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Falling prices, rising taxes squeeze African miners

By AFP
11 February 2015   |   10:18 am
AGAINST a background of crashing commodity prices, mining in Africa is facing increasing pressure as governments and investors struggle over distribution of the mineral wealth lying under much of the continent. The subject is a key focus of more than 7,000 delegates from around the world, including government ministers and mining company CEOs, meeting in…

AGAINST a background of crashing commodity prices, mining in Africa is facing increasing pressure as governments and investors struggle over distribution of the mineral wealth lying under much of the continent.

The subject is a key focus of more than 7,000 delegates from around the world, including government ministers and mining company CEOs, meeting in Cape Town this week at Africa’s biggest annual mining conference — the “Mining Indaba”.

It is also the focus of the “Alternative Mining Indaba”, a six-year-old counterpoint representing the views of rights groups who charge that Africa’s natural resources have been stripped by colonisers and Western firms interested only in profits.

With mineral-rich Africa still the poorest continent in the world, the debate about how its raw materials should be exploited — and for whose benefit — has gained renewed fervour with the fall in commodity prices amid slowing growth in China.

Prices of minerals and metals dropped to their lowest levels since August 2002 on January 29, according to the Bloomberg Commodity Index.

“If (governments) go too hard now on taxation, if they push too hard for certain policies, they might just simply accelerate the significant decline that we are going to see in mining companies,” warned Eunomix managing director Claude Baissac.

The country risk consultant told AFP on the sidelines of the conference that copper-rich Zambia’s recent steep hike in mining royalties was an example of the bad timing of several African countries considering such increases, which could scare away investors.

Zambia, Africa’s second biggest copper producer but one of the world’s poorest countries, more than tripled some mining royalties to 20 percent from six percent on January 1 this year.

Miners are already planning to slash spending on new projects by $20 billion to $79 billion amid waning demand for raw materials, according to Macquarie Group, with investors saying Africa could be hit hardest.

Baissac said that like many African countries, Zambia probably feels that it failed to cash in on its mineral wealth during the boom years.

“There is ample justification for taxing superprofits, which happened in the 2000s, but those superprofits are now long gone,” he said.

“Commodity prices are going down, in some cases catastrophically, mining companies are disinvesting and I’m afraid that the policy signal which these governments are sending is the wrong one at the wrong time.”

The point was acknowledged by Zambia’s Trade and Industry Minister Margaret Mwanakatwe, who is representing the mining minister at the conference.

“Unfortunately this hasn’t worked well in terms of timing,” Mwanakatwe told AFP.

“The copper price is at an all-time low. That is why the president has said we are willing to sit down and discuss the best way we can ensure that there is harmony between us as a government and the mining houses,” she said.

Combined with a 23 percent slump in the price of copper since early 2013, the tax hike has led Vedanta Resources to review its Zambian copper operations.

“We are facing a very, very difficult situation,” chief executive officer Tom Albanese said in a panel discussion at the conference.

Copper brings in around 70 percent of Zambia’s foreign exchange earnings.

South Africa, a mining giant in coal, gold and platinum, has also had second thoughts about a draft law that would give the state a free 20 percent stake in all new energy ventures and the right to buy additional shares.

Mineral Resources Minister Ngoako Ramatlhodi told a news briefing that the government may amend the draft law.

“We want investment in oil and gas,” Ramatlhodi said, adding that the government is considering limiting state interest “so we don’t take control away from private enterprises”.

Zambian-born international economist and author Dambisa Moyo told AFP the question of taxing natural resources “is always going to be a difficult one”.

But “the decisions that public policy makers need to make should be set in the global context of what is happening to commodity prices,” she said.

“When commodity prices are very clearly at a very low point, it doesn’t seem to me to be the best use of public policy choices to increase taxation at a time when actually that can be very harmful for employment but also for global growth.”

Despite the problems, Eunomix’s Baissac said that while “we are definitely seeing a return of the state, it is certainly more benign than it was 40 years ago when governments would just step in and nationalise mining companies.”

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