First Quantum boss says Zambia taxing mine to death

First Quantum boss says Zambia taxing mine to death

END OF MY ZAMBIAN CHAPTER-MATT PASCAL, FIRST QUANTUM MINERALS CHAIRPERSON

• We have to shed 1000 jobs as it’s the only cost we can vary

• ZRA refuses to allow us to bring fuel at costs demanded by SADC Protocols

• We are owed $400million in VAT tax refunds.

•Zambia may be taxing the mine to death

•Since I was involved in privatisation, it was inevitable that ZCCM is sold to save the sector.

• Will spend more time in Panama we were are developing a new copper mine.

My involvement with Zambia as part of First Quantum started at Kansanshi in 1996 when, as the first FQM person to visit the mine site, I did a quick review of the then small-scale mine and resource as part of the Privatisation exercise.

As a side note our bid for Kansanshi wasn’t successful and it was bought by an American company, Cyprus Amax on 31 December 1996. Cyprus Amax did a detailed drilling exercise which significantly increased the resource from ZCCM’s 50Mt to over 300Mt. However, they couldn’t make the project feasible due to the low copper price (about 80c/lb). Phelps Dodge, another American company, then bought Cyprus, and after some time agreed the project was not feasible by which time copper price had dropped to about 70c/lb.

In the meantime, FQM had started production of the tailing retreatment plant at Bwana Mkubwa. After several bidgs to buy mines through the Privatisation process of ZCCM, we were finally successful in being awarded what is now Mopani Mines through the privatisation exercise of late 1999. With Glencore we took over control of Nkana and Mufulira mines on 1 April 2000.

A year later we diluted our interest in Mopani and coincidently Phelps Dodge decided to get out of Africa with their last holding being the Kansanshi prospect. We were able to convince Phelps to sell to us, and we reworked the feasibility study which showed that with a considerably smaller plant (by selectively mining the different ore types) for the same copper output the project was feasible with a break-even at 72c/lb.

While working on the Kansanshi study we secured the exploration rights in DRC over what became the Lonshi and Frontier mines. Lonshi started mining in 2002, and after upgrading the Bwana plant we were able to start treating Lonshi ore in 2003.

Kansanshi’s first concentrate production was on 31 December 2005, and the first cathode was produced in about April 2006.
Exploration work at Frontier had been on-going and had proved up a viable resource. Work started on the mine site in mid-2006 and first concentrate production was in Q3 of 2008.

By this time, we had purchased Adastra whose principle resource was the Kinganambo Musonoi Tailings (KMT) deposit in Kolwezi. After some disagreements with our partners, Gecamines, we with the other minor shareholders (IFC and IDC) commenced construction of the process plant in October 2007. When this truly first class plant was nearing completion in the final months of 2009, the government decided to take away our license as we and our other shareholders were not prepared to adjust the terms of the agreement. Some 2 years later our license to mine Frontier (the biggest tax payer in Congo’s history) was removed in retaliation for initiating international arbitration over the KMT seizure.

So ended our short experience in the Congo. As some consolation one of the prime benefactors of our expulsion is under investigation by the US Department of Justice and is on the so-called Magnetskyi list. This certainly exonerated FQM in our principled stance with regard to honouring agreements and not bowing to unethical pressure.

Back in Zambia Kansanshi continued to expand from its original name-plate production of about 110,000 tons/year to the maximum achieved of over 270,000 tons. This making it the biggest producer ever in Africa. In 2015 one of the world’s largest single stage construction smelters was successfully commissioned and brought up to name-plate capacity within 3 months. The impact of the smelter in terms of acid costs, recovery and other benefits has been huge.

With the disappointment of Congo, the company became involved in mine construction and operations in Mauritania, Finland and Australia. The later acquisition of Inmet in early 2013 expanded our world footprint further to include Spain, Turkey and Panama.

Work started on Kalumbila’s Sentinel mine early in 2012, and despite a 6-month delay negotiating a workable power tariff, production started through 1 train late in 2014.

Due to the scale of the Sentinel plant and a number of other issues the build-up of production throughput took longer than we had experienced at our previous mines. But with the perseverance, dedication and professionalism of the current team this mine is now firmly established as a world-class asset.

Although my day-to-day management role in Zambia ends today, as one can see from the history, the voyage from a tiny start-up to now has been a tremendous ride. It couldn’t have happened without the all the men and women who have worked with us over these years, and this is really a tribute to all of you.

So my sincere thanks go out to all of you, and to those who may have been part of the journey but are no longer with us for whatever reason. Of course I have had to spend a large proportion of my time away from home and so my wife and family have been and remain a critical support to me.

I would also like to thank all those who, other than at work, have helped to make life more sociable enjoyable whether this was patiently waiting for me on cycle rides, hacking around the golf course, feeding me or in any other social activity.

Although our long since abrogated Development Agreements required us to be committed to undertakinge certain CSR functions, I believe we have gone a lot further than was strictly required.

Oddly it has been some of these activities that stick out as extremely rewarding. An area that we have put a huge amount of effort into has been in education. This is not limited to pure school-room education (even though we have built 6 new schools, supported early childhood schools and over 60 government schools around our mine sites) but has also included artisan training, Conservation Farming (with over 7000 active farmers), wildlife education, adult literacy, teacher training, business management training, etc.

When our mines finally come to the end of their operations the one thing that can never be taken away from people is their education i.e. it is truly sustainable.

As all of you who work on our mines will know we have also contributed hugely to infrastructure development around the mines. This has included: maintenance and rebuilding of the T5 National road; construction of many kilometres of tarred roads; buildings Kabitaka and Kalumbila towns; clinics; schools; power supply; airports; police stations; etc.

Realistically a lot of this work should be done by government out of the taxes, especially royalties, paid by the mines. Royalties, strictly speaking, should be for the benefit mainly of those whose lives are affected by the creation of the mines, i.e. the local residents.

Finally, it would seem improper for me to take my leave without some explanation for the letter I recently sent out regarding reductions in labour numbers, especially given the amount of negative reaction it has caused.

The prime responsibility of any company to all its stakeholders is to stay in business. If a company or mine closes down for whatever reason all parties, including all the employees, lose.

Having been personally involved in the ZCCM Privatisation process it was very evident even before 1999, that ZCCM could not continue as a business – it was losing $1 Million per day, which was only possible with World Bank funding that was meant for the State.

This is part of the reason that Zambia ended up with over $6 Billion in debt to the World Bank and others.

It is commonly believed that the company’s demise was due to the low copper price over a period of time. However, over the same period (1970 – 2000) Chile’s copper production went up by a factor of 10 from 500,000 tons/annum to over 5,000,000, while Zambia’s went down by a factor of 3 from 750,000 to less than 250,000. This despite the fact that Zambia’s copper grades were typically more than twice as high as Chile’s.

But it wasn’t just ZCCM that went down: so did real wages as the Kwacha depreciated from 1K = $2, to $1 = 5000, and employees were at almost starvation levels relying on the company ration of half a loaf of bread a day and 25kg of meiliemealie meal a month to survive; other para-statals like ZESCO and ZRailways were not paid over long periods leading to the deterioration of the power and railway assets of the country; and suppliers waited for months for payment of inflated invoices.

The problem was that ZCCM belonged to the government who often don’t or can’t differentiate between Gross Profit and Net Profit. This deprived the company of the Retained Earnings necessary to provide at least Sustaining Capital if not Growth Capital. Over a period of years without this expenditure the assets of ZCCM deteriorated and with this its ability to maintain high production levels.

By 2000 the assets were in such poor condition that not only did the new owners have to spend billions of dollars refurbishing them; but also had to pick up the full retrenchment liabilities (over $110 Million) for the entire ZCCM workforce.

The uneasy truth was that ZCCM had reached a stage where it couldn’t afford to pay reasonable wages nor could it afford to retrench workers due to the high retrenchment benefits. Sometimes it is important if not critical to reduce labour numbers if the health and survival of the company is at stake.
What had happened to the once mighty ZCCM? It had effectively been taxed to death this is probably true to say that being a State-owned entity it was not able to make decisions on a purely business basis, and the Golden Goose was plundered of all its eggs.

Winston Churchill once said “We contend that for a nation to try and tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handles”.

As I said in my letter, the government effectively controls a large part of our costs.

Specifically, it sets the level of taxation, it sets the price of electricity and it controls the price of one of the major consumables, diesel. The price of diesel has increased significantly over the past year as not only has the government stopped the import of fuel by major suppliers at competitive prices, but they have also disallowed a standard 25% rebate on duty exemption on South African fuel which passes all the definitions of SADC produced imports.

The taxation level has been further exacerbated by the non-refund of VAT to the tune of well over $400 Million to FQM.

This leaves the only costs in our control as being; other consumables, maintenance spares and labour. Reducing the cost of consumables automatically reduces the levels of production, and once production levels decline so must labour costs.

To prevent a ZCCM-style deterioration in assets, maintenance spares and quality of maintenance needs to be upheld as these are part of Sustaining Capital.

Any new or Expansion Capital will not be possible under the prescribed new tax regime.
To reiterate what was in my letter – these moves on labour reduction are not “strong-arm tactics”, they are simply measures that need to be taken to ensure the mines are not “taxed to death”.

It may also be worth pointing out that government, through the Ministries of Finance and Mines has Board members sitting on all the ex ZCCM company boards.

They have full unfettered access to all the financial information that illustrates the plight of the industry, and are free to ask for all pertinent back-up details.

The main reason for this message was to thank all current and past staff and employees of our Zambian operations for their loyalty, dedication and efforts that have contributed to the company’sir success and to my enjoyment and fulfilment.

Also to explain why the current unpleasant situation has arisen and why we are taking steps to mitigate their effects.

Finally, to wish you all a healthy and safe 2019, and to state that I have no doubt that Rudi (who has also made the 22-year journey) and his team will ensure that the mines get through this tough period and will flourish in the future.

  1. And while my main responsibility will now be in South America I will no doubt visit Zambia from time to time.
    Thank you
    Matt Pascall

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