MACIG Connect Series
Jackson Sikamo (JS): Mining in Zambia started in the 1920s and grew to become one of the most significant industries in the Zambian economy towards the end of the 1960s. In terms of employment, the mining sector created around 64,000 jobs and spurred infrastructure development across the country. By the end of the 1960s, Zambia was producing 760,000 metric tons per year (mt/y) of copper. The industry was subsequently nationalized in the 1970s, which led to a sharp drop in production, as output fell to around 250,000 mt/y. During this period, approximately 2,000 jobs were lost every year. One of the major reasons for this was a lack of capitalization and sustained underinvestment.
The industry was privatized between 1996 and 2000, which brought resurgence in foreign investment: be-tween 2000 and 2014, mining companies invested $12 billion in Zambia. Production volumes went from strength to strength, reaching 763,000 mt in 2013. Over the same 14-year period, direct employment within the mining industry grew to 90,000 jobs, with a further 50,000 indirect jobs and many more people benefiting from induced employment. Exports and foreign direct investment (FDI) are some indicators of the economic effect of mining: over 80% of exports and 86% of FDI were related to mining. In terms of contribution to government revenue, mining accounted for 35% of overall taxes collected in 2011. Since then, the figure has dropped to around 25%, as production has slowed. According to a study by the International Council of Mining and Metals (ICMM), mining contributed 11% of total GDP. As can be seen, the mining industry is of paramount importance to the Zambian economy and the Zambian people. It is not good for any nation to be so reliant on one industry, or one commodity in Zambia’s case, so there is a strong effort underway to diversify the economy. Nevertheless, this diversification process will require a powerful engine to drive it forward, and this engine must be found in the mining industry.
How much of the total copper production within Zambia is processed locally versus that which is exported?
JS: At present, Zambia does not export any raw copper ore. Our exports start at blister copper level, and even this constitutes a very small part of our output, as there is just one blister smelter in the country. There are some companies exporting anodes before they are refined. However, over 70% of our exports are in the form of cathodes. Beyond this point, local beneficiation is relatively underdeveloped but there is one company in Luanshya that produces copper cables for use in the local market and for export. Congolese concentrate plays an important role in local production as well. Zambia now plays host to four large smelters, and it is necessary to bring in concentrate from outside in order to run them at full capacity.
For the past two years, Zambia has fallen behind the DRC in terms of mining output. What would you identify as the main reasons for this trend?
JS: In 2013, the DRC produced more copper than Zambia for the first time. In 2014, this gulf widened further. There are several reasons behind this divergence. In 2011, the mineral royalty tax was doubled from 3% to 6% in Zambia and at the same time it was announced that the capital allowance rate would be reduced from 100% to 25%. This impacted the decision making process for investments and served to dissuade potential explorers. The tax system changed from a two-tier to a single-tier system, whereby gross revenues were lumped together and taxed. This was a major challenge for us, as the effective tax rate in Zambia was 48% as opposed to a 25% effective tax rate in the DRC. We have been in dialogue with the government to see how we can ease this situation. We will be returning to a two-tier system on July 1 and are anticipating this eagerly. Nevertheless, there is still a great deal of room for improvement, and we are continuing discussion with the government to alter the tax regime so that it grants increasing revenues on a sustainable basis. At the same time, for the mining industry to generate these taxes, the industry must be stable and consistent in order to attract investment.
The major mining houses are complaining that they are owed huge sums of money in the form of unpaid VAT rebates. When will we see a resolution to this situation?
JS: Since July 2013, value added taxes (VAT) have not been retrieved from exports due to a new requirement for exporters to obtain documentation from customs at the destination country. This is almost impossible and so the cash was no longer coming in, which affected several companies adversely. For this reason, production has continued to decline. Thankfully, the situation has been partially resolved. The VAT refunds from February onwards will be coming in as a result of an amendment to the law.
The mining industry in the DRC is heavily constrained by the lack of reliable power supply. How does the situation in Zambia compare?
JS: Zambia is better off than the DRC when it comes to power supply. We are generating almost as much as our capacity, and the infrastructure is functioning well. There is a 50-megawatts (MW) heavy fuel oil (HFO) power plant in Ndola, which has helped stabilize supply around the Copperbelt region. Before the end of the year, we should see another 150-MW coal-fired power plant come online in Maamba. The larger issue is with tariffs. The price of electricity is simply too high. The Energy Regulation Board has pledged to carry out a detailed cost of service analysis to establish how cost profiles are generated within the main utility companies.
How important are gemstones and coal to Zambia’s total mineral production?
JS: These minerals are vital. The gemstone industry is doing very well and is a driver for the economy in terms of both taxes and employment. Coal mining is also fairly developed as well and is a significant contributor to the mining industry. On the industrial mineral side, there is great potential to further develop manganese production and lime mining to fuel new cement plants.
How would you like to see the mining industry in Zambia develop over the next three years?
JS: There needs to be adequate stability in the industry in order for it to grow and reach a high production level. The investment that has already been made is not resulting in as high a production level as it should be. We must try to incentivize investment in order to produce to our full capacity while maximizing tax revenues and employment.
What message would you like to convey to potential future investors regarding the Zambian mining environment?
JS: This industry is 100 years old. We have a government that is responsive to the demands of miners. This is a major advantage to doing business in Zambia. In terms of infrastructure, there are ongoing improvements being made to the road network and electricity grid to ensure that the country can handle the incoming investment into the sector. Zambia is a peaceful and welcoming country that provides a functional business environment.
This interview was part of research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2016. A pre-release report on the Central African Copperbelt was released in May 2015 and can be accessed here. To participate in this report, please contact Molly Concannon at firstname.lastname@example.org or +260 96 248 6457.