Zambia: The Strengthening Pulse of the Copperbelt

Zambia’s mining industry is showing robust health despite difficult years of low prices, power shortages and fiscal uncertainties.

By Lindsay Davis

IMAGE: Vermeer

Long lauded as one of the more peaceful nations in the Southern Africa region, Zambia’s historic association with political stability has undoubtedly contributed significantly to its attractiveness as a destination for foreign investment. When the late 1990s ushered in the privatization of the nation’s mining industry, copper production increased from 300,000 mt/y to a projected 800,000 mt/y by the end of 2017. Sustained international interest in Zambia’s wealth of resources in tangent with rising copper prices facilitated the country’s rise as a globally significant player in the commodity marketplace. Over the years, the nation’s geological prospectivity has drawn the attention of the likes of De Beers and Anglo American, and with the names of these powerhouses once again in the air, Zambia’s future appears to have taken on the luster of its famous emeralds.

Nonetheless, the country has experienced its fair share of recent troubles. Fiscal flip-flopping has left some investor’s uneasy at the staying power of the recent stability in the tax regime. “The issue of the ever-changing tax regime and mineral royalties has been the largest deterrent for our clients in the mining industry,” explained Jason Kazilimi, senior partner at KPMG Zambia.

Power sector problems also plagued the mining industry from 2015 and into 2016, and Zambia has also felt the strain brought on by the volatility in commodity pricing in recent years. Its aging industry implies an urgent need for new discoveries amidst the worldwide deficiency in exploration funds, and the ongoing debate between the private sector and government on how best to reconcile business imperatives with national development concerns persists.

Although the nation grapples with the lingering impact of prior years’ problems and the abiding issues of politics and regulations, green shoots in the global economy have nonetheless inspired a cautious optimism across the value chain. Zambia’s large-scale mining houses are ramping up production once more, and exploration initiatives are proliferating as the buzz around the untapped potential of the “new Copperbelt” draws more and more players to the nation’s prospective North-West Province. Updates from the energy sector suggest a surprisingly promising outlook for Zambia’s capacity to overcome the havoc wreaked by electricity shortages — developments driven largely by the need to power the mining industry. Service providers, both international and local players, are investing in their capacity to serve the industry in anticipation of increased demand for their offerings. On the whole, it seems that Zambia is back on track as a regional leader in mining.

 

Production & Exploration

 

Base Metals: Copper Remains King

When copper prices dropped by 25% in 2015, Zambia’s copper-oriented economy felt the impact. The age of the sector means that many established mines are relying on orebodies found at increasing depths, making them more costly to retrieve and therefore less economical in the face of falling prices. However, with the price breaching $6,000/mt and showing signs of sustained recovery, production is ramping back up and projected to reach a record-breaking 800,000 mt/y by the end of 2017, exceeding the previous industry high of 790,000 mt/y in 2013.

Not with standing the contribution of other commodities and the gemstone sector to the overall success of the country’s extractives industry, copper remains king, and approximately 80% of Zambia’s copper production comes from four major players: First Quantum Minerals, Konkola Copper Mines (KCM), Mopani Copper Mines, and Barrick’s Lumwana mine.

Updates on the state of these production powerhouses provides a strong indication of the industry’s overall health. While FQM’s Kansanshi copper mine continues to be a powerful contributor to Zambia’s overall output, the company’s Trident project will prove instrumental in reaching the country’s vision of surpassing their neighbor to the north, the DRC, in terms of copper production. FQM’s current focus in the country is ramping up the Sentinel mine to nameplate capacity at 270,000 mt/y.

In September 2015, Mopani commenced an 18 month partial suspension of operations and reduced smelter operating capacity. Mopani’s mines at Nkana and Mufulira in addition to a refinery at Mufulira, have been in operation since the 1930s facing declining reserves, and had been operating at a loss. Currently, however, Mopani, with the support of 73.1% majority shareholder Glencore, is investing $1.1 billion into enhancing efficiency and revitalizing its production capacity, including sinking three new shafts.

KCM has announced ambitious production goals, intending to triple its output over the next three years aided by a pledge of $1 billion in financial support from its London-based parent company Vedanta Resources. The company will also resume activities at the Nchanga underground mine operation, which was placed on care and maintenance in 2015.

Although undeniably critical, copper is not the only base metal to be found in Zambia, and developments in the nickel sector have proven particularly interesting. In addition to the Sentinel mine, FQM’s Trident project in the Kalumbila district comprises of a nickel ore body dubbed Enterprise that the company intends to bring into production when the price proves favorable. “Enterprise shares commonalities with the Sentinel process plant, and under the right conditions it will not take much for us to commission Enterprise relatively quickly,” said John Gladston, government affairs manager at FQM.

Towards the south, the Munali nickel mine will end a three year hiatus to begin production under new British investors, Consolidated Nickel Mine. Placed under care and maintenance in 2011 due to poor performance, Munali’s new owners intend to invest $40 million into efforts that will produce more attractive returns and expand the mine’s life an additional 10 years.

 

Gemstones: Love in the Time of the Copper Downturn

Because of its relative cushion from the volatile commodity marketplace, Zambia’s gemstone sector escaped the consequences of the downturn, and has in fact been quietly attracting investment from around the world. Although the sector is often thought to be the business of small, artisanal miners — who indeed play a significant role in the industry — Zambia is also home to some of the world’s largest gemstone mines. These mines have played a decisive role in enhancing the sector’s sustainability by providing a consistent supply of products and branding potential. Emeralds in particular have benefited from this cohesive production strategy, allowing the distinctive blue undertones of Zambia’s stones to garner global recognition and appreciation.

Two of these mines are backed by London-based Gemfields, the world’s largest colored gem producer. Kagem mine represents the world’s single largest producer of emeralds, accounting for around 25% of global production. As a key player in the gemstone mining value chain, Kagem’s expertise has helped to drive the sector forward by developing the local capacity for everything from processing and grading to auctioning and marketing. Operating for over 60 years, the Kariba mine in the southern part of Zambia’s Kalomo district is the world’s largest amethyst mine, producing as much as 800 mt/y and projecting a further increase in production for 2018. Gemcanton Emerald mine, formerly known as Grizzly Emerald mine, was bought 50% by Lev Leviev in June 2017, adding emeralds to the Israeli billionaire’s previously diamond-dominated portfolio.

Although their contribution to global production is already significant, gemstone deposits in Zambia are still vastly untapped resources. The availability of capital is the crucial component needed to push forward the sector.  “Zambia has much potential for precious stones if it can find the means for funding,” said Iven Mulenga, managing partner at Iven Mulenga & Co, whose practice has seen business from investors coming from the Middle East and Asia that are interested primarily in emeralds. “A number of people have obtained licenses, but they do not have the capital to take their projects forward.”

 

Exploration and Development: Zambia Not Immune to Tough Global Conditions

Despite being such an established jurisdiction, Zambia’s geology remains widely unmapped, making a risky exploration endeavor an even greater challenge in the face of uncertain — or indeed nonexistent — data. Nonetheless, exploration for new deposits will prove critical. The challenging conditions of an aging mine do not allow for attractive returns in a time when the industry is seeking to achieve a cost profile that fits within lower commodity prices.

Chibuluma mine, known as “Zambia’s model mine” stays true to its name in exemplifying this necessary strategic shift. Having been mined since 1955, the copper reserves at Chibuluma had been depleted to the point that the mine was facing end of life as soon as 2017. The problems associated with its age in combination with the unattractive copper price saw the company running at a loss of $30 million in 2015. However, concerted efforts to enhance the mine’s efficiencies and ongoing regional exploration initiatives have bolstered the mine’s reserves through the extension of the ore body at Chibuluma South, in addition to defining the Chifupu deposit. “We could have put the mine under care and maintenance, but Jinchuan through Metorex, took a long term view and decided to expand its footprint in Zambia,” explained Jackson Sikamo, the country manager at Chibuluma Mines. “They made the strategic decision to keep the mine going, because continuing operations at the Chibuluma mines gave Jinchuan the opportunity to look for resources elsewhere in the country.”

In addition to its brownfield endeavors, Metorex has obtained two new exploration licenses in Zambia’s North-Western Province. Dubbed the “new Copperbelt,” there is a discernible shift in interest towards the region, which already homes Barrick’s Lumwana copper mine. However, as Panorama Security’s director Stewart J. Scott points out, there are risks to be considered as new projects start to emerge: “The socio-economic environment in the Copperbelt and North-Western Provinces generates significantly higher levels of risk which in turn creates opportunity. When a new mine comes online, people tend to flock to the site looking for employment with very low chances of success. This creates a massive security risk for the mine, and we have to find ways to engage with the community to find a platform through which they can benefit from the client’s presence. Otherwise, you alienate these people and create an ‘us versus them’ structure that exposes the client to further risk.”

Generally, Zambia’s exploration potential faces impediments because exploration spend worldwide has been decreasing, suggesting that the additional risks of operating in Africa would further deter investment.  However, Daniel Major, CEO of GoviEx Uranium, said: “From a project perspective, we have found that being in Africa actually helps. Because we are in a developing region, export credit agencies (ECAs) tend to be supportive, whereas they may be less likely to offer assistance in a developed country.”

The Canada-based company has three advanced stage uranium projects with significant exploration upside, including the Mutanga deposit in southern Zambia. In addition to uranium and its copper potential, gold and manganese could begin to play a greater role in the Zambian mining sector. Cobalt’s attractive price, driven by global interest in the commodity’s role in the production of lithium-ion batteries, could also prove a productive endeavor if the lower grade of Zambian deposits does not deter advancements.

 

Zambia’s Power Predicament: Problems and Solutions

The depressed copper price was not the only external challenge haunting the Zambian mining industry. Chronic electricity shortages across the nation contributed further to already high operating costs for the mines, and a dispute between the government and mining companies over energy tariffs intensified the ongoing conversations about the private sector’s contribution to state revenue. Drought brought on by climate change severely reduced water levels at the country’s Kariba Dam, which typically generates about 40% of the country’s electricity. Consequently, the government reiterated its efforts to diversify its power generation sources to stem its reliance on hydroelectricity, focusing largely on the potential for renewable sources in addition to its coal-powered capacity. “Dropping water levels challenged us to be more innovative to ensure that we will avoid the consequences in the future,” said Hon. Christopher Yaluma, Zambia’s Minister of Mines.  “We will accomplish that by exploring other energy resources, and we are very much headed towards utilizing renewable.”

The commissioning of the 150 MW power plant by Maamba Collieries Limited (MCL) will bolster Zambia’s thermal energy output in the interim, and the country’s ample coal reserves could help to generate as much as 300-700 MW. However, the environmental implications of coal mean that many DFIs will not provide financing for such initiatives, further underlying Zambia’s need for an energy mix. At the center of finding a solution to the predicament is Copperbelt Energy Cooperation (CEC), a ZCCM-IH subsidiary that was originally formed in 1953 with the purpose of supplying power to Zambia’s mining industry. Fast-forward to present day and the company still prioritizes its services to the mines, however, it has grown to encompass a fully integrated mandate that endeavors to expand Zambia’s capacity as a regional leader in power generation and transmission. The company currently owns much of the transmission infrastructure in the Copperbelt, which it uses to transport power on behalf of third party sources — namely the national energy company Zesco. However, CEC has a number of projects in the works to develop its own generation capabilities, which presently stand at 80 MW. The company’s 40 MW Kabompo Gorge project is located strategically in the north, whereas most power generation stations are in the south of Zambia. The company also has a 1 MW solar project in partnership with Copperbelt University that represents the country’s first grid-scale solar project and prequels plans to introduce a 50 MW project following its completion by the end of 2017. “This initial, small-scale project will aid in developing our solar technology and the capacity of our engineers,” said Owen Silavwe, the company’s managing director.

Importing expensive power supply resulted in high tariffs for the mining industry that are not sustainable. However, Zambia has recognized the need to diversify its energy supply and is keenly aware of its natural endowments that underpin the opportunity to be a regional leader in the energy sector. Because power infrastructure tends to be capital intensive, the potential for off-take agreements with the mining industry represents a mutually beneficial avenue to finance the development of the power sector in the southern Africa region.

 

Transport and Logistics

Zambia’s geographic position simultaneously presents both challenges and opportunities. As a landlocked nation, the lack of a seaport stunts the nation’s export potential while also driving up the price of imports. On the other hand, Zambia borders eight different countries, allowing it to serve as a regional transport hub and gateway between Central and Southern Africa. However, if Zambia is to successfully market itself as a land-linked intersection for international trade, key improvements to infrastructure must be prioritized. Several government funded projects suggest that the country is making a concerted effort to improve its road networks, including in the Copperbelt and North-Western Provinces. However, in the face of rising debt, the government’s capacity to continue with these projects may well be impacted if state revenue must be diverted.

Subsequently, several players in the mining space have undertaken key roadworks themselves. FQM spent $3.5 million on the road linking Solwezi to Chingola. With the increasing emphasis placed on the North-Western Province as an area with untapped mineral potential, Solwezi is set to act as the doorway into the region as a flood of service providers scramble to set up shop in the town, making this a strategic investment in the future of the region. Nonetheless, to maintain the quality of the roads has proven another perennial issue that can have a significant impact on the profitability of a project when considering the added cost of wear and tear in the transport process. In order to offset these expenses, transport companies such as the BHL Group, are becoming more innovative. “We used the Rhino as our symbol to reflect our company’s strengths. We consider ourselves to be groundbreaking through the use of new technologies in our vehicles,” said Elrick De Klerk, CFO of the company. “For example, we developed a dual trailer where you can put dry product in the middle and, back, and front you have tanks for liquids. This minimizes empty runs, maximizes payload, and decongests the roads, making our offer more efficient and cost effective.”

 

Equipment and Services

Surviving during lean times in Zambia’s highly competitive service provider sector proved a trying test for its players. However, those that pulled through are beginning to reap the benefits as new contracts come through and demand for equipment returns. Closely linked to this positive growth trend is the emphasis on infrastructure. “The government’s many infrastructure projects represent an opportunity for us,” explained Nawa Mataa, director at Hitachi Construction Machinery Zambia. “Because these projects are seen as long term, contractors in that space are willing to pay a premium to obtain quality machines as opposed to cheaper brands,” he added.

When looking to cut production costs, many mines tried to save by utilizing inexpensive products, often sourced from mass-manufacturing countries like China or India. “The Chinese pricing is incredibly competitive, causing us to have to reduce our rates,” said Seamus McKenna, director at Paul McKenna & Sons. “However, in the long run, we do not believe that the Chinese machines will last.”

Indeed, the lower quality of the products in the market has begun to show, and proprietors of more expensive yet higher quality equipment are seeing demand return. “The mining sector has become more particular about who they are dealing with,” said Raj Karamchand, director at Hytec Zambia. “Price is still a factor, but in most cases, they are more concerned with getting something that is going to last longer and will reduce downtime.”

Service providers employed a range of strategies to pull through challenging times. Maintaining solid relationships with clients through the provision of after-sales and maintenance services was key for many companies. “We have a high number of machines on the market, so we rely heavily on our parts and after-sales to generate strong revenue,” said Mike Quinn, general manager of Bell Equipment in Zambia and the DRC.

Particularly when faced with the consequences of poor quality equipment, mining companies are investing in the superior services that often accompany well-established brands.

Diversification into other sectors, particularly the highly government-promoted agricultural industry, provided many companies with a means of staying afloat. Alternatively, some suppliers chose to diversify within the sector, joining the throngs of Zambia’s small-scale miners to open their own mining operations.

 

Local Capacity

The long term sustainability of Zambia’s economy will heavily depend on the success of  its locally operated SMEs. As a long established mining destination, the Zambian labor force is well equipped to take advantage of the opportunities surrounding the extractives industry. “Investors should not be concerned about the availability of qualified labor to run a mine,” said Jason Kazilimi, senior partner, KPMG Zambia.Certain specialized skills may require expertise from abroad, but for almost any business you should be able use people that are available locally.”

When skills are not available, a host of international players have been keen to take advantage of the lucrative gaps. “The South African mining game has been going for a long time, but in Zambian there is still room for development, which is where companies like ours can play a role,” elaborates Louis Lindenberg, whose South African-based company Lindenberg Hydraulics has initiated operations in Kitwe, offering its expertise in mechanical engineering to the Zambian gemstone sector.

While there are still voids in the local skills market, the general consensus is that the Zambian population has the capacity to service the industry, and where it does not, the emphasis should be on providing training. “Foreign companies should not solely rely on corporate social responsibility (CSR) initiatives as a means of giving back to the host country because these projects are not as sustainable,” said Mwaba Coster, general manager of Hearmes Mining and Trading. “Often companies come in and build something that does not add true value to the community if it is not accompanied with training and support.”

Locally owned and operated in Zamia for 19 years, Hearmes is one of several companies in Zambian mining hubs like Kitwe and Ndola that provide services ranging from engineering consultancy to supplying labor and equipment.

 

The Way Forward: Value Addition

Local value adding initiatives in Zambia are more advanced than many of its African counterparts. No raw copper ore is currently exported from the country, but there are still several levels of benefaction that could be achieved to allow the country to take even greater advantage of its raw potential. Berry Mwango, director of locally run C&B Engineering elaborates: “It is important that we are looking at local content because Zambia is losing out on a lot of its mineral potential as a country. Depending on the location of the mine, much of the copper waste has a lot of gold content, for example. The Copperbelt also has a lot of other minerals such as cobalt, titanium, and selenium that are exportable within their own right if processed.  Some operators deliberately leave cobalt in the copper mix to extract outside the country.”

Further processing could also be achieved to enhance the purity of the copper concentrate being exported. These are well-observed challenges in the industry, and as Hon. Yaluma points out: “We are losing out on two levels: a means of sustaining our own people and lost revenue for the government.”

Forging strong partnerships built on trust and integrity between local talent and the expertise offered by outside players will undoubtedly prove the most efficient and lucrative means of achieving a sector that benefits both Zambians and international investors.

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