Mining sector to contract in 2009

miningThe mining industry in Zambia is forecast to grow at an average rate of 10%during 2008-2013.

The industry is expected to reach a value of ZMK2.094bn (US$0.5bn) in 2013.

However, although the longer-term prospects are good, in 2009 the sector is expected to contract significantly in real terms.  This is according to a Mining Report on Zambia by Business Monitor International (BMI).

According to the report, Zambia’s mining sector is being severely affected by the lower price of copper. It says anecdotal evidence has begun to accumulate of mines halting projects, with LCM suspending the construction of a US$354mn mine while it re-examines the project’s viability.

The report states that Zambia enjoys a vast endowment of metals, gemstones, industrial minerals and potential energy resources including coal, hydrocarbons and, more recently, uranium. For several years now, Zambia’s economy has been greatly dependent on mining, particularly on copper, cobalt and zinc. Globally, the country ranks seventh in the production of copper and second in cobalt.

The major development for the Zambian mining industry over Q209 was the news that the government intends to increase its shareholding in foreign-owned mining companies from a current level of 10%, to35%. The move comes in the wake of many foreign miners choosing to close down unprofitable mines against the backdrop of global economic recession. However, it remains to be seen how foreign investors will react to this increased state presence in the mining sector, with the government giving no steer onhow quickly it wishes to increase its mining stakes.

Copper and cobalt remain the lifeblood of the Zambian mining sector. Speaking in January 2009, FinanceMinister Situmbeko Musokotwane said that preliminary copper production estimates indicated that copper output rose 3.7% in 2008, to 569,891 metric tonnes. Cobalt production rose 19.5%, to 5,275tonnes. Further, exploration of the Zambian Copperbelt area since the 1930s has led to the discovery of many other metalliferous and non-metalliferous resources.

The Zambian state has adopted a mineralpolicy designed to augment investments in the mining sector and ensure its transition to a self-sustaining mineral-based industry. As part of this, state-owned mining companies have been actively privatised since the year 2000 – particularly in the copper segment. As a result of these efforts, Zambia is widely rated a low-risk investment destination and has attracted high levels of foreign investment in recent times. The government recently concluded drafting a revised mineral empowerment policy that aims to stimulate greater participation of Zambian nationals in their vast mining industry.

The government also plans to develop large mining assets in all major provinces to create greater employment opportunities. This would address growing concerns about the uneven distribution of mining wealth.

In June 2009, China Nonferrous Metal Mining Corporation (CNMC) pledged to invest US$400mn in Luanshya Copper Mines (LCM), following its formal takeover of LCM. This new money should see theBaluba mine reopened and further development of the Mulyashi project, which could start to produce copper cathode during 2010. The reopening of the Baluba mine may see the re-employment of some of the 1,740 workers who were dismissed when the mine was placed under care and maintenance at the end of 2008. At the same time, Zambia has increased its own stake in LCM to 20%, as it seeks to increase its stake in the country’s mining industry.

Windfall Tax Dropped

At the end of January 2009, Zambia scrapped the windfall tax on minerals that was instituted in early2008 following complaints from foreign miners operating within the country, and threats to delay projects and cut jobs amid difficulties in raising investment capital.

The pressure from mining companies fighting the greater tax burden increased as commodity prices tumbled and talks shifted in the companies’ favour. Indeed, the ongoing global economic crisis left Musokotwane with little choice but to drop the controversial 25% levy as the country sought to protect its copper industry. At the same time, the minister also cut duty on heavy fuel oil from 30% to 15%, and removed customs duty on various copper products. However, a 15% profit variable tax remains in place.

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