Zambia Tax Hikes to `Break Economy's Back,' Mines Lobby Says

(Bloomberg) -- Zambia’s plan to increase mining royalties will break the back of the economy in Africa’s second-biggest copper producer and make investment there impossible, an industry lobby group said.

Responding to plans Finance Minister Margaret Mwanakatwe unveiled last week to increase royalties by 1.5 percentage points while introducing additional charges for metal exports and imports, the Zambia Chamber of Mines said the measures would “lead to famine.”

“Let us be clear, these higher tax rates will not result in more tax revenue," Nathan Chishimba, president of the lobby group, said Wednesday in an emailed statement. "As industry production shrinks through the impact, there will be less jobs, less taxes and as a result there will be less in the government’s bank account for many years to come."

Members of the group include Glencore Plc, Barrick Gold Corp. and Vedanta Resources Plc. First Quantum Minerals Plc, which produces more than half of Zambia’s copper, is also part of the chamber. Mwanakatwe’s tax increases for copper producers come as the government tries to finance a gaping budget deficit amid rapidly rising external debt.

“As mineral resources are a depleting resource, it is vital to structure an effective fiscal regime for the mining sector to ensure that Zambians benefit from the mineral wealth our country is blessed with,” Mwanakatwe said.

Contentious Issue

Mining taxes in Zambia have been a contentious issue for years, with frequent claims the industry that accounts for more than 70 percent of foreign-exchange earnings doesn’t contribute enough to the Treasury. The changes are the 10th tax shift miners in Zambia have faced in the past 16 years, according to the New York-based Natural Resource Governance Institute.

Last time Zambia increased royalties in 2014, Barrick said it would close its mine, and the government dialed back the tax changes. Glencore said this week it’s undertaken a “wide-ranging” cost review at the company’s Mopani Copper Mines unit in Zambia, and hasn’t made a final decision on the outcome, including retrenchments.

The new tax system that comes into effect Jan. 1 makes the following changes:

• Royalties that have a sliding scale of 4 percent to 6 percent increase 1.5 percentage points across the board
• A new 10 percent royalty kicks in if copper prices exceed $7,500 per ton (the metal currently trades at about $6,270 per ton)
• Cobalt royalties will increase to 8 percent from 5 percent currently
• Zambia will introduce an import duty of 5 percent on copper and cobalt concentrates, the semi-processed forms of the metals
• There will be a 15 percent export duty for precious metals and gemstones
• The government also plans to replace value added tax with a non-refundable sales tax

The changes threaten profitability at mines, Chishimba said.

“A number of operations will be pushed into loss-making positions and will likely have to scale back,” he said. “Those already making losses will be pushed further into the red. And some of our members have had to immediately put on hold their expansion plans, which is the lifeblood of future production.”

To contact the reporters on this story: Taonga Clifford Mitimingi in Johannesburg at tmitimingi@bloomberg.net;Matthew Hill in Johannesburg at mhill58@bloomberg.net

To contact the editors responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net, Paul Richardson, Pauline Bax

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