Zambia shows it’s not too late for SA’s mining sector
The election of Hakainde Hichilema as president ushered in a new era of credible, stable policies
In last week’s column I identified four mining sector blockages: policy instability, the poor state of logistics, maladministration around mining licences and permits, and crime around mines.
Each of these blockages adds to the cost of mining in SA. Logistics failures alone cost the sector R35bn of export earnings in 2021 and R50bn in 2022. Add the price of the remaining blockages, and it’s evident why investors won’t enter the market despite its R42.5-trillion in resources.
The big question now is whether the SA mining investment climate is salvageable, and if so how long this will take. Based on the experience of Zambia, the answer is positive and a reasonable time horizon is five to 10 years. This accounts for the necessary changes and a period of stability to reassure investors. It’s a relatively short time frame when you consider that some of SA’s mines have a lifespan of more than 80 years.
If you had asked me five years ago whether Zambia would become an example of a “good” mining investment environment, I would have been doubtful. After all, in 2018 the Zambia Chamber of Mines released a statement warning that a new tax change would make Zambia “uninvestable”.
In 2018 Zambia raised its royalty rate for the 10th time in 16 years, withheld VAT refunds, imposed double taxation as mineral royalties were no longer tax deductible, adopted a resource nationalism approach by implementing a 5% import duty on copper concentrates, and created an environment with uncertainty of tenure.
The effect on mining investment? Production dropped, despite strong copper prices. According to the Chamber of Mines, in 2019 companies withheld over $650m (roughly R11bn) of investment. Vedanta shut down its Nchanga smelter in the face of a 5% import levy that made smelting unprofitable. Glencore shut down its Mopani operation and went on to sell it. First Quantum Minerals was on the brink of retrenching 2,500 people, citing unprofitability due to high taxes — but ultimately refrained from it.
At the 2019 African Mining Indaba I joined a small group of investors for breakfast with then Zambian mines & mineral development minister Richard Musukwa. The sentiment was bleak, at best.
However, the election of Hakainde Hichilema as president in 2021 ushered in a new era of credible, stable policies and investor confidence. Hichilema committed to increasing Zambia’s copper production from 800,000 tonnes a year to 3-million tonnes over 10 years. This would require billions of dollars of investment — and he rolled up his sleeves to make it happen.
Hichilema eliminated resource nationalism by scrapping the 5% import levy, which made importing copper from the Democratic Republic of the Congo (DRC) commercially viable. He replaced it with an agreement with the DRC to build a regional value chain by manufacturing electric batteries using the minerals found in both countries. He knew both countries would be better off.
Hichilema reduced taxes to a more competitive level and eliminated double taxation. He also brought accountability, pausing the issuance of mining licences to clean up the system and bring transparency going forward.
It has already started working. First Quantum Minerals has announced a $1.3bn investment to build a nickel mine and scale up copper production in Zambia. Anglo American has returned to Zambia after two decades. Rio Tinto has commenced an exploration campaign, and Barrick Gold has scaled up its exploration with the aim of creating a super-pit at its existing mine, which could extend its life by 60 years.
A question Zambia, SA and most other developing countries must ask themselves is what the country stands to gain from creating a favourable investment environment for multinational firms. Under the previous Zambian administration the rationale for resource nationalism and high taxes was to increase fiscal revenue. But what resulted was divestment, and a loss of revenue and foreign exchange despite the country having some of the richest copper reserves in the world. Zambia would go on to default on its debt in 2020.
When Hichilema was elected he opted to play the long game. He knew becoming an attractive mining destination would place the country at the centre of the clean energy transition for decades to come. Increased investment would ultimately generate significant fiscal revenue, which when coupled with credible debt restructuring discussions with creditors could put the country on a sustainable debt trajectory and enable the government to finance critical development objectives.
SA should take a leaf out of Zambia’s book. Short-sighted policies keep investment out.