Mine owners unite and threaten to sue

After weeks of anonymous briefings and delays, mining multinationals have finally declared their position on Zambia's proposed new tax regime. The Times of Zambia, The Post, The Daily Mail and the Lusaka Times all provide details of a hearing of the expanded parliamentary committee on estimates at which seven major mining companies, and their collective body the Chamber of Mines, were represented.

At first glance, the companies position is surprisingly confrontational: they claim they are ready to sue. A second look reveals something more subtle. The mining companies adopted two positions. Firstly, they claimed their Development Agreements are still legally binding, and that any challenge to them would result in the companies taking court cases in London or Johannesburg, depending on where the agreements were signed. Obviously it's true that the DAs are currently legally binding, as the text of legislation to override them has not yet been presented in Parliament. But it should be in the next few days unless the Government gets an appalliing dose of cold feet. Secondly, the companies said their doors are still open for a negotiated settlement. That tells us two interesting things to start with a) they have finally accepted that, against their wishes, there will be changes from the status quo and, having been unwilling to negotiate previously, are now trying to water down the proposals or call the government's bluff before legislation is put to the house. b) either I or they are unclear about how this would be legally resolved. Johannesburg or London? According to this Wikipedia page, "ICSID proceedings do not necessarily take place in Washington, D.C. Others possibles locations include the Permanent Court of Arbitration at The Hague, the Regional Arbitration Centres of the Asian-African Legal Consultative Committee at Cairo and Kuala Lumpur, the Australian Centre for International Commercial Arbitration at Melbourne, the Australian Commercial Disputes Centre at Sydney, the Singapore International Arbitration Centre, the GCC Commercial Arbitration Centre at Bahrain and the German Institution of Arbitration (DIS)." (for more on ICSID and useful link, see yesterday's blog) So maybe the settlement they are hoping for would not be through ICSID. What then?

Remember that Government evidence presented by James Mulungushi to the same committee said that said section nine of the Minerals Act was being proposed for amendment by repeal and replacement and that Attorney General Mumba Malila also told the expanded committee on estimates that the DAs could not stop the Government from making a Law, and that in the event that the mining companies dragged the Government to court, the State was ready to proceed and defend its position. So now we are all just waiting to see if the bullying tactics work and Government announces it needs to go into consultations, or whether the Government will follow through on its clearly declared intentions to introduce new legislation, and sticks to the system outlined by the Finance Minister in his budget announcement. The Daily Mail report ends noting that the mining company presentations angered MPs on the committee who said the companies were issuing threats, not discussing solutions. The Mail also reports that, in an interview later, Minister of Finance and National Planning, Ng’andu Magande, said Government was not obliged to consult anyone over tax changes. He said the new mine tax will be implemented and Government was ready to meet opponents in court.

The committee is chaired by Itezhi-Tezhi member of Parliament (MP) Godfrey Beene. The Chamber of Mines of Zambia was represented by the president, Passmore Hamukoma, an employee of Mopani Copper Mines (MCM), and general manager, Frederick Bantubonse. Apart from MCM, Konkola Copper Mines (KCM), Chibuluma Mines, Lumwana Mines, Kansanshi Mines, Luanshya Copper Mines (LCM) and NFCA Mines were all represented.

What was said, in detail
The text below is all taken from the report in the Times of Zambia, though reporting in all the papers was either identical or very similar.

Mr Bantubonse of the Chamber of Mines said the proposed tax was too severe and the action would trigger economic recession and consequences of unemployment and poverty. He threatened disputes arising from the breach of these should be settled in either London or Johannesburg depending on when the agreements were signed. Bantubonse also said President Mwanawasa wrote to all mining companies and held individual meetings with some CEOs and indicated that the Government wanted to re-negotiate the DAs. He said all mining firms with the DAs confirmed that they were willing to re-negotiate the agreements. Mr Bantubonse said at the Zambia International Business Advisory Council (ZIBAC) conference that was held in Livingstone in July last year, mining companies informed the gathering that they were ready to re-negotiate the DAs.At the same conference, Minister of Mines and Minerals Development, Kalombo Mwansa said that the negotiations would start in October last year."Mining companies were, therefore, surprised when Minister of Finance and National Planning, Ng'andu Magande, during his Budget address in Parliament announced new tax measures for the mining companies as they were still waiting for the committee to invite them to the negotiating table," he said. He said following the Budget address, the tax consultants worked through an example and found out that the effective tax rate came up to 79 per cent.

Chibuluma Mines general manager, Ed Mounsey said the taxation rate would increase from 22 per cent to 50 per cent over the life of the mine.Mr Mounsey said the investment made by the key shareholders, Metorex, would not be recouped and that there would be no dividends to Metorex and ZCCM-IH. He said the Chibuluma DA was a legally binding document both in Zambia and internationally. He said there was need for an independent review of the proposed tax changes on the viability of mines.

First Quantum Minerals (owners of Kansanshi Mine) country manager, Chisanga Puta-Chekwe said if the Government proceeded with the new tax regime the company would have problems with the shareholders. Mr Puta-Chekwe said the Government in that case would be liable for the costs to be incurred.He said his company was not against the idea of introducing the new taxation but rather the manner in which the process was conducted.

In the presentation to the committee, Lumwana Mines stated that the DAs were signed at the end of 2005 at a time when copper prices were high and when the Government was not under duress. The report states that economics of developing Lumwana were never robust and it took the mine two years to negotiate and close the financing for the project with 12 international banks. The report states that the Lumwana DA formed a key project document, the fiscal and other obligations formed the basis of the financial model."Lumwana is now at an advanced stage at a rate of $1.5 million per day. This debt financing is the largest in the history of the African continent and will take nine years from the start of production to pay back under the agreement with the banks," the report stated. The report said Lumwana had never enjoyed any windfall profits and would likely be some years before it did, depending on whether copper prices ruse or fell.

Mopani Copper Mines (MCM) submitted that the new tax regime had the potential to destablise long-term plans of expansion and recapitalisation at MCM.

KCM director of operations, CP Baid said the new tax regime was detrimental and jeopardised the ability to generate surpluses and raise funds for infusion towards growth and extension of the mine's life. Mr Baid said the tax regime was contrary to the Fifth National Development Plan (FNDP)'s spirit and fundamental requirement for sustainable development and growth of the copper mining industry which had passed through a decline phase and was now in the phase of recovery.