Although the growth prospects for Zambia’s mining sector remains positive for this year, amid rising copper prices and improved electricity supply, a worsening regulatory environment may negatively impact on the country’s copper production in the coming years, warns BMI Research.
“We expect Zambian copper production growth to accelerate in the coming months as copper prices and domestic power supplies improve. On March 20, the Zambian Ministry of Mines announced its targeted copper production levels of more than a million tonnes, up from 755 000 t in 2017,” BMI reports.
BMI expects Zambian copper production growth to average 8% this year, which will amount to production of 815 000 t – up 2% on that produced in 2017.
The primary driver behind rising copper production in Zambia this year will be the positive copper price environment. Within a generally strong performing industrial metals complex, copper prices have risen more than 21% in the past 12 months – copper being the best performing base metal after nickel.
“While we expect copper price gains to be more limited in 2018 compared with the rally witnessed over 2017, steady demand growth will underpin continued tightness in the copper market and keep a floor under prices,” states BMI.
Accordingly, BMI revised its copper price forecast to an average of $7 000/t for 2018 from a previous forecast of $6 300/t.
Meanwhile, higher dam-water levels in Zambia so far this year will likely reduce the possibility of power shortages in the coming months, as unreliable power supply remains one of the key constraints for the operational efficiency of mining companies in Zambia.
This is owing to the country’s over-reliance on hydropower.
Nevertheless, BMI notes rising downside risks, stemming from a worsening regulatory environment and prompted by a delicate economic environment.
In what is likely an attempt to raise funds, the government announced in March that it would audit local mining companies’ financial statements going back six years, to assess potential underpayment of taxes during that time.
So far, copper miner First Quantum has been handed a $7.9-billion tax bill as a result of the audit, which poses significant risks to the company, since Zambian operations account for about 80% of its pre-tax earnings as of 2018.
If other companies were to be affected in the same manner, BMI may revise its growth forecasts for the Zambian mining industry.