (approximately K101.2 billion), almost 10 per cent of the projected annual income from the mines this year.

“There is a formula that government came up with in calculating the windfall tax and looking at the current prices of the metal, the Ministry of Finance and National Planning is optimistic that the projected US $415 million in additional revenue from the mines will be collected at the end of the year,” Magande said in an interview. “I am very hopeful that we will get there because we are remaining with a few months before the end of the year.”

The government this year came up with a new tax regime in the national budget, with a projected US $415 million (approximately K1.3 trillion) in additional revenue to the treasury in 2008. “As long as mining companies continue producing, they will be obligated to pay the new taxes to the government,” said Mines and Minerals Minister Dr Mwansa.

Nonetheless, the news came in the same week that Zambia's biggest mining company reported a fall in profits that it linked to the new tax regime. The Post noted that Vedanta Resources Plc has announced a decline in profits at Konkola Copper Mines (KCM). First quarter earnings before interest, taxes, depreciation and amortisation declined to US$71.1 million compared with US$106.2 million gained in the corresponding period last year. "The decrease in profitability was primarily due to higher costs and higher royalties," Vedanta Resources stated. "Operating costs remained under pressure due to higher manpower costs, higher energy prices and lower production."

Vedanta stated that mine output from the Zambian mines was around 21,000 tonnes, marginally higher than the corresponding period last year and significantly higher than the immediately preceding quarter.

The estimates in terms of the expected additional revenue from new mining taxes is significantly higher compared to what the government has been collecting from the mines through taxes. In 2006, government collected slightly over K35 billion from mineral taxes when other copper rich countries like Chile gained around US $1.7 billion (approximately K6.3 trillion, half of Zambia's national budget) as tax contributions from its 17 largest privately held mines in just one quarter of 2006.

Meanwhile KCM continue to face criticism from local politicians that they do not do enough to support local communities around the mine. The Post cover criticism from local town clerk of Chingola township, Charles Sambondu: “About 60 per cent of Zambia’s copper comes from Chingola but there is really nothing to show on the ground. People compare with the days of Zambia Consolidated Copper Mines ZCCM when they used to take care of water supply, street lighting and all; in my view, the criticism is justified.”

In better news, The Post also reports that KCM is improving its environmental management practices. Company spokesman told the paper that the company remains on target to massively increase production by 2010, as the Konkola Deep projest and the new Chingola Smelter come online. “All these are indications that this country will meet the 2010 target of producing one million tonnes of copper and KCM will produce half of that projection,” he said.

The Chingola smelter which is expected to produce about 300,000 tonnes of finished copper. The new smelter is being built with Finnish-invented Outokumpu flash smelting technology would be able to capture about 95 per cent of sulphur dioxide thereby releasing little into the atmosphere.