Is Zambia Losing its Shine?

The government requested that bond holders grant a deferral of interest payments until April 2021, which creditors rejected. The China Development Bank, however, agreed to negotiate a deferral on a US$391 million payment that had been due in October. China owns one third of Zambia’s debt, amounting to more than US$3 billion. Public debt is currently 90% of GDP, and has triggered the Kwacha’s gradual depreciation and is fuelling inflation, which rose from 7.5% in 2018 to 17.4% in November of 2020. “The Kwacha’s exchange rate has been volatile as the currency depreciated by approximately 80% in 2020. Consequently, businesses must cope with a general loss of income,” stated Abhishek Patel, managing director of Acton Group, an indigenous company working in multiple sectors with a subsidiary manufacturing plastic products for mining companies.

The nation is struggling to recover its status as Africa’s leading copper producer that it lost to the DRC in 2013 as regulatory uncertainties plagued the sector. From January to September of 2020, Zambia produced 646,111 mt, a year-on-year increase of 9.45%, compared to the DRC’s 1.186 million mt in the same period. In the 1970s Zambia was producing around 700,000 mt of copper, today the country is yet to produce 1 million mt, even though the industry has undergone huge technological advancements relative to three decades ago.

Between 2001 and 2016, changes in mining regulations led to the re-drafting of eight national mining contracts. The Fraser Institute’s Annual Survey of Mining Companies ranked Zambia as one of the least attractive jurisdictions for mining investment in the world, as its score decreased from 63.6 in 2018 to 37.09 in 2019. The introduction of a new controversial tax regime and the consistent lack of trust between the government and mining companies will likely decrease its score further for 2020.

Concern over regulatory inconsistencies has eroded investor confidence, exemplified by the government’s feud with Vedanta Resources in 2019, when it seized control of Konkola Copper Mines (KCM), Africa’s largest integrated copper producer, on the grounds of an alleged breach of environmental and financial regulations. In April 2020, President Edgar Lungu’s government also threatened to strip British-Swiss company Glencore of its copper mining license after it announced the closure of its Mopani copper mines due to logistical challenges and falling metal prices as a result of the pandemic. As mine closure is illegal, the closure decision defied the government. The feud escalated further when Mopani’s CEO was detained at Lusaka airport.

“The position the government has taken with KCM could be seen or labelled as expropriatory in nature as KCM’s liquidation was petitioned by ZCCM-IH on the ground that KCM was not paying dividends,” elaborated Bwalya Musonda, partner at Bowmans Law, a South African law firm with offices across the continent. “The recent issue of the statutory instrument declaring Copperbelt Energy Corporation’s transmission and distribution lines as common carriers could be viewed as the same. These incidents will continue to spark fear that foreign investments cannot be protected in Zambia, which should not be the case."

A ‘them and us’ narrative defines current Zambian mining culture, as President Lungu’s administration is pressuring foreign miners in an attempt to increase its stake to a majority in Zambian mines. “Under our new strategic plan, we address the minority stake that we have had for years and that we wish to increase over all our assets if the opportunity arises,” explained Mabvuto Chipata, CEO of ZCCM-Investment Holdings (ZCCM-IH), an investment holdings company focused on mining and 77% owned by the Zambian government. “Many of our partners have not paid dividends for years, therefore by increasing our control we can ensure that we are in control in running the mines more efficiently and cost effectively. In the future, with our new investments we are taking majority control. Our strategic motivation is to ensure Zambia benefits from its resources. Zambia should have more significant participation in the exploitation of its resources. We are yet to benefit even from the dividends, even when copper prices were at US$9,000 /mt. The narrative must change to ensure the country guarantees its benefits.”

The mines where the government wishes to increase its stake are yet to be identified, however Mopani Copper Mines is topping the list, where ZCCM-IH owns a minority 10%. Mopani was forecast to produce between 50,000 and 70,000 mt of copper in 2020, however, the outbreak of Covid-19 and the resulting fall in copper prices led to a disruption in production. As a result of the feud with the government and operational bottlenecks, Glencore is negotiating the sale of its 73.1% stake in Mopani to the Zambian government. The remaining 17% belong to Canada’s First Quantum Minerals (FQM), who exceeded production targets for their majority-owned Sentinel and Kanshansi copper mines in Q3 of 2020. This exceptional performance was despite the pandemic and the Zambian tax regime pressure that penalises mining companies heavily when the market is strong, as the tax rate increase as the copper price increases. To a large extent, higher copper prices can make companies operating in Zambia less profitable, which disincentives the channelling of capital into the development of existing mines and new mines, explaining why Zambia’s tax regime was ranked as the least competitive in the world by consulting firm EY.

According to Sokwani Chilembo, CEO of the Chamber of Mines in Zambia: “The provision of indirect stimulus through targeted reliefs, especially on the double taxation elements on the non-deductibility of mineral royalty tax, would secure approximately US$2 billion investment into the industry, half of which could finance the expansion of First Quantum Minerals’ Kansanshi mine, and the other to finance EMR Capital’s Lubambe mine expansion, a 10 million mt copper asset expected to produce 160,000 mt/y.”

The Chamber demands that the government regard royalty payments as a deductible expense to avoid double taxation.

FQM’s Kanshansi mine, one of the oldest mines in Africa, has seen its reserves increase by 70% this year, to a total of 824 million mt, grading 0.64% copper, laying the foundation for a potential expansion, expected to cost an estimated US$650 million for construction alone, which could start in 2023. FQM also expects to spend about US$80 million on a smelter expansion. Meanwhile, the Lubambe copper mine, majority-owned by Australia’s EMR Capital, recently completed a concept study on an extension project that would produce up to 160,000 mt/y. Foreign investors in Zambia are weary of expanding current mines or initiating new operations and exploration due to the current tax framework, the government’s attitude to foreign players in the sector, and an upcoming election scheduled for August 2021 that carries its own risks of further regulatory changes. Zambia is, however, well positioned to supply battery metals as one of the most prolific copper and cobalt producers. What it lacks is the corresponding legal, environmental and financial conditions to further encourage the growth of the mining sector.

Image courtesy of Albrecht Fietz