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Key pieces to Zimbabwe's $12 billion mining industry

28 Sep 2020 at 07:27hrs | Views
In October 2019, the Zimbabwean government tabled an ambitious policy document that aims to turn the mining sector in the country into a US$12 billion industry by 2023. Achieving that export target will represent a 275% jump from the US$3.2 billion realized through exporting mining commodities in 2018. The blueprint targets Gold output of US$4 billion per year with Platinum coming in second at US$3 billion. Diamond is targeted to grow to US$1 billion, equal to the combined target of Chrome, Nickel and Steel. Coal, Hydrocarbons, Lithium and other minerals are projected to contribute the remainder. In 2019, export earnings from mining plunged 9% (to US$2.91 billion) as a result of crippling power cuts, foreign currency shortages, increase in operating costs and smuggling of Gold in protest to the low foreign currency retention scheme of 55% which prevailed then. Platinum Group of Metals (PGMs) contributed 43% of the mineral export receipts last year, surpassing Gold which contributed 38%. Platinum is likely to be Zimbabwe's mainstay in the foreseeable future, thanks to the massive investments made in value addition and consistent reporting standards implemented by the current PGM miners. In the same period, Diamonds contributed 5.71%, while Nickel and Black Granite contributed 1.72% and 0.84% respectively.

The mining sector has over 800 operating mines across the country and these range from international mining houses to small scale mines. In terms of employment, over 80 000 workers are employed directly and indirectly in downstream businesses. The sector is also home to over 550 000 Small Scale and Artisanal Miners who are mainly engaged in gold and chrome mining. Economic suffering has contributed significantly to the surge in the number of artisanal miners in the past 2 years in areas such as Gwanda, Zvishavane, Shurugwi, Kwekwe, Mazowe, Chinhoyi, Bindura and Chegutu among others.

Zimbabwe is endowed with two prominent geological features namely the rich Great Dyke and the ancient Greenstone Belts (also known as Gold Belts) which are home to billions worth of reserves in Chrome, Gold, Nickel, Diamond, Iron Ore and Platinum. The country has a massive competitive advantage in the mining sector with a highly diversified mineral resource base of over 40 commercially exploitable minerals. Investment figures and enquiries are heavily biased towards mining, highlighting the importance of the sector to the country's growth prospects in the long term. The Chamber of Mines in Zimbabwe (CoMZ) recently predicted that production from mining could reach $18 billion by 2030 if key challenges in the sector are ironed out through policy and legislative reforms. The following are some of the key pieces that need to be fixed in order to attain the government's US$12 billion target in 3 years' time.

Curbing Corruption (Transparency)
The biggest impediment to the attainment of Zimbabwe's mining target is lack of transparency and systemic corruption in the sector. There is massive red tape and bureaucracy in the processing of mining certificates, verification of applications, ground inspection and awarding of Exploration Prospecting Orders (EPOs). Added to it, there is disregard for rule of law by those politically connected and delays in the settlement of legal disputes. For a long time, Diamond mining remains a murky affair due to the involvement of a number of controversial mining houses, controversial investors and the army. The impact of corruption is that the country loses millions in potential tax proceeds while billions are externalized out of the country through illicit financial flows (IFFs). Communities that should benefit from mining activities are left marginalized with poor infrastructure and environmental scars. To address this, Zimbabwe needs to join the Extractive Industries Transparency Initiative (EITI) and implement its global standards on accessibility of mining data and transparency of operations. Joining EITI ensures that the government commits to full disclosure of information on beneficial owners of mining claims, claims size and number of minerals assets, minerals output, revenues, tax contributions and other information pertaining to minerals marketing.

Expediting Mining legislation
The Mines and Minerals Amendment Bill of 2015 has been stuck in parliament for close to 5 years now. The Bill was introduced to amend and reinforce the archaic Mines and Minerals Act of 1963 which is currently being used locally. The current mining law lacks on provisions that plug mineral revenue leakages and tax evasion, and consolidate tax payments by miners. More importantly the law promotes opaqueness in licensing, corruption by state institutions that oversee mining and secretive side marketing of precious minerals. The new bill should also decriminalize and formalize Small Scale and Artisanal mining to ensure proper reporting, private sector financing, taxation, minimum safety standards, inspections and environmental management. The amendments to the current mining legislation should be expedited as they are key in ramping up production and increasing transparency in the industry.

Zimbabwe Gold production statistics

Dealing with Gold smuggling
In 2019, the treasury department admitted that only 33% of Gold produced in the country is delivered to the central bank. The bulk of the Gold worth close to US$2 billion is lost through smuggling cartels that have influence in the entire value chain from owning gold mining claims (which are mined by artisanal miners through gold sharing arrangements) to owning Gold buying licenses to illegally exporting the mineral to South Africa and United Arab Emirates (UAE) among other countries. Parallel market buyers also pay cash to small scale miners, taking advantage of the central bank delays in paying for delivered Gold. It has been alleged that large scale producers have also been under-declaring their output while selling their Gold via small scale producers to get 100% foreign currency. This means that the country loses millions of dollars in taxes on foreign currency earnings. To curb smuggling, the central bank needs to ensure that the foreign exchange market freely floats to preserve value for exporters on the surrendered export portion. Alternatively, it can allow miners to retain 100% of their export earnings in a scheme which would see all export proceeds being repatriated back to Zimbabwe.  

Investment in exploration
New investment in the mining sector is hampered by lack of information on the size and quantum of mineral reserves. Similarly there are limited incentives to current miners who invest in exploration. So far there has been no investment in the exploration of recently discovered Rare Earth Elements (REE) minerals despite huge global demand for the minerals. To identify new mining areas and fully exploit the abundant mineral resources, the government needs to set aside a fund for exploration (through the Geological Survey Unit) from collected mining royalties and to grant as many time bound EPOs as possible.

Incentives to value addition
A significant portion of mining commodities exported from Zimbabwe are shipped in their raw or semi-processed form for further value addition in other countries. The government took a deliberate effort in incentivizing beneficiation of platinum locally and the policy is gradually bearing fruit. Tax incentives should be offered to current or new miners on additional investment made towards value addition of Lithium, Rare Earth Elements (REE), Gold, Diamonds, Nickel and Chrome. Value addition locally creates downstream employment, fosters transparency, increases mining output and tax proceeds payable to treasury from the entire value chain.

The recent changes on the Indigenization and Empowerment legislation to allow for over 51% foreign ownership of mining assets (Except for Platinum and Platinum assets) has also improved foreign appetite for investment into the country. So far the mining sector is beset by perennial challenges that hinder investment, optimum production and access to offshore loans. It will be mission impossible to attain the set output targets without changes to the current mining legislation and policies to guarantee transparency and investment in mineral exploration. Above all, strong institutions such as implementation of EITI, respect for rule of law and property rights are overdue in curbing systemic corruption and opaque operations in the mining sector. If the government dares to dream of a US$12 billion mining sector, it should also dare to reform its mining laws and policies that are hindering optimal production from the billion dollar mining industry.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email or Twitter @VictorBhoroma1.

Source - Fanuel Chinowaita
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