Country risk, forex laws stall mine expansion
Zimbabwe’s miners want to be allowed to use their gold output as security for foreign credit, saying increased country risk and central bank’s foreign currency regime has stalled expansion projects.
The government has targeted mining as its main route out of the deepening economic crisis, but a new petition sent to government by miners shows how the country’s own policies – from forex laws to taxation – are hurting the industry’s prospects for growth.
The Chamber of Mines, which represents large-scale miners, says they are finding it harder to raise money for expansion in Zimbabwe.
“Mining companies are struggling to raise capital due to increased country risk. This has seen most expansion mining projects put on hold as most financiers are demanding offshore collection accounts as guarantor for capital. In the case of gold, investors are also insisting on gold output as security for capital, in line with global practice,” the Chamber said in the report, prepared for government earlier this month.
The miners want government to allow mining companies to hold offshore collection accounts guarantor of capital and to let gold producers use their gold as security in raising funding for investment.
Reserve Bank of Zimbabwe’s foreign currency retention system allows miners to retain 70% of their forex earnings. According to the Chamber, this is not enough for miners to pay for raw materials.
“Foreign exchange retentions for the mining sector are inadequate to meet regular operational requirements including importation of critical raw material supplies. The situation has been exacerbated by requirement to pay for electricity bills, royalty and other taxes in foreign currency which have significantly reduced the effective retention from around 50% to around 30%,” says the Chamber.
The miners want to be allowed to keep at least 80% of their export earnings. They also want the option to pay for local expenses such as electricity and taxes in Zimbabwe dollars.
Unused forex: miners want more time
Under RBZ laws, exporters are required to liquidate any unused forex received in their accounts within 30 days. For miners, this is out of sync with a mine’s production cycle. The working capital cycle for mining companies averages between 60 and 90 days. This means a mining company needs excess balances in its nostro accounts beyond the 30 days.
“Also to note, some mining companies that experienced production disruptions during the COVID-19 era may have seen increase in excess balances in their nostro accounts. These balances remain strategic as decoupling cash reserves to augment working capital requirements to meet expansion in capacity utilisation in line with improvement in the COVID-19 situation,” say the mines.
The Chamber wants the time limit extended in line with miners’ production cycles.
“While we appreciate that the reintroduced auction system may see some mining companies voluntarily offloading their excess balances, we appeal to the Government to guarantee minimum working capital cycle for sustenance and expansion projects.”
RBZ payment delays
Miners are also facing payment delays of up to eight weeks from Fidelity Printers and Refiners, the RBZ arm that is the country’s sole gold buyer. This has affected output by as much as a quarter.
Says the Chamber: “This has resulted in working capital shortages and production disruptions, weighing down potential gold output to as much as 25%. Gold producers are appealing for a payment turnaround of not more than a week as per agreed payment framework with RBZ.”
The Chamber of Mines warns that power cuts may worsen as more operations resume work, increasing demand. However, ZESA has failed to meet its end of deals with miners to guarantee supplies.
Here are the Chamber of Mines’ other grievances:
- The Zimbabwe Revenue Authority is collecting VAT in US dollars. However, it is failing to pay for refunds in forex. This is hurting the working capital of mines. The Chamber says: “We are appealing to Government to ensure Vat refunds are paid timeously”
- The Chamber wants the removal of indigenisation equity thresholds on platinum and diamond, announced in 2019, to be formalised into law as is the case with other minerals. This, says the Chamber, would “bring certainty to investors in the platinum and diamond sectors”.
“To sum up as the mining industry is set to increase capacity utilisation and gain momentum towards the US$12 billion mining sector by 2023, it is imperative for the government to address the above challenges. Critical to this are policy consistency and predictability that promote certainty and investor confidence,” the Chamber said.
Expansion: contrasting fortunes
In June, RioZim, the country’s biggest producer, said it had faced delays on its new US$17 million BIOX plant at Cam & Motor due to forex shortages. Once completed, the plant would ramp up production by at least 50%.
In contrast, Caledonia Mining is due to complete equipping of the new central shaft at Blanket Mining, by the end of the year. The project will increase annual output by 30% to 75 000 oz in 2021 and 80 000 oz from 2022.
Zimbabwe generated US$2.91 billion in mineral exports in 2019, 55.2% of total exports, but output is expected to fall this year due to a combination of COVID-19, foreign exchange shortages and power outages.