Mining: Royalties, taxes and indigenisation remain in the spotlight
In a world where it has become clearer that human beings on earth utilise commodities everyday and where emerging economies (BRICS) continue to demand more commodities to sustain growth, Africa remains strategically positioned given its abundant mineral resources.
However, we have noticed that taxation and indigenisation laws, for example, have been big issues in mining circles. Even nations such as Australia have lately been reviewing their taxation levels on mineral resources.
These issues, in our view, stem from the notion that some resource rich countries continue to lose potential revenue from unbalanced tax concessions that do not take into account the depletion of the natural resources.
Recent reports out of West Africa have it that Mali is seeking to raise the state share in mining projects to 25% from 20%. The revision, which is yet to be passed by parliament, will however trim taxes on mining income to 25% from 35%.
Mali is Africa’s third-largest gold miner behind South Africa and Ghana. The country relies on gold for about 70% of export revenues and 15% of GDP. It is expected that the new proposal would give the government the right to hand over 5% of its increased stake to a domestic private company, thereby supporting indigenous businesses.
Furthermore, the proposed changes would require mining companies to sign community development deals with local leaders before winning new titles.
While the issue of indigenisation and economic empowerment remains topical in Zimbabwe, the government, in another development, has proposed to increase mining royalties in the gold and platinum sectors starting this year.
However, the African Development Bank (AfDB) has warned this could lead to a heavy plunge in production and profits among companies and will also discourage potential investors.
In his 2012 Budget, Finance Minister Tendai Biti proposed increasing gold royalties from 4.5% to 7% and platinum royalties from 5% to 10%.
The Chamber of Mines in Zimbabwe has also argued against the increase in royalties stating that it could slash profit margins for gold and platinum miners by nearly 18%, while rendering small-scale mining “totally unprofitable”. Chamber president Winston Chitando said most gold miners in Zimbabwe are still operating at around 44% of their full capacity because of antiquated machinery and outdated technology, besides other setbacks.
It is estimated that the mining industry requires a capital injection of between USD 5.0bn and USD 7.0bn to attain full capacity production.
“The companies are worried about the slight cut in profits but they also understand that, as government, we need to get revenue from the exploitation of our resources. The AfDB has its own way of assessing things but we are not even thinking about the possibility of losing any investors because that will not happen. Government remains open to frank and constructive engagement with players in the mining industry,” said the Minister of Mines, Obert Mpofu.
Similarly, around August last year, Namibia, the world’s biggest miner of offshore diamonds had to withdraw a proposal to increase the corporate tax rate on mining companies to 44% from 37.5% after facing opposition from the country’s Chamber of Mines and the Namibia Chamber of Commerce and Industry. Instead, the government proposed a windfall tax whenever international prices for the commodities were high. In addition, it also deferred removing the zero-rating for value added tax on mineral exports and cut a proposed levy on exports from 5% to between 0% and 2%.
In conclusion, we opine that issues around taxation, royalties and local empowerment thresholds will remain in the spotlight particularly in the resource rich countries of Africa. However, policy makers in various African jurisdictions should remain “on their toes”, devising means of promoting investment in mining activity while also ensuring that the benefits trickle to the broader economy.
Imara is an investment banking and asset management group renowned for its knowledge of African markets.