Plans by Edgar Lungu

Zambia’s new president to reverse a hike in mining royalties may come too late to revive investment in the sector, with confidence among foreign mining companies shaken and neighbouring Democratic Republic of Congo looking a potential better bet.

Eager to fill a hole in its finances, the government said last year it would scrap a corporate income tax of 30 percent while hiking mining royalties for companies operating in Africa’s second-largest producer of the metal.

That policy, developed under populist former President Michael Sata, was inherited by newly-elected President Edgar Lungu of Sata’s Patriotic Front Party.

Lungu pledged to fight poverty and maintain the late Sata’s legacy but has since signaled an intention to scale back the royalties, which came into effect in January, after mining companies threatened to cut production and jobs in a sector that is the life blood of the country.

The government is also ready to negotiate another sticking point: the payment of $600 million in Value Added Tax (VAT) refunds, which the industry says it is withholding.

But with no clear plan in place yet to reverse at least some of the royalty hikes of 20 percent from 6 percent on open pit mines and of 8 percent from 6 percent on underground mines mining companies are unimpressed.

“In hindsight Zambia might regret implementing this tax change at the low point of the mining cycle,” said Åsa Borssén, resources policy analyst SNL Metals and Mining.

“There are benefits to implementing a royalty system in this kind of governance environment in developing countries but it has to be reasonable in comparison to other tax environments, otherwise they will lose out on revenue as companies will move their investments elsewhere.”

Already contending with a plunge in copper prices to 5-1/2 year lows that have slashed their profits, mining companies are unnerved by the swift policy change and are unlikely to invest more in projects in the country whatever the outcome.

“Mining companies are not going to put another dollar in there, whatever their final decision is, because the government has proved unreliable,” said a mining industry source.

This will hurt Zambia, where mining accounts for 12 percent of its gross domestic product and 10 percent of its formal employment.


Taxing revenue rather than profit can work better in emerging countries with limited resources to check on collection and high tax evasion.

It should also bring more money for copper producers at a time of thinning profits, but it’s more punitive in a low price environment and it hits the highest-cost producers most.

Among the companies that would be worst hit are Glencore and Vedanta, with production costs for underground mines Nkana, Mufulira and Konkola at almost $6,000 a tonne and Barrick, with open pit Lumwuana’s costs at around $5,000, according to data from SNL.

Copper prices are currently around $5,700 per tonne.

Canadian company Barrick has announced that it will shut down its costly Lumwana mine.

Vedanta, which employs about 8,000 staff in Zambia has said the new tax regime would cost it $15 million in core earnings in the first quarter this year and has started a “deep review” of its mining operations Zambia.

“Our priority is to make sure that the business is viable, sustainable and generates positive cash flow We’ll look at all options,” Vedanta Chief Executive Tom Albanese said when asked whether job cuts were a possibility.

The uncertainty in Zambia could even drive mining companies to look at opportunities in neighbouring Democratic Republic of Congo, which became Africa’s largest copper producer in 2013.

“If companies start to see other countries as a better match for their investments then those will be moved to where the rate of return is the most favorable,” Borssén said. “And in the case of DRC it is just across the border.” 



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