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Mar 16 Mar 2010 07:30
Equinox Minerals defers payment of taxes to govt By Kabanda
By Kabanda Chulu in Kitwe and Fridah Zinyama in Lusaka
Tue 16 Mar. 2010, 04:00 CAT [61 Reads, 0 Comment(s)]
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EQUINOX Minerals, the holding company of Lumwana Mines, has deferred payment of taxes to the government amounting to US $36.2 million for 2009 until the company eliminates its debt worth over US $1 billion.
And a Zambian UK-based economist has observed that Zambia would have earned US $1.2 billion about K5.52 trillion from the 700,000 metric tonnes projected copper output for this year had the government maintained the 2008 mining fiscal regime.
Meanwhile, the government has awarded Equinox Minerals concession rights to explore an area that contains iron oxide and copper-gold in North West Lusaka with a view to develop another mine after Lumwana.
Last week, Lumwana Mining Company recorded its first annual operating profit of US $195.7 million for the year ending 2009.
As at December 31, 2009, Equinox had cash reserves of US $109.1 million, an increase of US $57.8 million from December 31, 2008 due to the April 2009 common share offering and operating cash flows from the Lumwana Mine.
In addition, the company had capital assets of US $1,102.8 million which consist primarily of the Lumwana assets compared to US $1,067.3 million at December 31, 2008 due to the capitalization in 2009 of Lumwana development costs prior to achieving commercial production and the ongoing construction of the Lumwana village.
And the long-term debt, consisting of outstanding amounts under project and fleet debt facilities was US $518.7 million compared to US $613.4 million as at December 31, 2008 due to principal repayments made during 2009.
Share capital also increased over the year to US $737.8 million at December 31, 2009 mainly due to the public offering of 102,235,000 common shares in April 2009, which resulted in raising gross proceeds of US $148.3 million.
But despite recording an operating profit of US $195.7 million for the year, the company has posted a loss during the same period of US $183.1 million primarily due to non-cash hedging losses of US $329.8 million related to the remaining hedge book being marked to market at the current strengthening copper price.
Releasing the financial statements for 2009, Equinox Minerals Limited president Craig Williams stated that the company believes that its Development Agreement with the Zambian government which overrides the current changes to the Zambian tax regime, including the timing and other related matters of such statements, are forward-looking statements.
“In stating that the company believes that its Development Agreement overrides the current changes to the Zambian tax regime the company has assumed that the legal advice received from its local and international legal advisors is correct and the increasing copper price during the year has resulted in the company’s hedge book closing out of the money and in a liability position of US $107.3 million and the income tax benefit of US $56.9 million recorded on the loss for 2009 has resulted in a reduction of the future income tax liability from US $62.8 million in 2008 to US $5.9 million in 2009, “Williams stated.
“Payment of mineral royalties, customs duties and withholding taxes totaling US $36.2 million for 2009 were deferred under the terms of the Development Agreement. Under the terms of the Development Agreement these amounts are deferred until the Lumwana debt is eliminated.”
Williams stated that ore mined and copper in concentrate produced demonstrated quarter on quarter improvement throughout the year as ramp-up continued towards design production levels.
He stated that strong first annual copper production of 109,413 metric tonnes of copper in concentrate delivered with Lumwana was steadily improving towards nameplate capacity.
“Operating profit achieved was of US $195.7 million. Operating profit is stated for the nine month period ended December 31, 2009 due to commercial production commencing April 1, 2009 and operating profit was subsequently offset by non-cash derivative instrument losses resulting from the rising copper price leading to a net loss position, after tax, of US $183.1 million,” Williams stated. “This is primarily related to the remaining hedge book being marked to market at a copper price that has strengthened throughout the reporting period.
Revenue was positively impacted by the same rising copper price.”
He stated that the company expects to produce 135,000 metric tonnes 297.6 million pounds of copper metal in concentrates in 2010 at an operating cost of US $1.35 per pound.
“Meeting this target is dependent on a range of factors including mine and mill performance during the annual wet season, the improvement in the availability and utilisation of the mining fleet and performance of the processing plant,” Williams stated.
During the year, mine and process plant operations continued to ramp up at the Lumwana Mine.
Ore processed at the Lumwana Mine for the year was 13.7 million dry metric tonnes of ore, producing 253,917 dry metric tonnes of concentrate at an average copper grade of approximately 43.09 per cent.
This resulted in copper produced in concentrate of 109,413 tonnes 241.2 million pounds at an average operating cost of US $1.49 per pound.
During the year, concentrate delivery was predominantly directed to the Chambishi Copper Smelter Limited and the Konkola Copper Mines Plc smelter at Nchanga, which when combined, account for a large majority of Lumwana’s forecast production.
On future explorations for the company, Williams stated that ‘another Lumwana’ might be established in the Lusaka region.
He stated that Equinox would continue to review and assess opportunities for organic growth and expansion and corporate opportunities to grow the company.
“Equinox has been granted the 2,200km2 Mufapanda licence, an iron oxide-copper-gold target some 200 km west-north-west of Lusaka. An exploration field visit identified an outcropping zone over eight kilometers of hematite-magnetite breccias above a magnetically active granitoid,” Williams stated.
“Following inconsistent samples from this zone the company plans to undertake an airborne magnetic and radiometric survey of 10,820 line kilometers to provide the foundation for future exploration activities in 2010.”
He disclosed that Equinox Minerals also holds additional regional exploration tenements and applications elsewhere in Zambia that had been affected by the introduction of new legislation in 2008, which govern the title and commitments on prospecting licenses.
“The company is working closely with the Zambian government to resolve the inconsistencies and ambiguities in the legislation before committing expenditure to the regional tenements,” Williams stated.
In 2008, Equinox completed its uranium feasibility study (UFS) investigating the onsite treatment of high grade uranium mineralization contained within the Lumwana Mine copper pit shells.
The UFS confirmed the potential viability of onsite uranium treatment.
Since then, mining and stockpiling of uranium mineralization has continued and currently, the copper-uranium ore is being diverted away from the copper concentrator and is being classified as ‘waste’ to the copper project.
And it is this uranium-rich copper ore stockpile, which will be treated at a later date if and when Equinox Minerals builds a uranium processing plant.
“Should Equinox be successful in negotiating viable uranium off-take agreements and securing the requisite project capital financing, the company estimates uranium plant construction to take approximately 18 to 24 months,” Williams stated. “But the decision to proceed with the development of the Lumwana uranium project will depend, subject to approval by the Equinox board of directors, on a number of factors including satisfactory financing and the negotiation of off-take terms.”
And Williams stated that significant opportunities exist at the Lumwana Mine following the completion of ramp up.
“Under the expansion and optimization plans, we intend to further expand and optimize the mine and concentrator throughput rate to assess and evaluate the additional near mine deposits discovered to date and we shall develop the Lumwana Mine uranium resource. Equinox will continue to assess these opportunities for expansion and organic growth at the Lumwana Mine,” he stated.
“And the Lumwana town development has continued to advance with 734 houses completed as at December 31, 2009. The commercial and retail developments, including the recently opened Lumwana supermarket, are advancing and a self-sustaining modern town environment is being developed.”
Equinox acquired the Lumwana project in 1999 and following nearly 10 years of feasibility, financing and construction, commissioned the mine, plant and infrastructure in December 2008.
At initial design capacity, Lumwana will process in excess of 20 million tonnes of ore per year, mined at an average life of mine strip ratio of 4.2:1.
Lumwana ore, which is predominantly sulphide, is treated through a large, yet conventional plant, producing a copper concentrate for sale to local and international off-takers.
Williams projected that construction of the plant to process uranium would take two years if negotiations to secure project capital become successful.
And Patrick Mulenga, a lecturer of economics at University of Essex in the UK, said at a projected output this year of 700,000 tonnes of finished copper at an average selling price of US $7,000 per tonne, the country would have yielded US $1.2 billion about K 5.52 trillion in windfall taxes plus a further US $147 million about K 676 billion in mineral royalties.
“The windfall tax calculation assumes a windfall trigger price of US $3,500 per tonne and a tax rate of 50 per cent while the mineral royalty rate is six per cent,” Mulenga, a former senior lecturer of economics at the University of Zambia said. “The empirical data used in the calculations is available in the public domain and there should be no state secrets about it.”
Mulenga said it was worth noting that the assumed windfall trigger price was substantially higher than the current break-even cost of the oldest underground mine, the most expensive to operate.
“Unlike the convoluted mining companies’ income tax calculations, which seldom present the true picture and invariably yield minimal or zero returns to government, the calculations above are straightforward, transparent and do not require costly audits to verify,” he said.
Mulenga noted that in view of the anticipated surge in international copper prices following the recent devastating earthquake in Chile, there was urgent need for the Zambian government to do away with its ‘laid-back business as usual’ attitude and revisit the 2008 mining tax regime immediately.
Mulenga urged the opposition political parties to stop wasting time discussing private extra-marital affairs and concentrate on the issues of the windfall tax which he described as an important national matter.
“It is important for everyone to appreciate the fact that foreign direct investment should not be only about creating a few low- paying jobs but must create sustainable sources of revenue for the national treasury so that all citizens benefit,” he said.
Mulenga said it was clearly obvious that the current administration was missing the bigger picture by focusing on employment figures and contributions of Pay as You Earn (PAYE) and Value Added Tax (VAT).
Mulenga observed that the decision by the government to seek a higher interest loan from the World Bank for repairing roads leading to mining areas was ill-advised and must have raised a few eyebrows in the donor community.
“In the private sector, the key lending criteria would be the sustainability of the borrowers’ sources of income and the borrowers’ record of debt collection,” he said.
Mulenga noted that unfortunately the government did not inspire much confidence on both counts.
“The mining companies are largely responsible for the damage caused to the country’s rail and road infrastructure; therefore it is only fair that they make a proportional contribution towards the proposed infrastructure repairs; however this is not the case at the moment,” said Mulenga.
