Gold miners raise red flag
BELEAGURED large scale gold mines have appealed to government for decisive action to save the sector after a 20,3 percent drop in international gold prices over 12 months ruined operations.
The situation in the sector reinforced gloomy forecasts for the troubled economy, whose bureaucrats flew to Peru this week for International Monetary Fund (IMF)/World Bank annual meetings to plead with international creditors for a rescue package.
Government has heavily depended on mining taxes and fees to fund its recurrent expenditure, the bulk of which goes towards salaries for a bloated civil service and an insatiably large executive.
Gold prices retreated to an average US$ 1 089 per ounce at the end of July, from US$1 362 per ounce in August 2014, but production costs remained extremely high in the country compared to regional comparatives, where resources firms reported profits despite the subdued prices.
Under pressure from the headwinds, gold mines said in a 25-page research to Mines and Mining Development Minister, Walter Chidhakwa, that it was time to review a broad range of taxes, power tariffs and other charges, while mining firms focused on raising US$600 million needed to ramp up production in the next five years.
About US$129 million of this was required this year alone.
Statistics in the document to government revealed a situation now almost out of control, with output flattening at 10 000 kg per annum since 2013, buffeted by huge costs against dwindling income.
Government has hiked royalties five times since 2009, as it battled to raise funding, placing Zimbabwe among Africa’s most expensive mining destinations.
The mining industry’s dossier said the crisis had been worsened by low ore grades of 2,5 grammes per tonne, compared to between 4,2 to 18,2 grammes in other countries.
The plea was dispatched to government after production costs, at US$1 354, outstripped the prevailing gold price of US$1 089 per ounce.
This translates to losses of up to US$265 for every ounce mined.
Last week, the Chamber of Mines of Zimbabwe (CoMZ) said output from large scale producers increased by eight percent during the 12 months ended June 30, 2015 to 5 135,4 tonnes, from 4 745,8 the previous year.
The crisis confronting gold mines has also been compounded by a slowdown in Chinese consumption, which has wreaked havoc across Africa, with mines in many countries being forced to shut down.
The CoMZ’s letter, coming after a week of relentless power cuts that shocked economic players with blanket blackouts gripping the country for up to 18 hours per day, also signalled possible contraction of the economy.
Mining areas were included in a load shedding schedule published last week.
These included the Mutorashanga gold mining area, Zimasco ACM Complex in Chinhoyi, Natural Stone Mine, Eureka Mine, Jumbo Mine, Shamva Gold Mine, Patchway Mine, Venice Mine, Empress Mine, Birthday Mine, Bromton Mine, Zimplats, Bikita Minerals, King Mine, Lennox Mine, Temerira Mines, Dinhidza Mine, Redwing Mine, Dorowa Mine, Inyati Mine, Elvington Mine Mezzotine Mine and Shamwa Mine.
The industry said even after the prolonged shocks, gold mines still had the potential to expand at a rate of 10 percent per annum and reach 27 tonnes of gold by 2020.
And with more interventions, output could rise to 30 tonnes per year by 2020 during the same period.
The CoMZ pressed government to urgently review royalties to two percent from five percent, slash power costs to US$0,067 per kilowatt hour (KWh) from US$0,128 per KWh “and ameliorate the potential incidences of closure or placements under care and maintenance whose adverse implications on employment and revenue are far reaching”.
Chrome producers are paying US6,7 per KWh, while platinum mines are paying US$0,085 cents per KWh.
The regional average is US$0,08 cents per KWh, according to the CoMZ.
In the report, the CoMZ said government should immediately roll out a royalties system based on gold price movements.
They said Burkina Faso had successfully implemented this system.
The total value of minerals fell from a peak of US$2,2 billion in 2012 to US$1,9 billion in 2014, while the share of mining to total exports dropped to 53 percent in 2012 to 53 percent last year, demonstrating the effects of developments at home, and on the international markets.
But experts said accepting the CoMZ’s proposals wholesale would have dire implications.
At the end of June, the Zimbabwe Revenue Authority was battling to recover over US$1,4 billion in outstanding tax after firm closures triggered widening defaults.
This figure was just under half of about US$3,6 billion expected to flow into government coffers this year.
Tax defaults have escalated since 2011, when a liquidity crisis gripped the country; firm closures have led to an extensive erosion of consumer buying power, resulting in weak demand and tepid growth. This has hurt retail-focused businesses, which has in turn also undermined productive sectors.
Government statistics indicate that between 2009 and 2012, closed firms and those still in operation but struggling to meet their obligations had accumulated corporate tax, Value Added Tax and other tax arrears worth US$500 million.
The situation clearly shows that government is treading between a rock and a hard place.
Directing ZESA to slash tariffs would ground the ailing parastatal, already reportedly losing up to US$25 million per month through ongoing load shedding.
The power utility is owed over US$1 billion by its customers, some of them political bigwigs and government chefs.
Deputy Minister of Mines and Mining Development, Fred Moyo, confirmed receiving the document from miners.
Asked what action they were taking, he said: “We are still working on it.”
He spoke as the Zimbabwe Stock Exchange-listed (ZSE) RioZim Limited, a major gold producer, reported last week that revenue had tumbled 41 percent to US$23,1 million during the half year ended June 30, 2015.
RioZim had reported US$39,3 million in turnover the previous year
It reported a US$7,2 million pre-tax loss during the period, from US$8,1 million the previous year.
At London listed Mwana Africa’s Freda Rebecca gold mine, tonnes milled during the fourth quarter ended March 31, 2015 decreased by eight percent to 297 953, from 322 216 tonnes during the third quarter.
There were fears in March that Falcon Gold, another ZSE-listed firm, would close operations because of poor commodity prices and after struggling to attract buyers for its mothballed Dalny Mine, a gold asset.
New Dawn president and chief executive officer, Ian Saunders, told shareholders at Falgold’s annual general meeting that the firm was in trouble but had put in place measures to remain afloat.
The CoMZ said the going has indeed become tough for local miners.
“Internal strategies and measures that were adopted by industry to survive have not helped much as most companies continue to operate below their breakeven point,” the CoMZ said.
“The measures that were adopted include reducing wage rate and labour hours, negotiated price reductions and discounts with key suppliers and replacing contractors with in-house staff. It is against this background that the Chamber of Mines appeals to government to complement the industry’s efforts to restore viability, by granting some reprieve in the form of reduction in electricity tariff and the royalty charge, in line with developments in gold prices,” said the CoMZ.
After looking at the available options, one expert said the power tariff reduction route would be the most viable.
Tariffs for gold mines must be reviewed in line with those of chrome or platinum, said Lyman Mlambo, chairman at the Institute of Mining Research at the University of Zimbabwe.
“There is need for government intervention in the short term to sustain gold mines,” he said.
“Industry must survive, and government needs the taxes, but do you milk a cow that is dying? If I look at the scenarios, they must review power tariffs in line with what other minerals are being charged. These are real issues that gold mines are bringing. Some mines are actually losing much more than what you have,” said Mlambo, a minerals economist.
Social analyst, Henry Harry Makowa, had a different view.
“Quite frankly, there is a naturally symbiotic relationship between company performances or lack thereof and government tax deliberations. While gold companies are adamant they face closure if government maintains royalties at five percent, it is also an oxymoron to buy that assertion considering that mining companies probably have the largest number of flamboyant executives in the corporate sectors of the country even as their workers live in abject poverty and unfathomable penury.
“It is an undisputed fact that most mining concerns, especially gold operations, whilst officially and technically operating under the veneer of formality and the law, they are also notorious for understating their actual gold output and revenue to the state preferring to surrender the bulk of their output to illegal, nefarious gold buyers operating in the economic underworld of vice and mischief. In all honesty gold miners ought to address the real challenge which is their foul treatment of the subaltern gold worker whose poverty they entrench daily not to cry foul over what in fact is a none event,” Makowa noted.
Economist, John Robertson, said downward review of power tariffs should cascade to banks to give mines breathing space.
He said a reduction in royalty rates was urgently required and unions should be persuaded to stop piling pressure on mines to increase wages.
“We can’t rule out closures, especially for small gold mines. Many gold mines are very small, but platinum miners operate in a fairly different way from gold mines. The mines are suffering from cost increases in Zimbabwe. This must be reversed,” said Robertson.