25 May 2017

Zimbabwe: Mining Gets Place in Government's Good Book

At the 78th annual general meeting (AGM) of the Chamber of Mines of Zimbabwe (CoMZ) in Victoria Falls last week, the usually combative Finance and Economic Development Minister, Patrick Chinamasa, stunned captains of the mining industry after addressing them in a conciliatory tone.

"Thank you for being the pillar in our exports," Chinamasa told mining industry executives. "Without you, my job will be more difficult."

It was a straightforward remark that surprised many more because of its tone rather than its truth.

"I can tell you that I am having a peaceful sleep. If mining did not perform, we would be in a worse off situation (economically). Gold has been performing well, platinum has been outstanding, so are chrome ore and nickel exports," he explained, visibly elated.

It had taken spirited efforts from his counterpart at the Ministry of Mines and Mining Development, Walter Chidakwa, to convince the Treasury boss to come to Victoria Falls last Friday.

Chinamasa had a scheduled meeting elsewhere.

And it is easy to understand why Chidhakwa had to convince Chinamasa to reschedule his trip to come and address the mining industry: Only three years ago, mining industry executives would have braced for a tongue lashing from the Treasury chief; the mining industry was considered the hub of all manner of fiscal vices, and was viewed as a breeding ground for tax evasion, transfer pricing and illicit financial flows.

But that perception had changed.

On Friday, Chinamasa's message, which signalled a dramatic about-turn, was simple: Our war is over, tell us what you want and we will listen.

Hearing Chinamasa sing praises to mines, one would feel the usually combative politician, who has shown deep resentment to the industry in the past, may have been addressing a gathering of like-minded ZANU-PF functionaries, or a meeting to rubber-stamp agreed positions. But no!

The executives that sat before him represented the country's finest mining brains, including the bosses of Zimplats, Mimosa Mining Company, Metallon Gold Zimbabwe, Unki, Asa Resources and many others running successful behemoths with Pan African interests.

In politically charged Zimbabwe, where resource nationalisation has been at the heart of political rhetoric, executives in private mining houses have not only been slammed for tax evasion and other vices; they have been accused of supporting the super rich in international markets, who they suspect of manipulating systems in third world countries to undermine their economies and setting the agenda for unchecked looting that has crippled nations like Zimbabwe.

That is why in confrontations with mining houses, bureaucrats had taken turns to lash out at the sector for impropriety and advised President Robert Mugabe to maintain his stance to force them to hand over majority stakes to black Zimbabweans under controversial empowerment laws.

The threat to punish mines had discounted the fact that in the midst of an economic meltdown, characterised by a foreign currency crisis, proprietors have pumped billions into the resources firms to prop up production and spur vital exports.

Outgoing CoMZ president, Toendepi Muganyi, said last week that one domestic bank had injected over US$300 million in working capital lifelines to the sector in the past nine years.

It demonstrated the confidence investors have for the industry.

This was at a time when the manufacturing industry had crumbled and the agricultural sector -- which only showed signs of life this season after years of turmoil due to prolonged droughts and lack of funding -- was still struggling for space in an economy that is predominantly agro-based.

The other key sectors like tourism have been undermined by subdued tourist arrivals, hotel closures and turmoil in airlines.

Industry data indicates that export dollars from the mining industry have accounted for half of total receipts generated by the country in the past nine years, with 145 000 workers directly and indirectly benefiting from the sector.

There were about 15 000 direct jobs in the mining industry in 2007, but an additional 30 000 have come on stream since 2009, taking the total to 45 000, according to official data.

It makes the mining industry one of the largest employers in Zimbabwe, after the public service.

It has been riding on aggressive expansion in the three platinum mines, which reorganised after being ravaged by hyperinflation in 2008, and brushed aside the threats of expropriation and harsh taxes to build the base on which the Ministry of Mines now says could generate US$3 billion in mineral exports this year.

Yet government had paid a blind eye to the fundamental role that mines have played rescuing Zimbabwe from the throes of a failed State, to an economy that has managed to pull through.

The 2015 CoMZ AGM in Victoria Falls stood out among the most charged.

Chinamasa came out with guns blazing, blaming sector executives for failing to live up to the expectations of the country.

"It is an industry that is fighting below its weight," Chinamasa said then.

"We must bring it to the heavy weight. There is a need to address transfer pricing and illicit financial flows that seem to benefit foreign companies rather than host countries," Chinamasa charged.

Massive profits were being declared to parent firms domiciled in tax havens, the 2015 AGM was told.

In Zimbabwe, these taxes were under declared through related party transactions between holding companies and subsidiaries, through a practice called transfer pricing, government charged.

Added to capital inflows now coming in as loans instead of equity, Zimbabwe was losing big time, according to Chinamasa, who also warned the industry then against transfer pricing.

"Please stop it," he warned.

"This will have serious consequences if we catch you."

Then, Chinamasa was reasonably comfortable, and could still afford to be complacent: The multicurrency regime that started in 2009 was still relatively working, although it was beginning to fall apart.

Hard currencies were still oiling the levers of the economy under his stewardship.

However, cracks were beginning to emerge everywhere.

The central bank had not intervened with bond notes, which have now instigated an exodus of billions out of the market and left banks battling to serve customers.

Chinamasa still had a semblance of control that gave him the luxury to threaten industries that crossed his path.

Today, the country is on the edge, with bank queues alone accounting for an estimated US$500 million in lost production.

At one time, foreign airlines could not remit over US$30 million because nostro accounts have run dry.

Communal tobacco farmers, usually loyal, turned belligerent three weeks ago when they demonstrated against lack of access to cash from banks after selling their produce, highlighting how bad the situation has become.

It has become clear that in spite of the plunge in mineral prices, mining has remained the biggest contributor to export revenue.

And slowly, government has realised how vital it is to court the industry to map a winning formula, instead of its perennial resentment.

Last year, mines made the largest contribution to the fiscus, implying that in the absence of meaningful exports from a bleeding manufacturing sector and tobacco, which is expected to bring about US$700 million this season, mines have saved the country.

"It is well appreciated that over 50 percent of the country's export revenue has been emanating from the mining sector," Chidakwa told miners in Victoria Falls last week, expressing government's appreciation of the sector.

"The sector has also been contributing about 16 percent towards the country's gross domestic product, with formal employment estimated at about 45 000 for large scale miners and over 100 000 in the small to medium scale mining sector. Performance of the mining sector in the first quarter of this year reflects a positive trajectory," Chidakwa said.

Revenues from chrome mines, whose exports had been previously banned, are projected to spur growth.

There have been sharp rises in other metals, including the exportation of ferrochrome, which generated US$147 million during the first quarter of this year, from only US$23 million during the same period last year.

Overall, mineral revenue rose by 23 percent during the review period to US$547 million, from US$444,6 million during the same period last year, according to the Ministry of Mines.

Chrome mines have returned to production after government lifted a 2011 export ban about a year ago.

It was one of many policy inconsistencies by government, whose flip flops have discouraged investors.

Government is hoping that by lifting its grip on chrome exports, it would help the country offset the biting foreign currency crisis.

"The mining sector has carried the economy, and I came here to thank you for that," Chidakwa noted.

"We (the mining industry) are having to carry the greater burden of pulling everybody with us. During our strategic meeting at the Ministry, we said we want to get to US$3 billion this year, from US$2 billion," Chidakwa said.

"We may not get to US$3 billion but we aspire to be at US$3 billion," said the minister.

He said mineral sales had been driven by robust growth in platinum exports, which accounted for 42 percent of the total export receipts, even after international prices tumbled in the past year.

Platinum prices have been hovering at around US$900 per ounce in the past few months, from a peak of US$1 800 per ounce during boom times between 2011 and 2012.

The past few weeks have been especially bad for platinum miners, who have seen prices slide to below US$900 per ounce.

This has sent shock waves across the world's leading producers including Zimbabwe.

Overall revenues could have been higher had gold mines not been ripped apart by flooding of shafts after cyclones and storms rattled resource fields at the beginning of the year.

Chidakwa said hundreds of artisenal miners, estimated to be producing about 43 percent of overall gold output, had switched back to farming.

"That is what affected gold output," Chidakwa said.

As the year progresses, the mining industry will be watching to see if government would honor pledges.

There were already concerns that several issues were yet to be resolved.

"The industry continued to be undermined by systemic challenges that include capital and foreign exchange constraints, high energy tariffs, a sub-optimal fiscal framework and increased labour costs. While some legislative matters remained outstanding during the year under review, notable achievements were recorded in a number of strategic areas," said CoMZ chief executive officer, Isaac Kwesu.

"The reviewing of the fiscal framework for the mining industry remained outstanding during 2016. Reliability and sustainability of (power supply) remained major causes for concern. The industry's performance in 2016, particularly the gold sector, was undermined by delays in the processing of foreign payments for importing critical supplies. Notwithstanding the above, the fiscal landscape for the mining industry remained an issue of concern during 2016, as the sector faced high ground rental fees, rural district council levies, high Environmental Management Agency charges and suboptimal royalties, which remained non-deductable as a tax expense," Kwesu told the conference.

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