60/40 the elephant in the room is growing by the day
While the Mining industry races to reach annual revenue of US$12 billion by the end of 2023, the 60% foreign currency retention for large-scale producers might be a major cause to upset the achievement of the vision.
The export retention scheme allows miners to retain 60 percent of exported minerals in foreign currency while the remaining 40 percent is surrendered to the country’s central bank (the Reserve Bank of Zimbabwe ‘RBZ’) at the prevailing interbank rate. If the 60% is not utilised within four months, the central bank will confiscate another 25 percent to take the total surrender requirement to 65 percent.
Currently, the interbank exchange is slightly above ZWL 500 per US$1 while on the parallel market, US$1 ranges between ZWL 1000 for soft currency and ZWL 800 for hard currency. With the above discrepancy between the formal exchange rate and the market rate, exporters are losing over 20 percent of their real earnings due to the surrendered earnings.
Miners are also paying taxes and electricity in foreign currency, foreign exchange regulations are a punitive tax to business viability.
Government measures to reduce inflation
It should however be noted that despite miners losing a lot of their money due to the exchange rate alone, the government has been working flat out to make sure that inflation is managed well to avoid a situation where miners lose.
Between 2015 and 2021, the country promulgated hundreds of statutory instruments (temporary measures) aligned with monetary policy and produced a plethora of exchange control regulations or statements in an effort to combat inflation.
Recently, the central Bank introduced gold coins which are meant to be a store of value for businesses, miners included.
The RBZ announced that 90 percent of the 4475 gold coins sold as of 10 August 2022 were sold in local currency with the government realizing ZW$3.7 billion from the sale of the coins.
According to RBZ governor Dr. John Mangudya, the high demand for gold coins will help the local currency gain in value and reduce inflation.
“As of 10 August 2022, 4475 gold coins had been sold realising ZW$3.7 billion of which 90% was paid in local currency and the balance in foreign currency, and evenly distributed throughout the agents.
“The high demand for the gold coins will assist in mopping up liquidity from the market and thus strengthen the demand and enhance the value of the local currency. The Bank shall continue to release additional gold coins into the market on an ongoing basis in line with demand,” Mangudya said.
However, Although gold coins might be an alternative for miners to return the true value of their mining operations, the coins are not allowed to be sold before 180 days after their purchase making it difficult again for miners to have sufficient operational funds.
60/40 forex retention pressuring miners
The large-scale mining sector has been hard-hit stubbornly by the cost of production, labour, and materials due to the current foreign currency retention offered by the government experts say is not viable.
The large-scale producers are of the view that the current foreign currency retention which is at 60 percent is an elephant in the room that is impacting production significantly.
According to Freda Rebecca Managing Director Mr. Eliakem Hove, the primary producers were pushing towards the government giving the miners 100 percent so that operations may not be affected making them significant to achieve the government’s vision for the mining industry contributing US$12 billion annual revenue.
He said that the 40 percent Zimbabwean dollar component aids in the increasing cost of production.
“Our position as the Chamber as well as Freda Rebecca 60/40 is not adequate we would actually want 100 percent, worst case 80/20. The Zim dollar component increases your cost currently sitting around 60 percent when trading, 60/40 is putting pressure on our side,” he said.
In a trading update, Bindura Nickel Corporation secretary Conrad Mukanganga said the adverse impact of the cost of local inputs and the increasing disparity between the auction foreign exchange rate, at which the company surrenders 40 percent of its revenue for Zimbabwe dollars, and the prevailing parallel market rate battered the mining company.
According to the Chairperson of the Geological Society of Zimbabwe Mr Kennedy Mtetwa operational costs in local currency are increasing due to high inflation on the parallel market and the failure by the central bank to provide all suppliers with the required foreign currency.
“Production costs going up in ZWL yet the exchange rate for 40% staying the same,” said Mtetwa.
Last year, diversified mining group RioZim during the first quarter of 2021 said it did not benefit from a 12 percent increase in average gold prices due to the reduction of the gold foreign currency retention threshold from 70 to 60 percent by the central bank.
The miner said the retention threshold impacted negatively on gold production by 10 percent.
When asked what Parliament was doing to ensure the 60/40 issue was addressed, Portfolio Committee on Mines and Mining Development Chairman Hon Edmond Mkaratigwa said Parly was open to getting details of modalities that work but the sector has also largely not been forthcoming of late.
“Parliament has always remained open to getting details of modalities that work. If you remember well, we stated during the time the 60/40% was achieved that, we must continue to engage until we get to where we desire. The best way is to get some new position papers so that we have the basis that justifies the new demands so that we represent while fully equipped. Parliament has raised these issues but the sector has also largely not been forthcoming of late. We are ready to hear what our constituents have in mind and as part of what they think works best for them and the national interest, for the broader good of all today and in the future,” Mkaratigwa said in an interview with Mining Zimbabwe.
Chamber of Mines President Collin Chibafa said the body will continue to fight on for improvement of the retention threshold.
“We cannot afford to give up. The Chamber of Mines continues to engage and lobby the RBZ and Government for an optimal foreign exchange framework for the mining industry. While the retention has remained at 60/40, we have seen some changes namely, allowing miners to pay a proportion of the royalties and taxes in local currency and the introduction of an incremental export incentive scheme that results in mining companies retaining 80% of export proceeds about a set threshold. In addition, for mining companies that are listed on the Victoria Falls Stock Exchange, the retention on incremental incentives is set at 100%. We will continue to engage and lobby for improved retention levels to ensure mining companies are able to sustain and expand their output,” Chibafa said in an interview with Mining Zimbabwe.
It would be witless for primary producers to blame the authorities or vice versa if the country fails to attain the US$12 billion industry by 2023 if the journey continues divergently.