Zambia: Roadblock to good business

2020-03-02T09:46:48+00:00 March 2nd, 2020|Country in Focus|

Zambia’s volatile relationship with foreign-owned mining companies continues, and the long-term effects might prove to be devastating, writes Nicolaas Steenkamp and Leon Louw. All photos by Leon Louw.

Delegates at the 2020 Investing in African Mining Indaba.

Delegates at the 2020 Investing in African Mining Indaba.

The Zambian government continues to upset the international mining cart. The recent outburst by Richard Musukwa, Zambian Minister of Mines, at the 2020 Investing in African Mining Indaba, is enough to deter even the most optimistic investor. In a scathing attack on Indian company Vedanta Resources, owned by business mogul Anil Agarwal, Musukwa said that the company had been involved in criminal activities and that Zambia had been the victim and not Vedanta, as popularly portrayed in the mainstream media.

Musukwa’s pronouncement was greeted with loud applause by several representatives from other African governments. However, investors and mining companies were stunned into silence. Musukwa continued his tirade, saying that Zambia does not welcome any ‘bogus’ investors in the country, and that all investors have to ‘follow the law’. “Vedanta had breached the environmental law and conditions for their grant. They last produced in 2014 and are thus locking up the resource, and we won’t allow that,” said Musukwa. He added that the country needs African and international support to make sure Vedanta pays the price for what they have done.

The bitter row between Zambia and Vedanta is symptomatic of the constrained environment in Zambia as government once again cracks down on mining companies to increase its share of the pie in the resource sector. Mining companies in Zambia have been subjected to periodic political interference, including a stint of nationalisation. The Zambian government and Vedanta remain embroiled in what is becoming an ugly scuffle about the Konkola Copper Mines (KCM). In May 2019, the African nation’s government mining vehicle ZCCM, sought the liquidation of KCM, accusing the copper miner of breaching the terms of license and owing money in unpaid taxes, which the company denied and decided to fight through international arbitration.

Copper cathodes. Zambia’s economy remains reliant on the production of copper, which is a constraint on the economy.

Copper cathodes. Zambia’s economy remains reliant on the production of copper, which is a constraint on the economy.

Tension at boiling point

Over the last year there has been increasing tension between the two parties. Vedanta holds a 19.4% interest in KCM. In response to the accusations made by ZCCM in May 2019, Vedanta contends that the state-owned mining company was in breach of a shareholder agreement after it sought an ex parte order from the Lusaka High Court to initiate a winding-up process. ZCCM issued a winding up petition, but it remains stayed pending the hearing on the appeals of both Vendanta and ZCCM.

Earlier Vedanta Resources applied to the South African High Court to grant an application for an injunction in support of an arbitration agreement. It was granted by the South African High Court and it also issued an order for the winding up of KCM be withdrawn. The ZCCM and the provincial liquidator did not heed this injunction. At the same time, the Zambian government indicated that they would appoint a liquidator to operate KCM in the interim.

In November 2019 KCM’s run of bad luck continued when the smelter was forced to shut down two days earlier than planned for scheduled maintenance, after a sulphur dioxide leak was discovered at the Nchanga smelter.

In the most recent development, KCM was placed in liquidation, but the Zambian High Court in November 2019 issued an order, restricting the sale of the Mimbula mining rights. At the time of writing this piece, the hearings were still in progress. It appears, nonetheless, that the Zambian government’s main aim is to appoint a new owner for KCM, with a number of Chinese companies in the running. This move could, of course, be disastrous and widen the trust deficit between government and the private sector further. But government’s gripe with international mining companies doesn’t stop at Agarwal’s front gate. In the past few years, it has taken on other international giants like Canadian-based First Quantum Minerals. At times, First Quantum and ZCCM’s love-hate relationship has boiled over and, on a few occasions, threatened to derail the frail confidence of international investors, which are so important to building a sustainable mining industry in Zambia.

First Quantum recently initiated arbitration proceeding against ZCCM. This followed a criminal complaint made by the government entity for the alleged unauthorised transfer of money by First Quantum’s Kansanshi Mining to the company’s local subsidiary.

It was alleged that a transfer was made between Kansanshi, which is 80% owned by First Quantum and 20% owned by ZCCM to Kansanshi Holdings. Kansanshi Holdings intended to appeal for arbitration over the dispute, with the arbitration case being heard in London. This follows on the dispute that First Quantum had with the Zambian government in 2018, after being handed a USD5.8-billion bill for unpaid import duties.

Canadian company First Quantum has a love-hate relationship with the government of Zambia. In picture is the company’s Kansanshi copper mine in the Northern Province.

Canadian company First Quantum has a love-hate relationship with the government of Zambia. In picture is the company’s Kansanshi copper mine in the Northern Province.

More woes for mining

First Quantum, however, appears to remain optimistic about operating in Zambia. The company mulled an investment of about USD1-billion to lift output, increase the life of mine and halt production declines at Kansanshi. This move will increase annual production to 300 000t from a previous estimate of 235 000t. It is considered highly unlikely, though, that the ambitious plan would be approved by the board, barring significant changes to Zambia’s tax regime and the fact that Chinese company Jiangxi Copper recently bought an indirect stake in First Quantum Minerals.

The troubled copper and cobalt sector in Zambia suffered another blow in January 2020 as Eurasia Resources Group’s (ERG) Africa unit, announced the suspension of its operations at Chambishi Metals due to an acute shortage of copper and cobalt concentrates required to produce cathode. ERG indicated that they will be placing the plant in care-and-maintenance, if insufficient feedstocks could not be obtained in Zambia. If the situation continues, upward of 200 jobs may be lost. This is mainly due to the introduction of a 5% import tax on raw materials. This severely impacted on the import of concentrate material from mines located in the Democratic Republic of the Congo (DRC).

ERG’s announcement follows reports that the battery mineral market is likely to remain depressed in 2020. The Electric Vehicle (EV) battery market has also changed in the last two years, with buying of metals being more sporadic and mines struggling to obtain long-term offtake agreements. The project result of this trend is that mines, like the ones operating in Zambia, would be subject to periods of intermitted shutdowns.

In the meantime, ZCCM has incorporated a new mining company called ZCCM Gold Company (ZCCM Gold) which is 51% owned by ZCCM and 49% by the Zambian government. The company has the intent of managing gold mining activities in Zambia, incorporating the whole mining value chain from exploration, mining, processing, marketing and value addition. What the impact of the creation of the entity will have on the Zambian precious metals sector, remains to be seen.

Copper producers in Zambia have continued production despite challenges and political interference.

Copper producers in Zambia have continued production despite challenges and political interference.

Government regulations

In 2019, the Zambian government introduced an export duty, which was levied in addition to the 6% mineral royalty tax. This in practical terms, resulted in precious stone miners like Kagem, to pay 21% turnover tax. In addition, any profits were also taxed at the prevailing 30% corporate tax rate. Fortunately, the Zambian government announced shortly thereafter that the 15% export duty on precious stones would be scrapped in 2020. Kagem was further adversely affected by wage negotiation with mining unions. The outcome of the negotiations is that unionised employees will receive a 10% increase in basic salary for 2020 and a further 10% increase for 2021.

Administrative issues, such as awaiting correct documentation, has also been cited as the reason that the Zambian government withheld payment of tax refunds to the major mining companies, in the region of 2.8-billion kwacha (USD215-million). Maamba Collieries was fortunate to receive the support of the Zambian government. This after having to face some challenges to keep its 300MW coal-fired power plant running, when one of its two units was forced to shut down in October of last year. As a result, the country as a whole, and specifically the mining sector, has had to deal with power shortages.

While Zambia hosts some of the best copper deposits in the world, the government has not done mining companies any favours. Maybe Zambia is just too reliant on copper exports, and diversification would go a long way in fixing a struggling economy.

Copper producers in Zambia have continued production despite challenges and political interference.

Copper producers in Zambia have continued production despite challenges and political interference.