Gold mines face closure in Zimbabwe

By Violet Chipunza

ZIMBABWE’S gold mining sector, rattled by massive cuts in global metal prices, is bracing for a renewed wave of mine closures that could significantly affect the country’s embattled economy.

At peak, Zimbabwe’s gold mines produced 27 tonnes of gold annually but the figure slumped to less than 10 tonnes after wholesale closure of mines during the Zimbabwe dollar era, which ended with dollarisation in 2009. Last year, gold output stood at 13,9 tonnes, against a target of 14 tonnes.

The industry is expecting to produce 14,5 tonnes of gold this year. The Chamber of Mines of Zimbabwe (CoMZ), a conglomeration of big mining firms in the country, this week warned that the diamond mining sector could also lurch into a crisis if government presses ahead with a 15 percent tax on raw export of gems that became effective this month.

Gold prices tumbled by a massive 30 percent during 2014, closing at an average US$1 140 per ounce, from US$1 671 per ounce in January. The slump in prices threw the country’s gold mining sector, beset by high production costs that have hit profitability, into turmoil.

Royalties, mining fees and other charges have remained high compared to regional rates, even after government took steps in the 2014 mid-term fiscal policy statement to implement reforms.

“The viability challenges facing the gold mining industry have worsened in the past 12 months due to the continued decline in gold prices and high operating costs,” CoMZ chief executive officer, Isaac Kwesu, said in a five-page letter submitted to the Parliamentary Portfolio Committee on Budget and Finance on December 9, 2014.

“If no immediate measures are taken, the likelihood of production reaching 1990 levels is very slim, and in the extreme mines will go under care and maintenance to preserve the assets,” Kwesu said in the letter in which he was seeking policy reviews to avert a crisis.

Finance and Economic Development Minister, Patrick Chinamasa, last year reduced gold royalty rates to five percent from seven percent as part of measures to give relief to an industry that is losing between US$60 and US$100 per ounce due to high cost structures. These have been compounded by high power tariffs and erratic supply.

The mining industry, estimated to require up to US$5 billion in fresh capital, has failed to access funding for recapitalisation and new projects. And if the sector plunges into care and maintenance as now feared by CoMZ, thousands could lose jobs. Chinamasa last year revealed that over 55 000 workers were thrown into the streets between 2011 and 2013 after their companies either closed or restructured.

A further decline of closure of mining firms could also affect already dwindling government revenues, as this would slash fees and taxes meant for the cash-strapped government. Downstream industries would also be affected.

As part of measures meant to avoid the collapse of gold mines, whose fortunes had started improving following the crisis that shook sector players during the hyperinflationary period between 2000 and 2008, Kwesu urged government to review further downwards royalty rates to three percent.

He estimated savings of up to US$24 per ounce if this was done. He proposed the reduction in the Fidelity Printers & Refiners charge to gold mines of 0,5 percent so that mines could save up to US$12 per ounce. At the Rand Refinery in South Africa, gold mines are charged 0,3 percent.

“In the outlook the price is projected to remain depressed, ranging (between) US$1 000-US$1 200 in the next 12 months,” said Kwesu’s letter.

“Gold production has been on a free fall with monthly average output having fallen by five percent from 1 229 kg in 2012 to 1 166 kg in 2014 (January-August average). While the reduction in the royalty of gold from seven to five percent in the mid-term fiscal policy was viewed as a positive move, the continued decline in the price of gold has eroded any purported benefit,” said Kwesu.

He proposed a significant review of power tariffs.  “The chamber’s appeal for a downward review of mining fees and charges was not addressed by the budget. It is important to note that the current structure of the fees remains suboptimal and unsustainable for some mining companies. When taken together with other fiscal charges, these fees are deterrent to investment in exploration and mine development,” said Kwesu.

With government battling to balance its books as a result of the continuing economic crisis that has sparked an industrial crisis, the CoMZ’s proposals could hit a brick wall. The Ministry of Finance has looked up to the widely expanding sector for revenues. Government would be unlikely to give further concessions that have the effect of reducing its revenues, especially as it battles to pay a growing and restive civil service.

In the past few weeks, government has been battling to contain potential strike action after crashing with public service unions over late payment of promised bonuses. Kwesu said key to the recovery of the mining sector would be the availability of cheap long-term capital. “A competitive and attractive mining fiscal regime is pre-determinant of investment and production growth,” he said.

“This has been the case for many countries that have witnessed mining sector growth over the past two decades.” Financial Gazette