ACHIEVING THE 50-TON PLATINUM TARGET BY 2030: CHALLENGES AND GROWTH IMPERATIVES
by Lyman Mlambo
Zimbabwe has the world’s second-largest reserve of PGMs in the Great Dyke after South Africa’s Bushveld Complex. There is also potential elsewhere outside the great Dyke as evidenced by 16 platinum EPOs granted in the 1990s. Thus, the geological prospectivity for PGMs in Zimbabwe is undoubted. Zimbabwe ranks third after South Africa and Russia. For example, in 2018 South Africa, Russia, and Zimbabwe’s production figures stood at 110 tons, 21 tons and 14.7 tons respectively. The platinum sector has the greatest potential to expand, besides gold, judging by its geological prospectivity, the several expansion programs by the current three producers (Zimplats, Mimosa and Unki), and the influx of new entrants into the sector (Great Dyke Investments, Karo Resources and several other projects which are at various stages of planning and evaluation). It is no wonder that the Ministry of Mines and Mining Development targets the industry to achieve a quarter of the US$12 billion mining industry target by 2023.
Looking at 50 tons of platinum by 2030 – what is really the magnitude of the task ahead in the context of the production trend we have seen in recent years? In the last five years (from 2014 to 2018), platinum production has grown by an average of 2.63% yearly. Assuming the average growth rate continues, platinum production would grow to about 20t by 2030, which falls far short of the 50-ton target. To achieve our target we need to grow the sector by an annual average of 10.78%. This requires a significant transformation of the current conditions under which the platinum sector is operating.
Production for platinum was on a generally upward trend from 2000 (at 0.51 tons) to 2018 (at 14.7 tons) with the highest recorded in 2016 at 15.1 tons. Over the same period, the international price for the precious metal was initially on an upward trend from US$544.03/ounce in 2000, peaked at US$1,721.86/ounce in 2011 and went on a monotonic decline to US$880.53/ounce in 2018. Clearly, production trends have not strictly followed price trends. Therefore, the achievement of the 50t by 2030 cannot be premised on either the existence of large reserves of platinum in the country (comparative advantage) or an assumed increase in the world market price of platinum. The sufficient conditions for the growth of the platinum sector include deliberate actions to influence the competitive advantage of the sector from within (that is, independent of world price). In short, we must create conditions that make it greater business sense to invest in the Zimbabwe platinum sector than in other countries or other sectors.
International perception of the investment environment in the Zimbabwe mining sector, in general, is bad, with the Fraser Institute ranking the country 5th last on Policy Perception Index (PPI) and 2nd last on Taxation Regime Index (TRI) in 2015. PPI looks at the whole policy environment in the country’s mining sector, while TRI (which is micro-perception index) looks at the taxation regime applicable to the sector. Platinum along with diamonds have now, like the rest of the minerals, been pronounced to be exempt from the indigenization policy requirement. However, clarity on this matter needs to be established by regularization of the Act, otherwise, the tag of indigenization could continue to linger. Perceptions themselves may not be accurate, being perceptions (not measured), but unfortunately, they drive investment decisions.
With regard to the royalty component of the fiscal regime, a comparison between Zimbabwe and other countries in the Southern African Region is instructive. Platinum royalties in Zimbabwe are based (charged) on gross sales revenue rather than on profit. This obligates even marginally economic and loss-making firms to pay them; makes them a variable cost (as they are exacted also on the cost component of gross revenue); is a drift away from the general global shift towards the profit basis, and is less competitive compared to neighboring South Africa. In SA, while it is revenue-based, it provides some formula to link the actual rates exacted to mine profitability, so that the rates vary by mine, thus taking into the accountability to pay. Zimbabwean rates are currently the highest in the Region at 10% compared to a range of 0% in South Africa (for marginal and loss makers) to 6% in Mozambique and Tanzania. The royalty regime does not provide for stability clauses, unlike in countries like Mozambique and South Africa. There is also generally a high burden of fiscal compliance due to a multiplicity of tax heads, regulatory/legislative instruments and collecting agents.
The serious power shortages being experienced in the country have also affected the platinum sector. In general, a mine requires on average at least 16 hours of uninterrupted power supply every day to ensure that production levels are maintained and that machines run optimally (frequent power outages affect machines). In 2008 the International Monetary Fund estimated that the cost of power outages to a mining firm could be as much as 5-6 % of revenue. It is common knowledge that all forms of infrastructure including transport – road, railway, and air have suffered dilapidation over the years.
Access to finance is the greatest obstacle to doing business in Zimbabwe due to limited opportunities for offshore lines of credit coupled with inadequate local funding at very high-interest rates. This has not been helped by the lower forex retention for the PGM miners at 50%. Much of the forex is on the parallel market where rates are much higher than the interbank market rates. This has resulted in mines failing to secure inputs in time, and in local inputs being very expensive. Generally, the sector is plagued by high costs of all sorts including electricity tariffs, fuel, funding, labor, consumables, and other materials and high fiscal and administered charges.
Zimbabwe has lost mining skills (geologists, engineers, technicians, and managers) to the region and to the broader international community due to a protracted general economic recession in the country. Zimbabwe’s capacity to develop more skills in the sector has suffered due to a decline in the capacity of the country’s training institutions. Funding and modern skills challenges have adversely affected the capacity of the Zimbabwe Geological Survey to generate new information including geological maps. There is a need for funding of more detailed exploration (beyond reconnaissance).
There are five things that Zimbabwe needs to do to achieve the 50-ton platinum target by 2030 or even earlier by 2023. These include:
(1) improvement in the attractiveness of Zimbabwe as an investment destination;
(2) Improvement in infrastructure development framework in the country;
(3) Promotion of beneficiation and value addition in the platinum sector;
(4) General linkage promotion in the sector; and
(5) Attracting and retaining capital in the platinum industry.
In order to address imperative
(1) we need to improve our country international rankings through addressing the policy vacuums, finalizing the legislative/regulatory framework in the platinum sector, providing a robust framework for the protection of private property rights and ensuring that these policies, legislations, regulations, and rights are stable. We also need to improve the ease of doing business (expedite the ongoing reforms), increase forex retention levels in the sector from 50% to 85%, make the fiscal regime more competitive especially by reducing the royalty rate to the regional average and improve the availability of geological information in order to effectively reveal the country’s propectivity.
Improvement in infrastructural development can be achieved through several measures. We need to integrate the production expansion plans (consistent with the 50-ton target) with infrastructural development plans so they speak to each other. Local financial institutions such as IDBZ, RBZ can play a key role if they are capacitated enough to fund infrastructure development. It is also probably time that mines are incentivized to participate in infrastructure projects that will ensure long-term service supply, through Public-Private Partnership (PPP) or in their own right. There is a need to develop an energy pricing model that strikes a balance between the sustainable supply of power and competitive pricing.
The promotion of beneficiation and value addition in the platinum sector is a critical element of national industrialization. The government needs to emphasize more on the carrot (incentives) than on the stick (tax penalties) until such a time that lack of compliance is deemed clearly deliberate (for example, when the mooted national centralized beneficiation facilities are in place). The infrastructure imperative alluded to above applies here too. Further dialogue on this matter through a beneficiation conference, to clearly define targets and implementation milestones, is imperative. Associated with this is the need to promote the development of upstream, downstream, side-stream, spatial and knowledge linkages in the PGM sector. In particular platinum mines should be incentivized to support local enterprise development and increase the local procurement of materials and consumables. The mutual feedback effects of these linkage industries to the primary production of platinum are obvious.
The PGM sector is currently operating at almost full capacity, which implies that the growth to 50 tons would be achieved only if adequate net capital is attracted. Required capital for the sector over the next five years, both for sustenance and ramp-up, stands at about US$7 billion. It is imperative that the Government facilitates the acquisition of cheap capital for the platinum industry through loan guarantees or other instruments. This, coupled with an increase in the forex retention level, will improve the financial standing of the platinum producers.
Lyman Mlambo is the Chairman of the Institute of Mining Research at the University of Zimbabwe he writes in his personal capacity.
This article first appeared in the December 2019 Mining Zimbabwe Magazine