19 January 2015-Over half of Zambia’s copper production is currently in a loss-making position following a consistent decline in the international copper price. As of 14thJanuary, 2015, the base metal was trading at US$5,353.25/tonne, its lowest since July 2009 according to Bloomberg.
Zambia Chamber of Mines, Economist Mr Shula Shula says, this price slump, in addition to structural factors, legacy issues and a new tax regime, which imposes from 6 per cent, a 20 per cent Mineral Royalty Tax on open cast mines and 8 per cent on underground mines, will severely penalize the vast majority of Zambia’s mining operations.
“Profitability is derived from total revenue less total costs. Most of Zambia’s mines are high-cost operations, significantly higher than other copper-mining provinces in the world. At the current copper price, nine out of eleven of the country’s large mines (both open cast and underground) is uneconomic”, Mr Shula said.
Considering that the mining industry accounts for over 86 per cent of Zambia’s Foreign Direct Investment and approximately 80 per cent of exports, this is alarming for the state of the country’s economy.
Government’s taxation of the mining industry, let alone any industry, must take into account two strong principles;
- Collecting equitable revenue required for national development.
- Ensuring sustainability of the sector as a contributor to national development.
Government’s introduction of the new tax regime is severely contrary to both principles. An excessive tax burden on the mining industry, without taking into account the cost of production and unpredictability of the copper price trend, will inevitably lead to mine closures in both the short and medium-term. This will in turn lead to lost revenue for the country. At the current copper price, nine out of eleven mining operations are loss-making, even under the 2014 tax regime.
The trend in copper price is, has been and will most likely remain highly unpredictable. This is because copper is a base metal, heavy, plentiful and cheap when compared to precious metals such as gold and silver. As such it is purchased by consumers whenrequired, making it difficult to speculate on future prices. This needs to be understood when effecting any policies or legislation that could impact the industry in some way.
The downward trend in copper pricing shows that Zambia’s industries are very sensitive and could easily become defunct. The current precipitous drop will cause mines to scale back on production. Contrary to the perception that the proposed regime will be simple to administer, it will be very complex as mines have open pit, underground and processing operations sometimes on the same site. At declining copper prices and a new tax regime, Zambia will move into unexplored fiscal territory.
Government must therefore reverse its decision to introduce the new tax regime that poses a higher mineral royalty as a final tax and instead, institute dialogue with all stakeholders to come up with an equitable fiscal policy which is consistent with promoting mining investment and generating adequate revenues for the treasury on a sustainable basis.
Zambia Chamber of Mines