Why a Tax Crusade in Zambia Worries Copper Miners

(Bloomberg) -- Zambia’s government has long complained that it doesn’t derive sufficient revenue from its copper industry, Africa’s second-biggest and the world’s seventh-largest. President Edgar Lungu upped the ante in May, when he accused the local unit of Vedanta Resources Ltd. of lying about its expansion plans and cheating on taxes. A state-owed company is now moving to liquidate Vedanta’s assets. Lungu’s heavy-handed embrace of resource nationalism, which could be directed at winning reelection in 2021, has the potential to upend copper markets.

1. Why is Zambia at odds with the mining industry?

There’s a fundamental disagreement over how Zambia’s copper spoils should be shared between the state and companies that mine them. Tensions have boiled to the surface whenever the government has sought to raise taxes and companies have responded with threats of shaft closures and job cuts. Vedanta’s relationship with the government has been particularly fraught since its local chief executive’s work permit was canceled in 2013. Other companies have also been targeted -- First Quantum Minerals Ltd. was presented an almost $8 billion tax bill last year, while Glencore Plc has been ordered to surrender shafts it had planned to mothball to local companies so they can continue operating.

2. Could more mines be seized?

Possibly. Lungu has said Zambia’s “divorce” with Vedanta was just a start. But his mines minister, Richard Musukwa, has given assurances that the case is an isolated one that arose because the company failed to comply with its license conditions. He insists the government isn’t embarking on a nationalization drive, as it did in the years following independence in 1964. Vedanta argues the government didn’t follow proper dispute-resolution procedures; its Indian billionaire owner, Anil Agarwal, has warned that the standoff will scare off investors. The wrangling has weighed on the share prices of other mining companies with operations in Zambia, including First Quantum and Gemfields Group Ltd.

3. Is Zambia alone in this?

No. Acacia Mining Plc, majority-owned by Barrick Gold Corp., was slapped with a $190-billion tax bill in neighboring Tanzania in 2017 -- a levy equal to almost two centuries worth of its revenue. And in 2018, the Democratic Republic of Congo, which also borders on Zambia, raised its mining royalties. Both governments argue that their tax take from mining is insufficient.

4. What does this mean for the copper market?

The global market faces a production shortfall of about 190,000 metric tons this year and 250,000 tons in 2020, according to the International Copper Study Group -- a deficit that would be exacerbated by any further disruptions in Zambia. Zambia’s Chamber of Mines, which represents the industry, warned that the nation’s output could fall by as much as 100,000 tons this year because of what it called an increasingly unbearable tax burden. Vedanta mined 90,000 tons of copper in Zambia in the 12 months through March. The escalating trade war between the U.S. and China, which alone accounts for more than half of global copper usage, has depressed demand for the metal and so far negated the effect any shortage may have had on prices. Copper, used in pipes, electronics and electric vehicles, accounts for more than 70% of Zambia’s export earnings.

5. What happened the last time Zambia took over mines?

Zambia was one of newly independent African states swept up in a socialist wave in the 1960s and 1970s, and the government nationalized mines owned by companies including Anglo American Plc. Poor management, coupled with spiking oil costs and falling copper prices, resulted in the mines wracking up massive losses, and copper production plunged by two-thirds in the three decades through 1999. Output recovered after the mines were privatized again, and booming demand from China pushed prices to record highs. Production reached a record high of 861,946 tons last year. A production decline this year would be the first since 2014.

The Reference Shelf

• Bloomberg stories on Vedanta’s efforts to resolve its dispute with Zambia’s government and Barrick’s proposal to address Acacia’s tax difficulties in Tanzania.
• The International Copper Study Group’s latest copper market forecast.
• The Zambian mining industry’s warnings on how higher taxes could curb copper output.
• From Bloomberg: A copper mining lesson from Zambia: history repeats itself.
• QuickTakes on the resource curse and on resource nationalism in Indonesia.

To contact the reporter on this story: Matthew Hill in Maputo at mhill58@bloomberg.net

To contact the editors responsible for this story: Karl Maier at kmaier2@bloomberg.net, Mike Cohen, Andy Reinhardt

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