The Zambia Chamber of Mines (ZCM) is continuing discussions with the country’s government about a new royalty tax regime that came into effect on January 1 and is “cautiously optimistic” that these discussions will be fruitful, ZCM communications manager Talent Ng’andwe tells Mining Weekly.

The new tax system increases underground mining royalties from 6% to 8%, with opencast mining operations liable for a 20% royalty.

The mining sector has expressed concern about the new royalty system.

In December, gold mining major Barrick Gold announced that the company would initiate procedures to suspend operations at its openpit copper-producing Lumwana mine, in Zambia, following the increased royalty rate applicable to the openpit mining operations.

“The introduction of this royalty has left us with no choice but to initiate the process of suspending operations at Lumwana. Despite the progress we have made to reduce costs and improve efficiency at the mine, the economics of an operation such as Lumwana cannot support a 20% gross royalty, particularly in the current copper price environment,” said Barrick Gold co-president Kelvin Dushnisky at the time.

Ng’andwe emphasises that, as of this month, no mining operations have yet been suspended.

Nonetheless, he says an analysis of Zambia’s 2015 Budget, which was endorsed by the Zambian Parliament, reveals the threat of “wide-ranging” unintended ramifications for the country’s mining industry, including the suspension of certain mining operations, which will significantly affect jobs at mines, inward investment and government revenue, owing to the new tax laws.

Further, Ng’andwe notes that local communities will potentially no longer benefit from the corporate social responsibility initiatives and support programmes initiated by mining operations.

“The ZCM and its members are committed to working with government to find solutions that will enable them to sustain operations, protect jobs, support local communities and pay appropriate taxes.”

Ng’andwe says it is therefore a “great regret” that Barrick Gold has been forced to make this announcement, as Lumwana is a major driver of the North-Western provincial economy, having bought goods and services from Zambian suppliers in 2014 valued at about $400-million, and supporting various education, literacy, healthcare and community projects.

The ZCM states that suspending operations at Lumwana could also adversely affect operations of the three smelters on the Copperbelt, which depend heavily on the Lumwana copper concentrates.

Further, the chamber highlights that Zambia has the highest base metal tax regime in the world, which is about double that of second-placed Chile. This is according to the International Council on Mining & Metals 2014 report, ‘Enhancing Mining’s Contribution to the Zambian Economy and Society’, which was endorsed by government and the ZCM.

The ZCM estimates that production losses in 2015 will exceed 158 000 t of copper and that, over the next five years, lost production will exceed 1.1-million tonnes of copper.

“Zambia stands to lose more than $1-billion in export earnings this year and $7-billion over the following five years; the latter will equate to about 30% of the country’s gross domestic product,” Ng’andwe warns.

The ZCM states that the 2015 Budget does not elaborate on the impact of the introduction of the higher mineral royalty rates; however, government has forecast that the new tax regime will raise ZK1.7-billion this year.

“However, according to our analysis, the 2015 Budget has not factored in the impacts of mine closures and suspensions. Once these have been accounted for, the chamber estimates that, in 2015 alone, government will raise about $320-million less in taxes than forecast in the 2015 Budget proposal, and $115-million less in taxes than would have been collected if the changes had not been made.”

The mining industry accounts for more than 86% of Zambia’s foreign direct investment (FDI).

Ng’andwe explains that this FDI is “critically important” for increased capacity and production levels in the mining industry, and is fundamental to the development of growing economies such as Zambia’s.

“However, the introduction of the higher mineral royalty tax rates is forecast to halve the FDI associated with the industry.”

The ZCM and its member organisations are continuing the thorough analysis to fully understand the impacts of the continued implementation of the 2015 Budget in its current form.