Message Mar 10 Fév 2015 10:50

Zambia’s tax regime keeps lid on First Quantum spending plan

With no sign of compromise from Zambia on a controversial royalty tax regime, First Quantum Minerals Ltd. says it will prolong its suspension of more than $1-billion in mining investment plans in the African country.

The Vancouver-based company, whose investments in Zambia include a majority stake in Africa’s biggest copper mine, is among the Canadian miners that were heavily affected by Zambia’s decision to triple its open-pit mining royalty rate to 20 per cent from 6 per cent last month.

Some analysts had predicted that Zambia might roll back some of the royalty hike after its presidential election last month, but government leaders are giving no hint of a reversal so far.

“They’re sticking to their guns,” Matt Pascall, operations director for First Quantum, said in an interview on Monday. “All the latest statements by the minister of finance, and even the president, indicate no change.”

First Quantum had planned an expansion of its biggest Zambian asset, the Kansanshi copper mine, and a smelter, but those investments are now “still on hold,” Mr. Pascall said.

He said the Kansanshi mine has paid nearly $3-billion (U.S.) in taxes to the Zambian government over the past six years. “This is up to 20 per cent of Zambia’s tax take, coming out of one mine,” he said.

“We’d like to see a more predictable tax environment. Since 2008, there have been a number of major changes. It’s very difficult to plan mid-term or long-term projects.”

There was recent talk of a special deal to reduce the royalties for one foreign-owned mine in Zambia, but the company rejected the offer and insisted on an industry-wide deal, Mr. Pascall said.

One Canadian company, Barrick Gold Corp., responded to the higher royalty regime by announcing plans to begin laying off some of its 4,000 employees in Zambia next month, and to suspend operations at its Lumwana copper mine by June.

“The mining industry in Zambia gets continually accused of somehow hiding its revenue and paying too little taxes,” Mr. Pascall told a Canadian panel discussion on Monday on the sidelines of the Mining Indaba, the biggest annual African mining conference.

“The government has now introduced a mining royalty tax because that’s apparently easier to administer,” he said. “Unfortunately it’s already probably seen the end of Barrick’s Lumwana mine as being completely unsustainable.”

Even before the latest sharp increase in the royalty rate, Zambia’s mining taxes were the highest in the world, he said.

Zambia is the second-biggest copper producer in Africa, and the eighth-biggest in the world. But its Chamber of Mines has warned that the higher royalty rate could cost the country 12,000 jobs and nearly a third of its GDP.

The royalty regime is unfair, since it is based on revenue rather than profit, Mr. Pascall said. “One of the crazy things about the royalty tax is that it’s the exact opposite of a windfall tax. As the copper price is low, it hammers the industry. You can be paying well over a 100-per-cent tax. You might be making no profit at a low copper price, and yet you’ve still got to pay royalties. It’s obviously unsustainable.”

To justify the tax increase, Zambia has insisted that $2-billion in copper has gone missing annually and must have been stolen, Mr. Pascall said. “I’ve challenged the government to find the perpetrator. Who’s stealing all this copper? It’s not something you can take out in your jacket pocket. Twenty truckloads a day is the rate at which it’s apparently being stolen. Obviously that’s not the case. It’s just a convenient whipping boy, and therefore taxes keep getting ratcheted up.”

He said the “missing copper” was a result of double-counting by the industry, which had counted both the mine production and the production of the same copper from smelters. But even after the mistake was corrected, he said, the government uses it to justify higher taxes.