JOHANNESBURG (miningweekly.com) – Zambia's mining sector will see solid growth between 2017 and 2021 following proposed changes to the country's regulatory environment, says research firm BMI.

Favourable global copper prices and rising cobalt demand will attract foreign investment; however, the country will face ongoing challenges related to power shortages and policy uncertainty.

A recovery in copper prices and a positive global demand outlook for cobalt will provide further incentives for foreign miners looking to enter the country, leading to an increase in the number of mining projects.

“We forecast the Zambian mining industry will grow by a yearly average of 5.5% between 2017 and 2021, significantly faster than the average decline of 5.4% experienced between 2012 and 2016.”

Amendments to reduce royalties and taxes for mining companies operating in the country are likely to further boost growth in the mining sector.

Originally, the Mines and Minerals Development Act of January 2015 proposed an increase in royalties for opencast mines to 6%, while those for underground mines were set at 8%.

However, a backlash from the mining industry resulted in government backtracking on these measures.

Consequently, new amendments to the Act were passed by the Zambian Parliament in May 2016, which proposed significant reductions in mining royalties.

“These royalties will now vary from 6% for gemstones and precious metals and 5% for energy, industrial minerals and base metals, except for copper where the new tax regime implements a progressive levy correlated to prices.

As the second-largest copper producer in Africa, with an output of 740 000 t in 2016, and as a top ten global cobalt producer, Zambia will benefit from the positive outlook for both commodities.

“We forecast copper prices will rise from an average of $5 500/t in 2017 to $5 800/t in 2021, supported by Chinese fiscal spending in the short term and a consistently tight global market in the longer term,” the company said.

Cobalt has been the global outperformer in commodities so far in 2017, having risen by 131% from January to March.

“Despite our positive outlook for Zambia's mining industry, power shortages and policy uncertainty will pose downside risks to growth in the sector in the coming years.”

A severe drought in 2016 led to water shortages at the Kariba dam, one of the largest sources of electricity in Zambia.

Further, government has talked of raising electricity tariffs to reflect production costs by the end of 2017, something which could impact on miners' margins and investor sentiment.

“Finally, policy uncertainty will remain a concern for mining companies looking to enter the country as reflected by government's latest decision to change royalty rates on the production of minerals for the third time in only two years,” BMI noted.