Institutional Challenges Overshadow Zambia And DRC

Copperbelt_ Zambia_ DRC_ Copper_Cobalt
African copperbelt                              Source: Mining Weekly

David Creamer, CEO of Core Africa and Lara Smith were interviewed by Nadine James from Mining Weekly regarding the challenges facing mining in the DRC and Zambia. These jurisdictions are famous for their copper assets, but socioeconomic challenges, political and legislative issues continue to undermine development in these regions. Read the article below, or click on the following link:  

Prevailing institutional challenges facing Zambia and the Democratic Republic of Congo (DRC) will continue to hinder copper mining in the region if not addressed in a timely and satisfactory manner, says mining and business consultancy Core Africa, a division of privately owned consultancy Core Consultants.

Core Africa cofounder and CEO David Creamer notes that, despite recent discoveries of large, high-grade, undeveloped copper deposits within the Copperbelt region, in Central Africa, socioeconomic issues – exacerbated by macroeconomic factors such as the copper price, relatively low gross domestic product growth and imported inflation – have significantly impacted on the Copperbelt’s mining activities and will continue to adversely affect mining revenue.

 

“In the Zambian context, the recent drought negatively impacted on day-to-day operations and the revenue of the mining industry, the country and the people. “Further, the country’s economic turmoil and currency volatility, owing in part to the sustained dollar strength, certainly didn’t help much,” Creamer tells Mining Weekly.

 

He stresses that the resultant political rhetoric aimed at pressuring the Zambian government to ensure that mines contribute more to the local economy through increased taxes is, “more of a desperate plea than anything else”. However, he warns that, if the country’s mining industry remains in its current state of decline, government may be forced to implement populist changes that may benefit the people initially, but will be detrimental to investors and, therefore, the country’s economy as a whole.

Regardless, since 2014, Zambia has introduced two changes to its tax and royalty regime. Core Consultants MD and Core Africa cofounder Lara Smith comments that one of the more significant changes is the 2016 Mines and Minerals Development Act Amendment Bill, which proposes to reduce copper royalties to a variable tax of 4% to 6%, depending on the price of the metal. “The royalty tax would be 4% when the price of copper is below $4 500/t, 5% between $4 500 and $6 000, and 6% above $6 000.”

She notes that this is a reduction in royalties and taxes to support copper production while prices are relatively low. “However, this is the third change in two years, so it creates a level of uncertainty, despite the fact that royalties are declining,” she says, noting that copper prices are currently at $2.55/lb, or $5 620/t.”

This sliding scale boosts government profits when prices are high and supports the flow of activities when prices are low. However, Smith says it could backfire if copper prices exceed $6 000 which is why it could negatively impact on mining in the region.

A big positive, she explains, is the suspension of a 10% exportduty on ores and that government has removed the variable profit tax on income from mining operations.

In addition to political and legislative pressures, miners have had to contend with the relatively depressed copper price of late, as well as high transport costs, as Zambian operators, based in a landlocked country, have to transport copper to South Africa’s commercial ports.

Further, Creamer points out that, according to Zambian sources, last month the national power utility Zambia Electricity Supply Corporation (Zesco) proposed a 300% tariff increase to the Zambia Energy Regulation Board (ERB) for evaluation, and that the ERB is evaluating its position.

This follows closely on a recent increase in the price of fuel, which is expected to rise again in the near future. He notes that Zesco’s ability to generate power has been adversely affected by the drought as close to 1 000 MW of the country’s power is usually generated by its nine hydropower stations. The corporation has taken to using generators to keep the lights on and, therefore, needs to budget for the fuel increases.

Efforts to mitigate Zesco’s fuel use has resulted in a load-shedding schedule, with power cuts in certain areas lasting for up to eight hours a day.

The DRC’s main challenges, Smith notes, pertain to political uncertainty, extreme poverty, labour unrest, corruption, a lack of adequate transport infrastructure and the need to introduce some form of structure in the country’s artisanal mining sector.

She says the DRC government also needs to be more transparent, specifically when addressing issues of regulatory compliance.

Creamer adds that the recent legal action taken by the DRCgovernment against American copper miner Freeport-McMoRan this yearand Canadian copper miner Lundin Mining may harm the willingness to mine in the DRC. The legal action pertained to the sale of Freeport’s majority stake in the Tenke Fungurume mine (TFM), with Lundin included as a joint venture partner that owns a 24% share of TFM.

The State-owned mining company, Gecamines, in October filed a claim with the International Court of Arbitration inParis, attempting to force both companies to restructure the terms of their exit from TFM. Reportedly, Gecaminesdemanded, among other things, that any amendments to the indirect ownership of TFM be blocked unless authorised by the State miner.

DRC Mines Minister Martin Kabwelulu announced on October 28 that government was favourable to the conclusion of the sale of TFM to mining company China Molybdenum and was looking to facilitate an agreement acceptable to Gecamines, Freeport and Lundin. However, the legal action between the three companies is still ongoing.

Smith states that, while a legal battle may still be avoided, the initial knee-jerk reaction by Gecamines may hinder future projects.

“In a revenue-hungry environment, governments are looking to secure their piece of the pie. Although this is not new, it will be interesting to see how this plays out,” Creamer concludes.

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