Overcoming Adverse Conditions in Zimbabwe’s Mining Sector

Currency woes, droughts, power shortages and a lack of access to affordable funding are among the core challenges for the sector and industry at large.

By Catherine Howe

IMAGE: How Mine, courtesy of Metallon

Alongside agriculture, manufacturing and tourism, mining is a crucial sector within Zimbabwe’s economy. A country rich in a wide array of minerals including gold, diamonds, platinum, nickel, chrome and coal, many of Zimbabwe’s mineral reserves can be found along the Great Dyke, which runs from the north to the south of the country and spans a length of about 550km. Mineral resources found here primarily include platinum group metals (PGMs), gold, nickel, copper and chrome.

Despite Zimbabwe’s high levels of public debt, recent droughts, currency challenges and weak domestic demand contributing to the country’s declining economic growth, the country nevertheless moved up 16 places to a ranking of 155 out 189 countries in the World Bank’s 2016 Doing Business report. However, following a drop in growth rates from 3.8% in 2014 to 1.5% in 2015, the IMF recently slashed growth expectations for 2016 from around 1% to -0.3%, and forecast that the economy will contract by a further 2.5% in 2017.

Zimbabwe’s mining industry has been under a great deal of pressure due to factors at both a global and in-country level. Currency woes, droughts, power shortages and a lack of access to affordable funding are among the core challenges for the sector and industry at large. Nevertheless, although some companies have struggled, with RioTinto exiting the country in 2015, others are having great success despite adverse conditions.

 

Gold

Zimbabwe holds many greenstone belts, also known as gold belts, which are considered the most productive in the world. With four running mines, Metallon Corporation is Zimbabwe’s leading gold miner, producing a quarter of the country’s output and employing 4,000 Zimbabweans. Holding an estimated resource of about 8.3 million ounces, the company has just completed construction of a 65,000 mt/month plant at Mazowe, which will add 24,000 oz/annum to its existing production. Last year, Metallon produced 97,000 oz of gold and expected 2016 production figures stood at 102,000 oz.

Meanwhile, Bilboes Gold has seemingly done the greatest amount of recent exploration and metallurgical work. The company’s flagship operation is its sulfide project, for which it has established a JORC-compliant resource of approximately 4.3 million oz, and is due to complete its pre-feasibility study in March 2017. Bilboes will be using open pit mining methods to establish a mine producing six tons of gold per year. The full feasibility study is due to be completed in 2017, at which point mine construction will commence. Bilboes also has a smaller operation in oxide mining, producing about 4,000 oz of gold a month.

Other notable gold operations include Blanket mine, which produced over 42,800 oz of gold in 2015, with Caledonia Mining Corporation holding 49% interest, and Freda Rebecca gold mine, 85% owned by Asa Resource Group, previously Mwana.

 

Platinum and Platinum Group Metals (PGMs)

Zimbabwe has the world’s second largest resource of PGMs after South Africa, occurring primarily along the 550km-long Great Dyke. Within the Dyke there are four PGM-bearing complexes, of which the Hartley Geological Complex is the largest, containing approximately 85% of Zimbabwe’s known PGM resources. Of the four geological complexes, Hartley is mined by Zimbabwe Platinum Mines (Zimplats), Wedza by Mimosa and Selukwe by Unki-Anglo American. The fourth is the Musengezi complex.

Zimplats, in ownership of the largest PGM-bearing complex, is fittingly the country’s largest platinum producer and has reportedly invested nearly $5 billion since 2002 in its mining operations in Zimbabwe. Operating four underground mines and one open pit mine, Zimplats supplies ore to two concentrator modules at Ngezi and a third at Selous. The company is a subsidiary of South Africa-based Impala Platinum Holdings (Implats), which itself contributes approximately 25% of global platinum output. With a record 6.4 million tons of ore milled during 2016, Zimplats’ run-of-mine (ROM) ore production also increased by 26% from 5.2 million tons to a record 6.6 million tons. The redevelopment of the company’s Bimha mine is on schedule to achieve design capacity by the fourth quarter of 2018.

Mimosa, a joint venture between Implats and Aquarius Platinum, holds platinum reserves of one million attributable ounces. Anglo American, responsible for approximately 40% of newly mined platinum worldwide, operates the Unki mine in Zimbabwe, with the rest of its operations in the Bushveld Complex in South Africa.

 

Diamonds

Despite being in the top ten producers of diamonds worldwide, Zimbabwe’s revenue from the sector has suffered in recent years. In a drive to increase transparency and accountability in the sector, the Zimbabwe Consolidated Diamond Company (ZCDC) was formed in early 2016, and took over diamond concessions previously owned by companies in Chiadzwa. The company commenced operations in March 2016, but production figures throughout the year have been low, at only a fraction of monthly targets.

 

Chrome

Zimbabwe’s Great Dyke also holds the world’s largest resource of high grade chromite, quantified by the U.S. Geological survey at 90% of chromite reserves worldwide. Since the seam deposits span the entire dyke, chromite is mined throughout.

Having halted exports of chrome ore in 2011 to protect the country’s ferrochrome industry from competition and promote value addition, the government lifted the chrome ban in June 2015. “The chrome ban effectively shut down the industry which had a massive effect on our company as 90% of our business had been in chrome,” said Anthony Kinsey, managing director at WGB Kinsey & Company, a Zimbabwe-based company specializing in civil engineering, contract mining and plant hire. “Recently, however, we have had many people asking us to mine chrome for them although we do not believe it is currently viable, as the resource in Zimbabwe in most areas requires the market price to be higher than it is at present…Many companies see this as a way of getting much needed foreign currency out of the country, which is also problematic as they are not really considering how viable it is.”

Together, Zimbabwe Alloys (ZimAlloys) and Zimbabwe Mining and Smelting Company (Zimasco) until recently controlled upwards of 80% of Zimbabwe’s chrome ore resource. However, in a move to break their monopoly, the government ordered the companies to relinquish some of their chrome claims, to which the companies complied in late 2016. Meanwhile, Zimasco is also in the midst of a turnaround strategy having been heavily affected by depressed prices in the global ferrochrome market.

 

Currency

Having entered a multi-currency regime in 2009 to mitigate the effects of hyperinflation, the Zimbabwean government’s recent decision to roll out bond notes has been met with discontent. The bond notes, pegged one-to-one against the U.S. dollar, were launched by the Reserve Bank of Zimbabwe in December 2016, with the intent of easing the country’s severe cash shortages and supplementing the U.S. dollars in circulation. However, stocks of the new bond notes reportedly ran out within a week due to high public demand.

Equally, because the bond notes have no value outside of Zimbabwe, there could be further repercussions in international trade and imports, areas already impacted by the currency shortages. “We now have to rely on our customers to provide the external funds, but not everyone has access to these funds,” said Mike Biss of Volvo Penta in relation to sourcing foreign currency to pay for the company’s engines and gensets. “One would hope, going forward, that the central bank would step in and assist, as power generation for industry and mining are the key role players in earning much needed foreign currency.”

Volvo Penta’s market share within the industrial and mining sector does, however, continue to grow despite such challenges and depressed market conditions, aided by a new relationship with Sandvik.

 

Policy change and framework

Zimbabwe’s mining industry has been regulated by the Mines and Mineral Act of 1961, but the draft of the new mining policy, released in August 2016 and subsequently sent for debate in parliament, outlines many changes, some of which have been of concern to investors. For example, in a drive to capture greater benefits within the country, the new mining policy demands that raw materials may only be exported with ministerial approval, and asserts that mining rights will only be issued to companies listed on the Zimbabwe Stock Exchange. Several mining firms operating in Zimbabwe, including Anglo American, Impala Platinum and Aquarius, are not currently listed on the local stock exchange.

There are, however, some decidedly positive incentives in place, such as the duty rebate on imported goods for mining operations. Commenting on the difference in incentives offered to mining companies and those in other industries, Christina Muzerengi, director of tax and advisory services at Grant Thornton, noted: “For example, capital allowances are much higher for mining companies in the first few years after setting up. This also gives relief in terms of taxes paid in the early years of commencing operations. Furthermore, where other companies are allowed to carry forward their losses for a period of six years, mining companies are allowed to carry forward their losses for an indefinite period.”

Zimbabwe’s tax regime is competitive with that of neighboring countries, and Zimbabwe’s VAT legislation was in fact copied from South Africa.

 

Supporting artisanal and small-scale mining activities 

Artisanal and small-scale mining activities make up a substantial portion of Zimbabwe’s mining, particularly in gold, and if properly managed could provide an excellent channel for the development of local skills and a means of income, while at the same time contributing to the country’s economy. “Artisanal miners contribute greatly to gold production in Zimbabwe, and at some point the government decided to invest in equipment and seek to formalize the activities, but there are still many leakages,” asserted Ishmael Muchena, managing director of Monadi Mining, a small-scale gold mining company based in Headlands, about 130 km East of Harare. “The operations are scattered all over the country and are therefore difficult to control and police – there are many rumors about the tons of gold leaking out of the country as a result.  Equally, when payment is delayed from the government the miners will turn to the black market, because they cannot afford to wait and want to be paid immediately. This is where the problem lies.”

Artisanal gold mining activities have now been decriminalized, and all small-scale producers are required to sell their bullion through Fidelity Printers and Refiners. Fidelity is wholly owned by the Reserve Bank of Zimbabwe, and specializes in buying gold from small-scale producers, operating a printing and gold refinery plant in Harare. “Of its throughput so far this year, more than 45% has come from small-scale miners; in the past it was 26% on average, and in future it could outstrip large-scale contributions,” said Augustine Makoni, director at Zimlink Minerals, a Zimbabwean company focused on gold mining in the small-scale mining sector, with the aim of providing a voice for small- to medium-scale companies in the mining sector.

Highlighting opportunities for investment in small scale operations, Makoni added: “The advantages of small-scale mining include lean startups and the possibility to spread risk over multiple tenements… Many investors want to pursue brownfield projects to mitigate risk, but the startup costs for a greenfield small-scale project are only a fraction of those for resuscitating a brownfield project. The mineralization in Zimbabwe is much less deep than in South Africa.”

 

Inside track: local service companies

Over the decades, companies servicing the mining industry have developed in quality and capability alongside the increasing maturity of the sector. International companies such as Bell, Caterpillar and Volvo have a footprint in Zimbabwe, alongside several homegrown companies increasingly proving themselves to be competitive at an international level in terms of their product, service quality and capabilities.

Whilst competition may be on the rise with cheaper products entering the market from countries such as China, locally-based companies maintain attractiveness by offering knowledge of the local industry and business environment and a more integrated service, including extensive aftersales services and maintenance plans. “A lot of people aren’t in for the long-term when the environment is so uncertain – they want to make a quick dollar and therefore go for the cheapest option on machinery,” commented Anthony Kinsey, managing director at WGB Kinsey & Company. “Our support goes much further than just supplying machinery – we always endeavor to go the extra mile… For example, we assist on the statistical side and administration with regards to operations, and provide very useful figures and information which is very much an added addition to the normal contract. This gives us an edge on most of our competitors.”

Equally, quality does often win out, particularly with trusted and internationally recognized brands, and those with a local base are able to service their machinery in a way that others cannot. “When money is tight, companies start looking at cheaper products, which has been a challenge for us – some come in at half the price, but you are only getting half the machine, and often there is no servicing or spare part supply,” explained Keith Bydawell, sales manager at Bell Equipment. “I always tell my customers ‘if you buy cheap you buy twice’. We are a long-term supplier, and have had some of our customers for 25 years now. We also like to sell maintenance plans to customers because it lengthens the lifespan of machinery and equipment.”

Although industrial machinery is one of Zimbabwe’s biggest imports, local machinery and equipment is becoming increasingly competitive. Locally-based companies such as Craster International, an engineering company with a background in grinding media and general engineering, have an increasingly strong track record. “We are trying to become competitive in terms of import substitution,” stated Vimabyi Matarirano, general manager at Craster. “Some of the Chinese products are very cheap, but the durability is not there, and this is extremely important for the mining industry. We offer a reliable product and have an excellent reputation – we have been streamlining and cutting down on our costs so we can be more competitive in this respect.”

Recognizing that mining companies operate non-stop, Craster also offers a 24/7 service and a fast response time. The company’s success is clearly reflected in its winning contracts with some of the big mines, currently supplying a converter for BNC and with an upcoming project with Zimplats.

In addition to quality, a clear advantage of Zimbabwe-based companies is the more simple supply chain. Hilmax, a family-owned company specializing in hydraulic solutions, hoses, mining technology and conveyor systems and distributor for brands such as Hytec, Brelko, Eaton and The Hydraulic Centre (THC), has established itself as a local partner working to the highest international standards. “We are the only supplier company in this country that is fully ISO certified to the latest standards,” said Pascal Musavaya, Hilmax’s CEO.

Citing the necessity to ease the flow of stock and ensure availability, Musavaya continued: “Equally, most of our competitors do not have a local base – many have tried to come into the country directly with little success, or have failed to choose a champion in the country… We have applied to the government to be considered for a bonded warehouse. When our stock arrives, it will come into a bond – it will be here and available, but we will only access it when there is an order.”

With its set of capabilities and high quality standards, Hilmax is now able to compete anywhere worldwide and has recently been invited by Sandvik International to move internationally with them, having previously worked with the company as a subcontractor on the new Zimplats mine.

 

Investor perception

Many investors are skeptical due to perceived risk factors partly stemming from a lack of clarity, of which the indigenization laws are a prime example. “Clarity is the key factor – the government needs to work on ensuring clear communication with a unified and consistent message,” commented Tinashe Mawere, senior partner at Grant Thornton. “Empowerment laws are in place, but may not have been properly received by investors. Now, however, a lot is being done to ensure clarity and consistency in communication of the laws. We have also seen quite marked improvements in areas such as the ease of doing business – there is now a one stop shop for processing of licenses and greater speed in processing of investor licenses, for example.”

Although the country is facing challenges, Zimbabwe’s mining industry is well established and, while the newer challenges should be short-term if handled effectively, mining is a long-term game. Zimbabwe’s mineral wealth is undisputed and several companies are seeing excellent results despite unfavorable global market conditions.

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