Wednesday, October 28, 2020

Good policy is determinant of mining success

Botswana is on course to get a windfall of a boom across the mining sector. Already, the country is bracing itself for the largest private sector investment in the country through the Mmamabula Energy Project and equally boasts of the world’s best nickel refinery technology called Activox. As the country readies itself for potential economic boom, corporate finance analysts of a London based mining finance house ÔÇô Loeb Aron & Co. Ltd, Mashale Phumaphi has warned that success in the mining sector would be a function of good policy formulation. Drawing lessons from the region, Phumaphi noted that some of the resource rich countries within the region have in the past failed to optimise the mining benefits because of bad policy decisions. The bad policy decisions, he said, emanated from the increased agitation for getting a fair share of the spoils.

“Historically the feeling is that Africa has been taken advantage of and there is still a feeling in some countries that Africa is not receiving the value that it deserves from its natural resources,” he noted.

Although the objective of deriving more value from the resource sector has been the same, the strategies implemented have varied greatly from one country to the next, said Phumaphi. In Zimbabwe and the Democratic Republic of Congo (DRC) for instance, the international investment community has frowned upon the proposed and implemented changes in the running of the mining industry.
The economic meltdown and unfriendly foreign investor polices have had harmful impact on gold miners in Zimbabwe.

“Gold producers in Zimbabwe were receiving as little as US$70/oz for the gold that they produced. The problem being that in Zimbabwe, by law, all gold produced in the country must be sold to the Reserve Bank,” he said.

The problem is that, when Zimbabwean gold producers are selling their gold at US$70.00 per ounce to government, their counterparts in the open market are raking in excess of US$260/oz. The low turnover problem is compounded by the ever sky-rocketing inflation.

“The reserve bank periodically sets an official exchange rate, which it uses to pay the miners. The rampant inflation means that unless the exchange rate is revised on a daily basis, the miners receive a price that is much lower than the market price for gold,” he said.

In effect, the government is imposing a type of bizarre mineral royalty on the revenue of gold mining companies that increases on a daily basis, he added.
Phumaphi cautioned that the attractiveness of Zimbabwe’s mining environment would further be reduced by its plans to indigenise 51 percent or more of foreign-owned companies with 25 percent going to the state for free!
Mandatory state part ownership and indigenisation of mining projects is not limited to Zimbabwe.

In Angola and the DRC, state companies, such as Gecamines and Endiama, get a free carry shareholding in mining projects. In South Africa, Black Economic Empowerment (BEE) policies limit the amount of foreign ownership of local companies.

“In these countries, foreign investment growth in their respective mining sectors has been stunted due to these policies,” he concluded.

He further warned that foreign investors are equally sensitive to governments that move goal posts ÔÇô going back against agreements that have been made in the past when it suits them.
A point in case is the DRC. The country said recently that it intends to review 60 mining contracts and many investors are sceptical about the move.

In his radar screen, it is only Botswana, Zambia and Namibia that have taken more acceptable actions. This is because the trio opted for beneficiation as opposed to business grapping.
“Beneficiation of minerals has been identified, correctly, as an important area where significant income and economic growth can be generated in African States,” he noted.

Through the creation of the Chambishi Economic Area in Zambia, China is to spend US$900 million in the Copper Belt over the next four years. The establishment of Chambishi economic zone is projected to create over 60,000 jobs.
Similarly, the relocation of Diamond Trading Company (DTC) from London to Gaborone has attracted several diamond cutting and polishing and several thousands of Batswana are expected to get employment.

“However, as profitable as beneficiation is, it is a complex process that must be carefully implemented to achieve the desired effect,” he stated.

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