Royalty Rate Hike May Jeopardize Zambia's Mining Business

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Researched by Industrial Info Resources India (Delhi, India)--Miners in Zambia seems to have a tougher time ahead, as the government is set to increase the royalty rates for open pit mining, from 6% to 20%, a move which may lead to shaft-closures, in several mining projects, causing over 12,000 job losses.

Zambia Chamber of Mines, a body that represents mining companies operating in the Southern African nation, has said that the Government of Zambia's decision to hike the royalty rates would jeopardize Zambia's mining business.

Canada's Barrick Gold Corporation (TSE:ABX) (Toronto, Canada) already announced suspension of operations at its copper mines, in Zambia's Northwestern province following the passage of legislation that raised the royalty rate on open pit mining operations from 6% to 20%.

Barrick, the world's largest gold producer, said the new taxation regime, which is expected go into effect from January 1, 2015, eliminates corporate income tax, but imposes a 20% royalty on the gross revenue. The suspension of operational mine is also expected to hit output of three copper smelters which are dependent on the metals from the mine.

"The imminent implementation of the 2015 budget measures may make a number of other operations economically unviable, potentially leading to more mine closures," said the chamber.

Mining accounts for 12% of gross domestic product (GDP) and 10% of formal employment in Zambia, Africa's second largest copper producer. The International Monetary Fund (IMF) estimates that the country's economic growth will dip to 5.5% in 2014, from around 6.5% last year, partly due to mining outages.

Although the chamber estimates that the tax hike would next year result in total production losses of 158,000 tonnes of copper, the loss of 12,000 jobs and cost the government $1 billion in lost earnings, mines' minister Christopher Yaluma said the government would not change the law because the level of royalties the mines were currently paying was too low.

"We are not getting sufficient proceeds from our mineral resource and we felt we would only be able to do so by hiking the royalties to the current levels," Yaluma said.

Mines owned by Glencore Xstrata (Baar, Switzerland) (LON: GLEN), Canadian firm First Quantum Minerals Limited (TSE: FM) (Vancouver), Vedanta Resources Plc (LON: VED) (London) and Brazilian metals and mining Vale SA (NYSE: VALE) (Rio de Janeiro) in Zambia, are also likely to be affected by the increase in royalty.

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