12 January 2007
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IT is no secret that the Zimbabwean mining industry has been shrinking over the past six years and has not witnessed any significant new investment other than in the platinum and diamonds sectors. The gold industry has been particularly affected with production having fallen from a high of 29 tonnes per annum at its peak to the current 12 tonnes expected to have been produced in 2006.
Why has the gold sector contracted so dramatically when the platinum sector has been expanding? Recent press and company market briefings indicate that the two current platinum producers, Zimplats and Mimosa, have systematically increased production and new investments over the past six years and will continue to do so in the near future. A third producer, Unki Platinum, under Anglo has committed and started its capital investment to bring another mine into production in the next few years. This is in direct contrast to the Zimbabwean mining industry in general and the mining sector in particular.
The answer is very simple. The platinum industry enjoys a fiscal and monetary regime far superior to any other sector of the Zimbabwe economy. The platinum industry is allowed to retain 100% of its foreign currency earnings offshore, and only liquidates into the Zimbabwe dollar as and when it so wishes.
The mining industry is a capital-intensive industry and typically it takes a long time before any profits can be realised. Most of the capital required in this industry is forex-based as most of the items are imported. In addition, most of the consumables in the industry are imported and typically, up to 75% of a mine's input costs including capital are imported.
It is a known fact that although gold producers operate in an environment of high capital requirements, long lead times to production, high recurring foreign exchange requirements, they have been subjected to the worst monetary regime of any other exporter in the country.
Indeed, the anomaly whereby gold producers enjoyed only 40% retention of their earnings in US dollar, whilst the majority of others enjoy 70%, whilst simultaneously requiring high foreign exchange retentions to sustain and grow operations, has contributed to the fall of production and new investment in the gold industry.
Until August 2006, gold producers were required to surrender 60% of their forex earnings to the government at a sub-economic exchange rate. The 40% forex retention was hardly enough to take care of working capital requirements, leaving virtually nothing for critical capital such as exploration, equipment, etc.
What is the typical cost of mining gold in Zimbabwe? No two mines have the same cost profile. For simplicity, one can take two typical examples which are an open pit, shallow to medium depth ore body, heap leach operation (category one) and an underground deep, narrow ore body with a long strike that uses standard crushing, milling and leaching technology (category two). These costs have also been exaggerated because of the overvalued currency to some extent, but essentially represents the typical costs of a gold miner in Zimbabwe. Table I shows data for the two typical example.
One may ask, if the costs of gold production are so high, how gold mines have survived over the years when gold prices have been below US$400 per ounce. The answer is simple; when prices are high, most mines undertake their long-term capital investment and when prices are low, capital expenditure is brought to a minimum.
Based on the above figures, one can easily determine the forex retention level required by gold producers to maintain and grow operations at different gold prices and table II shows the retention levels required.
Therefore, based on these numbers, the operational retention as a percent of revenue needs to be between 51% and 68% for category one and between 46% and 61% for category 2. The capital retention as a percent of revenue needs to be between 19% and 25% for category one and between 25% and 32% for category 2.
The total retention to ensure the continued operation and increased exploration and development of the mines is thus between 70% and 93 % for both categories of mines. Therefore even at the higher gold prices, a retention of at least 70% is required. These figures include a percent for return on capital and management fees of between 4% and 5%.
Over the years when gold producers have been allowed to retain only 40% of their forex earnings, it stands to reason that no capital expenditure has taken place. No new exploration, development ramp up and equipment have been done by gold miners. They have been preoccupied with just survival to worry about replacement let alone expansion capital.
What the authorities do not realise is that whatever capital a miner does not do today, he will have to do it in future. You cannot reap where you did not sow. In order to maintain production, a miner must replace what he mines today through exploration and development and equipment has to be renewed at appropriate times. To increase production, a miner must carry out additional exploration and investment in new equipment.
In October last year, gold producers were summoned to a meeting with the governor of the RBZ and the Minister of Mines. The governor berated gold producers for not having increased production despite the retention having been increased from 40% to 75% (and then down to 67,5% later) since August 2006. The miners responded that it was impossible to see the effects of the increased retention in such a short period of time as policy changes in the mining industry take a minimum of 24 months to take effect.
Obviously to increase production, capital has to be spent, development and exploration has to take place and whatever capital work functional was not done during the period when the authorities were milking the forex from gold producers would have to be done now. It was obvious from this meeting that there seemed to be a lack of trust between the miners and the RBZ and the expectations that gold production would increase in the short-term were misplaced.
The issue of the exchange rate at which exporters surrender their forex to the RBZ has also contributed to the slump in gold production. Since August 2006, the exchange rate has been fixed at $250:US$1. Inflation has been going up by 20% to 30% per month since then. Wages and salaries in the industry have gone up dramatically and all costs have been going up and yet the exchange rate has been kept at an unrealistic level.
Essentially the revenue exchange rate is set at $250:US$1 while the cost exchange rate is the parallel rate. No business can operate like that for too long and sooner or later the impact will be apparent to everyone. It must be remembered that the exchange rate has largely been fixed for the past four years, which has driven all exporters to be unviable, thus driving many of them out of business.
More shocking in the gold industry are developments since September 2006. The RBZ is supposed to pay for 50% of gold deliveries within four days of delivery, with the balance being paid within 21 days. The RBZ has not been living up to this promise and in most cases is taking up to 60 days to pay. This has serious cash flow implications for gold producers. Most inputs have to be imported for cash as few foreign suppliers will give credit to Zimbabwe companies. When the RBZ is over 45 days overdue, it means a gold producer has to have working capital (consumables like cyanide, explosives, drilling spares, pump spares, fuel etc) of at least 90 days, which is near impossible in these days of tight cash flow and high interest rates. The gold mining companies have been brought down to their knees by this latest development. It is estimated that gold mining companies have lost at least 30% of their production during the period September to December due to the late payment of sales proceeds by the RBZ.
It is difficult to understand the motive behind this failure to pay gold producers on time; surely, by paying on time, gold producers are able to produce more gold and therefore earn the country more foreign currency. Representations made to the RBZ and the Ministry of Mines, which is responsible for administering both the Mines and Minerals Act and the Gold Trade Act, have yielded no positive result. It is now near impossible to plan procurement of inputs and production at the operations. In the meantime, companies have to meet fixed costs like wages and salaries, pumping and general maintenance even when production is curtailed through no fault of theirs.
Mining companies have also been inundated with officials from the RBZ and the ZRP. There is a proliferation of people with not much mining knowledge visiting operations and disrupting operations as a lot of management time is spent on these visitors. One big company was approached by the ZRP who wanted to see the specifications of the locks to the elution tanks so that they (ZRP) could buy their own locks and that elution would only take place in the presence of ZRP officers.
Recently the government engaged an international inspection company to audit gold producers to ensure that producers do not side market gold. The gold industry welcomed this move as it will show once and for all that gold leakages are not from formal producers, but are from the korokozas. Chamber affiliated mines are unlikely to side market gold due to the risks associated with it; that would jeopardise a whole investment worth millions of US dollars for a few pieces of silver. The reduction in production witnessed over the years has more to do with viability in the industry than side marketing by formal producers who are mostly Chamber of Mines affiliated. The industry has welcomed the clampdown on illegal mining as this is good for the country in terms of the environment and the eradication of the black market for gold.
It is crazy that gold producers are on their knees when gold prices are at historically very high levels. Gold mining in other countries has taken off, but in Zimbabwe it has fallen to pathetic levels.
Government and RBZ officials need to work closely with industry to ensure viability and growth. The Ministry of Mines has been supportive to a very large extent, but there seems to be difficulties at the RBZ.
* The author is a large-scale indigenous gold miner.
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