Mining forecast remains positive amid new taxes

Fitch Solutions researchers have indicated that recent tax hike announcement by government recently are to prompt downside revision to the country’s copper production forecast.

Government recently announced it will expand and increase taxes on mining companies operating in the country, as part of its 2019 budget.

This comes after speculation on the possibility that the mining industry would be targeted in next year’s budget had grown following an announcement by authorities to trim the country’s fiscal deficit despite increasing overall expenditure.

In addition, the move is part of government’s greater commitment to slow the accumulation of new debt, reassure investors after the kwacha depreciated by 23.8 percent in September.

The new budget proposal introduced key mining tax changes and additions that include an increase in the mineral royalty tax by 1.5 percent across the different price bands (4-6 percent in the case of

copper) and introduction of a fourth tier rate at 10.0 percent when copper prices rise above USD7,500/tonne.

On the other hand, the mineral royalty tax is now non-deductible for income tax purposes, introduction of sales tax in lieu of value added tax, a 15.0 percent duty on manganese ores and concentrate exports.

The barrel of changes also includes a 15.0 percent duty on gold and precious stones exports and a 5.0 percent import duty on copper and cobalt concentrates.

“The new measures confirm our previously-held view highlighting growing downside risks to Zambia’s mining sector as rising fiscal deficits recently prompted the government to toughen its rhetoric on mining companies in an attempt to raise funds,” Fitch Solutions said recently.

“We believe higher taxes and royalties will increase operational costs for the domestic mining sector, likely leading to reduced output as a result.”

Zambia Chamber of Mines President Nathan Chishimba declared that the measures will push many firms into loss-making positions, forcing them to scale back production.

For example, it is estimated that one of the country’s largest copper miners, First Quantum Minerals, will witness a rise in all-in sustaining costs from USD1.65/lb to USD1.68/lb.

More generally, the latest tax hike represents the 10th time miners in Zambia have witnessed a shift in tax rates over the past 16 years, thus increasing policy uncertainty and negatively impacting investor sentiment.

As such, we have revised down our copper production growth forecasts in the country from 6.0% and 8.0 percent in 2019 and 2020 to 5.0 percent and 4.0 percent, respectively – despite our conviction that copper prices will continue to rise over the coming years.

Though government has previously backtracking on proposals to increase mineral royalties and taxes in 2015 after Barrick Gold Corporation threatened to suspend operations at its Lumwana open pit copper mine.

Fitch Solutions says that will not happen next year and government will not succumb to pressure.

“We do not think President Edgar Lungu’s administration is likely back off this time, as investor concerns over debt sustainability will force the government to implement the needed reforms, while rising copper prices will offer a key bargaining chip in tax negotiations with the miners.”

The researchers’ forecast for copper prices is a rise from USD6,700/tonne this year to USD7,100/tonne in 2019 and USD7.200 in

2020 that will soften the impact of increasing royalty rates on mining companies’ profitability.

“Much like in the DRC, where mining royalties were increased earlier this year, we do not expect an exodus of mining companies leaving Zambia in the coming months as a result of the new tax measures – leading us to maintain a positive outlook for the country’s copper production outlook ahead,” Fitch Solution researchers said.

Nathan Chishimba – President – Chamber of Mines


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