Batanai Matsika, an analyst at Imara, looks at Zimbabwe’s mining sector operating environment[hidepost=9][/hidepost]
Zimbabwe has been trailing behind the rest of the world in terms of mineral exploration and development and has lost out on major “commodity booms” enjoyed elsewhere mainly as a result of the “lost decade” (1998‐2009).
However, Africa is known as a mineral rich continent. A close analysis of African economies reveals that minerals and oil have been the engines driving development and a pillar for sustainable growth. For example, about 35%‐40% of Botswana‘s GDP comprises mining revenues while in Zambia mining contributes up to 10%‐15% of GDP and constitutes 80% of export earnings. We believe now is the opportune time to take an in-depth look at the mining sector in Zimbabwe.
At its peak in 1986, the Zimbabwe mining sector contributed about 7% to GDP. It is also worth noting that mineral shipments for 2008 amounted to US$676m, which represented about 51% of total export shipments and 3.8% of GDP.
Undoubtedly, there has been a significant change in the sector, having evolved through hyperinflation and periods of foreign currency shortages. Given the new dispensation in the form of a dollarised economy, the face of the mining sector has changed.
We believe the total value of minerals produced in the country is poised to increase in the near future and that the main pillars of growth will be increased investment (FDI), improved liquidity in the financial sector and a reduction in local input costs.
We highlight the key constraints within the sector as follows:
- The continued political uncertainty affects the sector’s ability to attract capital (FDI);
- Government has been slow in acting on issues that affect investment such as amendments to Mines and Minerals Act and Indigenisation and Economic Empowerment regulations;
- The release of ground for Exclusive Prospecting Orders (EPOs) has also been sluggish, inhibiting progress in mineral exploration; and
- Electricity supply constraints will take time to resolve.
Why invest in the Zimbabwe mining sector?
The answer was best summed up by Peter. M. Vanderspuy in 1989, who was then the chairman of the board of Delta Gold N.L. Australia:
“Because it is a mineral rich country with very great potential for further discoveries, it offers security of minerals tenure, it has a well established mining tradition regulated by an effective Ministry of Mines and supported by an active Chamber of Mines, it is well served by road, rail, telecommunications and power, the government is and always has been pro‐mining and the investment climate has historically been reasonable and, we believe, will improve significantly over the next few years . . . [because] . . . all governments of this country have recognised the contribution mining makes.”
The statement clearly points out that there was definitely a lot to like about the mining sector in Zimbabwe in 1989.
However, a lot has changed largely as a result of negative economic and political developments.
Background of mining in Zimbabwe
Around 1996, the mineral industry in Zimbabwe was a major contributor to the world supply of chrysotile asbestos, ferrochromium, and lithium minerals. Gold production was the leading sector in 1996 with output exceeding 24 metric tonnes.
During that time, the Gold Trade Act gave the Reserve Bank of Zimbabwe the monopoly on purchasing and exporting all gold produced in Zimbabwe. The Minerals Marketing Corporation of Zimbabwe (MMCZ) handled most other mineral exports. Most of the country’s mineral industries were export‐oriented and subject to world market fluctuations.
The suspension of the granting of EPOs in 2005 crippled exploration activities, the effect of which was to slow future mineral recovery. The upshot of this suspension was a serious impact on the future of the mining industry.
As a result of ill‐thought‐out policies, all sectors of the economy faced reduced output due to power outages, huge skills flight and a shortage of foreign currency to buy raw materials and equipment. Inflation was officially at a record high of 31,000,000% as of July 2008.
Other factors that adversely affected the general economy included a lack of BOP support and a rapid depreciation of the local currency unit.
Gold miners and all other exporters were in a quandary as a result of exchange rate misalignments and the government‐imposed price controls. The law stipulated that all locally mined gold would have to be sold to the Reserve Bank of Zimbabwe (RBZ) through Fidelity Printers Refinery (FPR). As much as 75% of the value had to be paid direct to the seller’s Foreign Currency Account (FCA) while the remaining 25% was paid out in Z$.
The RBZ had problems in terms of releasing the foreign currency component. As a result, miners could not freely access funds from FCAs and funding mining operations became an immense task.
Coal miners also had their own set of predicaments. The main coal miner, Hwange Colliery Limited, had a mandate to supply a big proportion of its mining output to the ill‐funded Zimbabwe Power Company (ZPC) at a price set by the government. Against an average international price of thermal coal of above US$100/tonne, ZPC paid them a local currency equivalent, which was less than US$1/tonne (at the parallel market rate). All other mining houses that had to export their mining products had a similar set of problems. Thus, most mines were in a serious liquidity glitch.
Mining activities to date
To date, over 40 different minerals have been extracted and mining has remained an important cog in the Zimbabwean economy; creating jobs, earning foreign currency and diversifying the economic base. With relative political and economic stability around 1999, mineral exports accounted for about 45%‐51% of Zimbabwe’s foreign currency earnings. In addition, mining was a direct employer of up to 60,000 people with numerous others in support industries.
Mining activities also stimulated the development of towns such as Hwange and Kadoma and was a catalyst in the development of basic infrastructure such as road, rail and telecoms. The sector’s contribution to GDP has remained at an average of 7%.
The liberalisation measures introduced in 2009 have restored confidence in the mining sector. This has allowed previously closed mines to reopen and resume operations, particularly in gold mining. Production in the mining sector is, however, expected to remain subdued as some mining houses remain closed as a result of undercapitalisation.
Gold output is estimated to increase significantly from 4,966 tonnes recorded in 2009 to 7,724 tonnes in 2010.
This is largely due to the resumption of operations by gold miners. The liberalisation of gold marketing introduced in 2009 has allowed gold mines that had suspended operations to resume production. In addition, the issuance of gold dealership licences to gold producers has resulted in mining houses securing lines of credit, critical in increasing production. As a result, Zimbabwe’s largest gold mine, Metallon Gold, which closed down its five mines, has since re‐opened two of them, and is expecting to reopen the other three by year‐end.
In addition, capital injections also allowed Mwana Africa to re‐open Fredda Rebecca Mine.
Coal output is expected to increase from 1.7 million tonnes in 2009 to around 2.4 million tonnes in 2010, as a result of the improved macroeconomic environment. Aged equipment and frequent breakdowns have had a negative impact on coal production at Hwange.
Notwithstanding the adverse macro‐economic environment in the country, platinum production has been steadily increasing from 519kgs in 2001 to around 6,849kgs in 2009. Platinum output is projected at 8,712kgs in 2010 following the expansion programme by Zimplats, the anticipated firming up of international prices and general improvement in the macroeconomic environment.
Asbestos output is estimated to have declined from 11,489 tonnes in 2008 to 3,316 tonnes in 2009. One of the major producers of asbestos, Associated African (AA) Mines, is heavily weighed down by old machinery, which needs constant repair and maintenance.
Chrome and nickel production has been heavily affected by the world recession. With international prices at 33% of the levels achieved in early 2008, most nickel and chrome operations have been put on hold and the equipment placed under care and maintenance. Maranatha, one of the country’s largest chrome producers is struggling to recapitalise. Similarly, Bindura Nickel Corporation is yet to resume operations at its Bindura and Shangani mines.
According to an Israeli diamond consultancy firm, Zimbabwe has the potential to supply 25% of the global diamond demand in terms of value within just a few years.
Zimbabwe sold its first batch of 900,000 carats of diamonds from Chiadzwa (eastern part of Zimbabwe) on 11 August 2010 and realised $72m after meeting minimum requirements under the Kimberley Process (KP) Certification Scheme. It was the first public sale of diamonds from Marange field in eastern Zimbabwe since international regulators imposed a ban in November 2009 under rules designed to screen out conflict gems.
Buyers came from India, Lebanon, the US, Israel and Russia. However, Zimbabwe still requires KP certification for more than 3m carats extracted by Canadile Miners and Mbada Diamonds. The auction covered the gems produced between 28 May 2010 and 1 September 2010.
The Mines and Minerals Act [Chapter 21:05] is the overall law that governs mining in Zimbabwe. The most pertinent legislature affecting mining at present is the Indigenisation and Economic Empowerment regulations. Under these regulations, all large companies with a net asset value exceeding $0.5m will be required to have a minimum indigenous shareholding of 51% within a period of five years.
Considering indigenisation has been on the cards for more than a decade, the major investor concerns stem from the empowerment threshold, considered high at 51%.
However, recent reports indicate that some amendments are being done. Recently, the Ministry of Indigenisation and Empowerment indicated that amendments will result in the term ‘cede’ being replaced by ‘dispose’ and allow for community ownership trusts.
The government will also abort a blanket approach to the regulations and instead apply a sectoral approach. The amendments will also provide for the establishment of committees that will set empowerment thresholds for the different sectors.
Organisations such as the Chamber of Mines have proposed a minimum direct equity participation of 15% for the mining sector and the use of empowerment credits. These would include social and infrastructure spending, local procurement of inputs, assistance to small scale miners, release of mineral rights, creation of new businesses, skills development and other socially and economically desirable expenditure.