Mining News

Zambia Triples Mining Tax

Posted by Cheryl Rutledge on 1/14/2015 4:13:39 PM

By Sean Taggart and Kenneth P. Green

The Zambian government has announced that there will be significant changes to the country’s mining royalty regimes as part of their aim to overhaul the country’s tax system. The tax on earnings will increase from 6% to 8% for underground mines, and 6% to 20% for open pit mines.

The tax regime change in Zambia, Africa’s second largest copper producer, is predicted to force the closure of a number of significant scale mines, and leave over 12,000 Zambians jobless. Given mining activities made up 12% of Zambia’s GDP last year, this is one of the most significant decisions made yet by the first-term government.

Mining giant Barrick Gold (TSX: ABX) has already announced it will halt operations at its Lumwana copper mine as a direct result of the changes in royalties. “Despite the progress we have made to reduce costs and improve efficiency at the mine, the economies of an operation such as Lumwana simply cannot support a 20% gross royalty”, said Barrick’s co-president Kelvin Dushnisky. The closure of this copper mine alone will account for 4,000 job cuts, which are scheduled to begin in March this year.

Zambia’s largest foreign investor, First Quantum Minerals (TSX: FM), said the royalties increase would inevitably dissuade further foreign investment and lead to fewer new jobs. Earlier in the year, the company had already delayed $1.5 billion worth of new project investment due to the country’s growing “fiscal uncertainty”.

Fiscal uncertainty was a key point highlighted by mining executives in the 2013 Fraser Institute Mining Survey. Zambia finished 41st and executives cited a possible “increase in royalties” to be the largest and most likely deterrent to further investment. As evidenced by Barrick Gold and First Quantum Minerals reactions to changes, Zambia’s ranking is likely to suffer as the previously mentioned concerns become a reality.

Guinea and Tanzania are two other countries that have subscribed to this policy model; both have recently changed the tax regime or adjusted ownership structures and, consequently, both have then seen reduced investment.

Resource nationalism is growing throughout Africa as many governments are eager for more revenues. But such policies undermine the economic viability of many mining projects and threaten the employment created in the mining sector. If they wish to maintain a robust mining sector, the Fraser Institute annual mining survey results suggest that governments should aim to provide an attractive economic climate, with low levels of uncertainty that could deter mining investment.

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