A case for subsidies in the mining sector

A case for subsidies in the mining sector
Published: 11 June 2019 (254 Views)
Zimbabwe racked in US$3.2 billion from mineral exports in 2018, a figure which represents 76% of the country's official total export earnings. This year the government has set the target at US$4.2 billion, which if attained would mean adding a billion worth of export earnings. Gold (with $1.1 billion in exports) is the country biggest foreign currency earner, followed by Nickel mattes, ores and concentrates which brought in a combined $923 million. Other strategic minerals include ferro-chrome, chrome ores and concentrates, platinum, diamonds, coal and iron. The Chamber of Mines in Zimbabwe (CoMZ) recently predicted that production from the sector could reach $11 billion by 2022 and $18 billion by 2030 if key challenges in the mining sector are ironed out through policy review.

The mining sector has over 800 operating mines across the country and these range from international mining houses to small scale mines. In terms of employment, the sector currently employs over 80 000 workers directly and indirectly in downstream businesses. The country's investment enquiries from foreign investors are heavily biased towards mining, highlighting the importance of the sector to growth prospects. Zimbabwe has a massive competitive advantage in the mining sector with a highly diversified mineral resource base of over 40 commercially exploitable minerals. However the country's biggest miners have been facing operational challenges in the past 3 years, with gold producers being the worst affected.

The major constraint is the shortage of foreign currency as gold miners are compelled by exchange control regulations to surrender 45% of their export proceeds to the Reserve Bank of Zimbabwe (RBZ), the figure is an improvement from the 30% that prevailed for much of 2018. Other mineral producers retain 50% of their export earnings while the other 50% surrendered to the central bank at the prevailing Interbank Rate. CoMZ recently highlighted that the mining sector required as much as $11 billion in new capital from 2018 to 2022 to ramp up production.  

In November 2018, the country's second largest gold miner (RioZim) suspended operations at its three mines involuntarily after running out of consumables and spare parts which are mainly imported from South Africa. RioZim operates Cam and Motor Mine, Dalny Mine and Renco Mine. The miner later sued the central bank to as compel it to pay $92 million in export earnings debt dating back to 2016. Another key miner, Metallon Gold halted operations in April 2019 citing foreign currency shortages at its mines. As a result, more than 800 workers were fired at its closed Mazowe, Shamva, Redwing and How Mines. The company later sued the central bank for $132 million for unpaid gold deliveries dating back to 2016. Metallon Gold's recently completed $25 million smelting plant lies idle after plans to build a new mine close to Harare were thwarted due to mining claims invasion by artisanal miners. Another Gold miner, Caledonia mine has plans to increase its investment in Zimbabwe with exploration and brownfield projects but is skeptical about the surrender requirements, profit repatriation and operating environment which is marred by bureaucracy. Other key miners facing similar operational challenges include Hwange Colliery, Zimasco and ASA Resources which owns Bindura Nickel

Corporation and Freda Rebecca Gold Mine
The mining sector has not been sparred of the power cuts affecting other producers as well, despite contributing bulk of the foreign currency used to import electricity. The government recently highlighted that miners can pay for electricity in foreign currency to guarantee supplies from ZESA, the country's power utility. However that arrangement can be scuttled by legacy issues as miners owe ZESA close to $200 million in unpaid bills while ZESA owes over $83 million to Eskom of South Africa and Hydro Cahora Bassa (HCB) of Mozambique for delivered electricity. Zimbabwe's three platinum miners (Zimplats, Mimosa and Unki) are however well cushioned of the power cuts as they import their own electricity from regional producers. The country's biggest chrome miner, African Chrome Fields (ACF) relies heavily on diesel generators to power its operations. Other producers especially the small scale miners have also resorted to back up generators and this has a bearing on operations given the fuel shortages in the country.

As a result, production in the mining sector declined in the first quarter of 2019 with Gold exports down 17% to $273.5 million compared to Q1 of 2018 when $330 million was realized. Producers have also been diverting minerals to the parallel market in protest over the unsustainable surrender requirement scheme. Zimbabwe loses between $200 million to $1 billion annually to minerals smuggling with gold, silver, chrome and diamonds at the forefront. This trend of subdued production and rampant smuggling may continue into the foreseeable future thereby denting the country's export potential. As such, Zimbabwe's export earnings are projected to fall below the $4.23 billion figure realized in 2018. The figure takes into account depressed deliveries at the country's tobacco auction floors as well. Mining operations consume large amounts of electricity and naturally require massive amounts of diesel to power production as the country's power generation capacity worsens due to declining water levels in Kariba Dam. A fully functional mine requires at least 10 hours of non-stop electricity supply per day yet some mines go for a full day without power. The downtime can run into days if it emanates from faults or vandalism of electricity infrastructure.

Mines are the biggest consumers of electricity locally and will in turn be the largest consumers of fuel going into the future due to power generation challenges. The government will need to craft measures to subsidize production for the country's biggest miners who have been sustaining the economy with foreign currency earnings. Export oriented subsidies can be in the form of discounted diesel supplied at landing prices instead of the ZWL $4.89 per litre indexed on the pump. To ensure smooth operations and limited downtime, the National Oil Company of Zimbabwe (NOICZ) can facilitate for supplies through PetroTrade service stations. Similarly miners can also be allowed to import their own electricity through ZESA infrastructure at no cost or negotiated rates that ensure production is maintained sustainably. The key component in such export subsidies will be the dollar value of export earnings so that producers are incentivized to declare correct figures on export receipts, produce more and deliver output to the formal market through government departments.

It also goes without saying that any form of smuggling of minerals hurts the country's tax revenue collection capability as well. The most important advantage of such export oriented subsidies is to maintain growth in mining production with Zimbabwe sitting on mineral wealth in excess of $18 billion. These subsidies will halt the closure of key mines that sustain the economy and various livelihoods in various mining towns. Any decline in mining production or closure of mines has serious ramifications on Zimbabwe's economy going into the future. Subsidies may also take other forms such as tax cuts considering the fact that mining is one of the most taxed sectors in Zimbabwe. The government has indicated that it is determined to progressively review the tax regime, eliminate bottlenecks, red tape and all forms of corruption within its structures as part of mining reforms to improve investment inflows. Layers of mining laws and bureaucracy in licensing are still making Zimbabwe far from being open for business. Without maximizing production capacity from the mining sector, Zimbabwe will not be able to exorcise its foreign currency shortage demons or attain its 2030 vision.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on vbhoroma@gmail.com or alternatively follow him on Twitter @VictorBhoroma1.

- Victor Bhoroma


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