Taxes and royalties create further changes

Taxes and royalties create further challenges for mining in Africa

Original article by  Nomvelo Buthelezi published in Mining Weekly on 20 January 2012.

According to mining in Africa director, Ian Kramer, there will be significant opportunities and projects coming on stream in the African mining industry regardless of the decrease in demand experienced by various markets.

“Massive growth will be experienced in the next six months to a year and beyond – for example, investments in the coalfields in Mozambique, as well as the iron-ore market and existing and new investments in Guinea, but these may take longer than a year to come to fruition.”

Kramer does, however, sound a warning that increased pressure by governments in the form of taxes and royalties will add to the challenges of mining in Africa, such as poor infrastructure and skills shortages. This may result in some hesitancy to invest in mining ventures.

The African mining industry

The African mining industry has suffered since the 2008 economic downturn; however, the result of recent increases in commodity prices and the global financial crisis are yet to play out, says Kramer.

“It will be interesting to see how these trends affect the African mining industry.”

There have been many extenuating factors that have resulted in the current condition of the mining sector.

“The global financial crisis and the issues emerging from the European and US debt crises are playing a bit of havoc with the commodity prices. The gold price, which is not necessarily linked to the normal principles of supply and demand, is currently fairly volatile in its traditional inverse correlation to the strength of the US dollar.

It is interesting to witness such volatility in gold at the moment – we were quite surprised to see the gold price rise up to $1 900/oz in 2011, then decrease to $1 500/oz and then slowly creep back up to $1 700/oz.”

Concerns about investing in Africa

Kramer says gold producers have realised that the market is unstable and this will influence whether they invest in Africa and globally.

“If one looks at the production cost profile of gold, producers cannot produce at levels below $1 000/oz any longer. Although the gold price is increasing, the cost curve has increased quite considerably, resulting in concern about mines closing down should gold return to levels of around $1 200/oz.”

Further, the prices of other commodities were expected to recover significantly after the economic downturn of 2008/9.

“The price of copper did recover after 2008, but decreased once more owing to China’s reduction in copper consumption and the drop to a single-digit growth rate.”

Other commodities have faced the same pressures owing to the financial crisis. Copper is not the only commodity that is starting to cool off – ferrochrome demand is also decreasing as a result of China’s influence. However, with other countries, such as Europe, being significant consumers of ferrochrome, it is not only China’s demand that has affected the market.

“Europe has stopped buying out of South Africa and the ferrochrome market will be under pressure for quite some time.”

The global financial climate

It is not only the South African market that is affected. In Namibia, uranium is a significant growth prospect; however, the current global financial climate has affected the possibility of building this market.

“There has also been resistance in Europe to pursuing further uranium interests in Namibia after the recent nuclear incident in Japan.”

Kramer notes that there are many challenges that the African continent is faced with; one of the big obstacles in the way of getting projects on stream faster is the lack of infrastructure in many African regions.

“Africa is going to remain a tough continent for miners to operate on. Even though the demand cycles may pick up once more, coupled with a possible economic recovery, there will be pressure on the mining industry and projects in Africa.”

Development of African mining sectors

Meanwhile, African governments are creating setbacks in the development of their mining sectors.

“Governments are in two minds. On one side, they are keen for foreign direct investment (FDI) to develop Africa, and on the other, they are removing the incentive for FDI as they attempt to increase their share of the capital generated by Africa’s resources.

Many African countries have discussed the nationalisation of mines and have increased their mining taxes.”

Zimbabwe’s Indigenisation and Economic Empowerment Act requires mining companies to relinquish 51% of their operations in the country to the people of Zimbabwe. Guinea’s government has also increased its interest in mining projects from 10% to 30%.

“Meanwhile, some countries have opted to attack mining companies to get a share of the profits by reworking their tax structures. Zambia has doubled its royalties and Ghana has changed its tax regime by increasing income tax by 10%, introducing withholding taxes and changing tax capital allowances to be less favourable.”

This has caused an interesting conundrum, with some African countries increasing their share of projects, while other countries are still looking to attract FDI.

With stumbling blocks such as infrastructure, skills shortages, the European and US debt crisis and increases in mining tax, it is uncertain how mining investments and projects will be impacted.

Kramer fears that there is so much pressure on mining companies to bend to the will of the host countries that they might hesitate to invest in existing, as well as future, projects.

Original article by  Nomvelo Buthelezi published in Mining Weekly on 20 January 2012.
David Okwara

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