Mining firms choke

LIVINGSTONE MARUFU

Mounting economic headwinds are choking Zimbabwe’s mining industry with the country’s biggest mining lobby group, the Chamber of Mines of Zimbabwe, revealing that mining companies are now facing uncertain future, Business Times can report.

Thomas Gono, the president of Zimbabwe’s Chamber of Mines, chronicled how the sector, which has been contributing 70% of foreign currency receipts and 13% of the gross domestic product, has been hamstrung by the sharp decline in global commodity prices, foreign exchange shortages, severe power outages, expensive electricity, unstable exchange rates, and a heavily regulated environment.

The mining companies are also grappling with escalating operational costs, which could force them to turn to job cuts  to survive.

“The mining industry is facing significant headwinds,” Gono said.

He added: “As you might be aware, the mining industry  growth rate declined from 10.5% in 2022, to 4.8% in 2023, with most key mineral subsectors recording subdued output performance. The sector is likely to further decline this year.

“The value of mineral exports also declined to US$5.2bn  in 2023 from US$5.6bn  in 2022. This performance comes at a time when the country is reeling from a drought that is threatening to disrupt the strong and positive economic performance of prior years. Our preference is for the mining industry to be resilient in supporting the economy in such difficult times.

“The power supply constraints continue to adversely impact the mining sector. In particular, those that are not connected to dedicated power lines, endure frequent and severe power outages that result in lost production time.

“The quality of power is reported to be poor resulting in damage to electrical plants and equipment and in addition, responses to reports on faults are slow resulting in extended periods of down times.”

According to Gono, a number of mining businesses have resorted to pricey alternative electricity supply options in order to prevent grid power outages from interfering with their operations. The majority of these options consist of solar power and pricy diesel generators.

He also voiced concern over the high cost of electricity.

“High electricity tariffs are choking the mining industry. The increase in electricity tariffs to USc14.21/kWh in October 2023 had a profound impact on the overall cost of production in mining. Compared to our peers in the  region and in other major mining jurisdictions, the electricity tariff for Zimbabwean mineral producers is very high. Our appeal is for a downward review of tariffs particularly at this time when mineral commodity prices are depressed,” Gono said.

“Many operations are facing foreign currency shortfalls to meet their operational requirements. The economy has witnessed increased usage of United States dollars is putting pressure on the available retained export earnings. We commend the government for the efforts to build confidence in the ZiG. We support government efforts to secure the functional use of the portion of export revenue that is converted to ZiG.

“In addition, support measures for the ZiG are greatly welcome. By ensuring that the ZiG is a preferred transactional currency in the economy for both business and the general public, the pressure on the retained portion is bound to dissipate,” Gono said.

According to him, the chamber would  continue engaging with the government on issues related to foreign exchange management that have an impact on mining companies.

The majority of mining companies are finding it difficult to secure offshore capital and are depending on internally generated resources (retained earnings), which means there is still a significant financial gap that must be filled in order to optimize operations and reach output targets.

According to Gono, the mining industry’s long-term growth has been negatively impacted by the delay of capital projects due to the softening mineral prices, which have also constrained retained earnings.

Due to persistent geopolitical tensions, a weak Chinese industrial sector, and a slow global economic recovery, prices for the majority of important minerals were mostly muted in 2023.

“These factors introduced uncertainty in commodity markets. Gold prices, however, traded at historical peaks in 2023, largely driven by safe haven demand amidst global uncertainty,”Gono said.

Alex Mhembere, the ZIMPLATSCEO, weighed in: “In the outlook for 2024, commodity markets are expected to remain depressed as the prevailing conditions are anticipated to persist for the rest of 2024. Royalties for Platinum Group Metals  (PGMs), diamond and lithium  remain high, increasing the cost of production impacting negatively on the viability of mining projects. With mineral prices on a downward trend, the viability situation in the mining industry has been severely compromised.

“Also, the government in the 2024 National Budget announced the introduction of the Special Capital Gains Tax on transfer of mining title. At 20% of the transfer value of the asset, applied in retrospect for 10 years and payable by the buyer of the asset, this policy has caused significant disquiet in the mining industry.”

The Chamber has approached the authorities collectively  and individually for affected parties for a review of this policy as the way the tax is structured appears to the miners  as a direct tax as it is not applicable on capital gained, but on the purchase price of the mining title

Miners said the rate of 20% is deemed very high as it is applied on the full purchase price.

 “Applying the tax in retrospect has severe consequences on investor confidence. Questions are being raised on which other laws can be amended in retrospect with implications on liabilities for current operations. We will continue to engage for a solution that will support government efforts to enhance investment in mining and the President’s Mantra that Zimbabwe is Open for Business,” Gono said.

Despite this drop in performance,  the industry still makes a substantial contribution to employment, employing over 500,000 small-scale and artisanal miners in addition to over 53,000 official jobs.