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Will Zambia be ready when the copper price recovers?

Being unprepared for the coming upswing in metal prices is the number one risk facing global mining – and copper mining in particular, says Ernst & Young in its annual risk report, Business risks facing mining and metals: 2015-2016.
That’s according to an article posted recently on the website www.miningforzambia.com.

It is also the number one risk to the Zambian copper-mining industry, the article says, quoting a warning in the World Bank’s 2015 Zambia economic brief that “growth in production will begin to slow after around 2019. Along with the decline in production there will be a decline in government revenue, mining industry jobs, and foreign exchange”.

“So, three to five years from now, Zambia could wake up with a mining industry that is unable to cash in on renewed global demand for copper, unless there is further investment in new production capacity and improved productivity,” the article says. “Given the long lead time to develop new supply, decisions to invest for future growth have to be made now.”

The second major risk identified in the report is access to energy, which is said to represent up to 40% of a mining company’s total cost base. Securing “sustainable, cost-effective and reliable” energy is becoming critical as mining companies expand operations to remote areas with under-developed energy infrastructure, the report says. Also, increasing affluence in developing markets – like Zambia – has meant greater demand for residential energy from domestic users.

The importance accorded to energy by the Ernst & Young report comes as “no surprise to Zambia”, where there is not even enough power for existing mines. “Current power constraints mean that even if there was the desired massive wave of new mining investment in Zambia, new or expanded mines would stand idle for lack of electricity,” the article says.

The good news, however, is there are several power generation projects planned, under construction, or nearing completion in Zambia, and the first of these are scheduled to come on stream within the next three to five years.

Another major risk identified in the Ernst & Young report is resource nationalism, which typically translates into high taxes and other measures. Taxes and royalties are still being increased around the world, the report says, but “not with the vigour of previous years”. Various countries have been improving their investment environment to encourage capital flows; others – like Zambia and Australia – have repealed punitive royalty tax rates.

“The Ernst & Young report is useful in that it shows Zambia’s challenges are not unique to the country, and exist in a global context,” says Zambia Chamber of Mines president, Nathan Chishimba, in the article. “That said, the various risks outlined are proportionately more important for a single-commodity economy like Zambia’s, than for larger, more diversified economies.”

He adds that the report shows that everything is connected from a policy perspective in the quest for higher revenues from copper – higher revenues imply higher copper production; higher copper production implies more investment; more investment implies an investor-friendly environment; and an investor-friendly environment implies a reliable supply of energy, without which no new production can take place.

“This is why strategic, long-term vision is so critical – both by the mining industry which invests, and the government which establishes the policy framework within which that investment takes place,” says Chishimba.

 

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