Maravi

Chamber of Mines calls for stimulus package

COMMENT - I thought the mines already had their stimulus package - the development agreements.

Chamber of Mines calls for stimulus package
Written by Kabanda Chulu and Florence Bupe
Thursday, June 11, 2009 12:23:47 PM

THE Chamber of Mines, a consortium of mining companies in Zambia, has asked the government to provide a stimulus financial package to the mines to mitigate effects of the global financial crisis on the sector.

And Zambia Association of Chambers of Commerce and Industry (ZACCI) chief executive officer Justin Chisulo has said the government should lend money to the mines rather than increasing its shareholding.

But sources at Ministry of Finance have indicated that it is not possible for the government to find money to finance the mines because only two of the 13 registered mining companies agreed to pay windfall taxes to the government when Copper prices were selling above US$8, 000 per tonne.

Speaking last week, Chamber of Mines general manager Frederick Bantubonse said in the short-term, the government should provide a stimulus package to mitigate the crisis and restore investor confidence in the long-term.

Under the short-term stimulus, Bantubonse said there was need to re-evaluate the tax structure for the mines to maximise production and collect revenue through income tax.

He said this development would boost foreign exchange earnings and increase economic activity with multiplier benefits to the economy in general.

“Currently, mineral royalty tax rate (MRT) is at three per cent, irrespective of the level of Copper prices at London Metal Exchange and we request that MRT rate be graduated at levels of Copper prices as follows, above US$3 per pound at three per cent, at US $ 2 per pound at two per cent and below US$2 per pound at zero per cent,” Bantubonse said. “And in calculating MRT, mining companies must be allowed to offset Copper and Cobalt price participation from gross sales, as these are not realised in the hands of mining companies and mining companies should be allowed to offset selling expenses against revenue, in short royalty tax should be based on realised income and not some theoretical income.”

Bantubonse also said company tax for the mines should be reduced to 25 per cent from the current 30 per cent so that available earnings could be retained for developmental projects.

He observed that Zambia Revenue Authority was applying withholding tax to services provided by foreign companies even when the service was performed outside Zambia such as engineering and design of new processing plants for which there was no capacity.

“It is a disincentive to future investments since the end user of such services generally becomes liable for this withholding tax, whilst we agree with the principle of withholding tax being applied to services performed within Zambia, we request that it should not be applied to services performed outside the country and the rate of withholding tax at 15 per cent is unacceptably high and we request that this rate be reduced to 10 per cent,” Bantubonse said. “Withholding tax is even applied on interest payments on funds borrowed form outside Zambia. For large, projects, it is inevitable that borrowing form foreign banks is required, but cost of borrowing is increased to the extent of withholding tax payments so we request that this tax on interest charged on foreign borrowings be abolished as it discourages borrowing to finance developmental projects.”

He said imposition of import duties on fuel products was a heavy blow to the mining industry.

“Safety rules in Zambia requires that only low sulphur diesel is used underground, however, Indeni Refinery does not produce this type of diesel, which is therefore imported from outside hence we ask for the removal of duty on these low sulphur products,” said Bantubonse.

And Chisulo said the dramatic fall in copper prices had reduced earnings of the mines with the cost of production outstripping revenue.

“It became unprofitable to mine at such low prices and foreign capital in flows have reduced thus making it difficult to borrow easily on the market because such businesses have become a credit risk and government should lend money to the mines,” said Chisulo said. “We are not of the view that government should increase its stake in these mines but to lend them money and agree on repayments terms since the copper price is bound to rebound.”

But sources at Ministry of Finance said it was not possible to find money to support the mines since the budget had already been passed.

The sources further said providing a stimulus financial package would have been possible if the mines had complied with tax payments under the repealed regime which also catered for windfall taxes.

“But only two out of 13 companies agreed (with conditions attached) to pay windfall taxes, the rest refused and they still owe government funds since the mines are still arguing about paying windfalls taxes, so had they paid like elsewhere, these are the same funds that could have been provided to mitigate the crisis,” said the sources.

And when making submissions to the parliamentary committee on economic and labour affairs, Bantubonse said the mining industry was ‘sick’, saying the government should support it since it was the main stay of the Zambian economy.

He said large mining companies such as Anglo American Corporation, Rio Tinto and BHP Billiton had not been spared and had also reviewed their operation costs resulting in job losses.

“However, the Zambian situation is different in that problems started early in 2008 with the enactment of the mines and minerals development Act and the amended Income Tax Act 2008 and these two pieces of legislation resulted in eroding investors confidence and slowing down the growth of the sector as some projects were either deferred or cancelled altogether and the implication of this is that even when metal prices rise some projects will still not be implemented,” said Bantubonse. “So mining industry is ‘sick’ but since it is the main stay of the economy it needs government support so that it can continue playing its role regarding economic development.”

Meanwhile, Chamber of Mines president Nathan Chishimba observed that Zambia will not benefit from attractive copper prices for as long as operating costs remained high in the industry.

In an interview, Chishimba said it was vital for the government to come up with ways aimed at addressing the high cost of doing business for the mining industry if any meaningful gains were to be attained.

“The cost of doing business in Zambia has remained high, not only for the mining industry but every other area. We need to vigorously bring the cost of doing business down if we are to benefit from rising copper prices,” he said.

International copper prices have risen by 61 per cent since January this year, having peaked to US $5,060 per tonne last week.

Chishimba said the high costs of running the industry would eat into profits and exert pressure on mining companies.

“Even though we are seeing a recovery in copper prices, we don’t stand to benefit because costs have remained high. High costs tend to feed into production. There’s need to tackle the cost of infrastructure and utilities,” he said.

On whether the upward trend in copper prices was sustainable, Chishimba said it was dependent on strong economies like China and the United States as these were the main determinants of international market movements.

“We need to learn that the futures of those economies determine demand levels. China’s restocking to a large extent led to the rebound we are witnessing, although market experts have stated that the fundamentals are still weak and the increase in copper prices may not be sustainable,” Chishimba said. “However, there is some level of optimism as well because confidence has begun to return to the international financial markets.”

Chishimba further called for diversification within the mining industry to cushion the country’s economy against the vulnerability in copper prices.

He advised the government to prioritise the implementation of policies that will promote diversification within the sector.

“Zambia still has a broad potential in other minerals than copper, such as industrial minerals and precious stones. What we lack is conducive policies that will promote sub- sectors within the mining industry. We should focus on diversification within the mining industry in order to address the current vulnerability in the industry. We are encouraging the mining sector and other policy makers to make it a policy priority to create a conducive framework that will see other sectors apart from copper to thrive,” said Chishimba.

Labels: CHAMBER OF MINES, JUSTIN CHISULO, ZACCI

posted by MrK @ 11:28 AM