Is the 40 tonnes gold delivery achievable?
The country’s sole gold buyer and exporter Fidelity Gold Refinery (FGR) is targeting to buy 40 tonnes of gold this year, with experts optimistic that if the current incentives and timeous payments for gold deliveries are maintained a possibility to surpass the target remains in eyesight.
Rudairo Mapuranga
As the government is targeting to have a mining industry worth US$12bn by 2023 improved gold deliveries to FGR become significant. The Minister of Mines and Mining Development Hon Winston Chitando is confident that the target of 40 tonnes is achievable.
Minister Chitando said the government was optimistic gold output will reach 60 tonnes in 2022 and exceed 100 tonnes in 2023 following the mobilisation programme. The gold mobilisation programme, which seeks to enforce compliance by gold miners and buyers, increases accountability by stakeholders with the main goal of boosting gold deposits to FGR has fingerprints of the government all over in the achievement of the gold target.
“We are coming from a situation where we have a 2030 vision of Zimbabwe being a middle-income economy. We have at the same time the mining industry targeting to achieve US$12 billion and we are definite that we will achieve it by the end of next year. Specifically, today we are talking about gold and specifically gold mobilization.
“Taking a step back, last year we did well, 32 tonnes was good but it does not represent the full potential which the industry can deliver. This year as the Ministry responsible for Mines we are targeting gold deliveries of up to 60 tonnes,” Chitando said.
According to Chamber of Mines CEO Mr Isaac Kwesu, the target by FGR to mop gold of about 40 tonnes can be achieved due to the growing number of projects currently being developed. Kwesu also said that the government through the Ministry of Mines’ quest to mobilise gold and encourage miners to comply with the dictates of the law could also play a part in increasing deliveries.
“With the efforts to mobilise what is produced to be marketed through formal markets I think the target will be exceeded. There are a lot of projects underway, new projects as well as existing mines trying to increase capacity utilization. All this signals an increase in output for gold, so we are very optimistic,” Kwesu said.
Why are deliveries and production declining from the 2018 period?
In 2018, fidelity received a record 33.3 tonnes of gold deliveries with the United States Geological Survey reporting that a total of 35.1 tonnes was produced in the country the same year.
Experts have pointed to the rise in gold production from the period 2009-18 to currency stability coupled with 100 per cent forex retention which gave the miner increasing confidence to invest in the gold sector with a decline from 2018 attributed to policy inconsistency as well as poor foreign currency retention and rising inflation of the local currency.
Although gold is Zimbabwe’s top export, exports of yellow metal fell from US$1.64 billion in 2019 to US$981 million in 2020. The RBZ attributed the overall poor gold production in 2020 to COVID-19 lockdowns, suspected smuggling, fuel shortages, and antiquated technology.
Gold production and deliveries decline has been necessitated by the fact that Fidelity pays less than buyers in neighbouring South Africa and sometimes pays late. The partial payment in US dollar denominations and partially in Zimbabwe dollars determined by the official exchange rate is a catalyst to poor production and suspected smuggling.
The 60/40 forex retention is designed to save the central bank foreign exchange, something it has been perennially short of. But in the open market, the Zimbabwe dollar is worth less than half of its official value, causing huge losses to the miner.
The discrepancy means Fidelity pays substantially less for gold than international buyers, who tend to pay all in US dollars. The black market, where sellers can get straight US dollar payments immediately, therefore becomes an attractive option.
Before May 2020, large-scale miners were receiving 55 per cent of their payments in US dollars, which later increased to 70 per cent while small-scale miners were receiving 70 per cent later increased to 100 per cent spot but largely below international price. For large-scale producers, foreign currency is now back to 60 per cent in US dollars. The Chamber of Mines of Zimbabwe (COMZ), which is made up of mining companies and other industry bodies, has decried delays in payments from Fidelity saying they have been eroding producers’ profits.
According to Blanket Mine General Manager Mr Caxton Mangezi during Mines and Mining Development Parliamentary Portfolio Committee visit to the mine in November, the current foreign currency retention threshold for large-scale gold miners which is standing at 60 per cent is not sustainable for the growth and development of the mining sector and might lead miners to a possible shutdown of operations.
He said operational costs in local currency are increasing due to high inflation on the parallel market and the failure of the central bank to provide all suppliers with the required foreign currency at the auction rate. Mangezi said the retention was a form of the tax itself which makes it difficult for operations as costs are always rising due to inflation.
“One of the challenges that we are facing as a mine has to do with the 60/40 per cent gold retention. You could find that some miners could operate viably on a 60:40 basis but some of us could need 100 per cent forex retention due to the extent of our requirements. What we hope the Government will notice is that we comply with tax payments and as such once we also retain 100 per cent forex, that means we are also able to pay all our taxes in foreign currency,” he said at the time.
Steps by Fidelity to increase production and deliveries
Fidelity announced in mid-2021 that it will combat these underlying issues by allowing large-scale gold mining companies to export a portion of their bullion directly. It expects this measure to increase production by allowing companies to secure funding in the form of gold loans. The gold buying and exporting company hopes that direct payments will help prevent the illegal export of gold, estimated at US$1.2 billion per year by small-scale miners who extract most of the country’s gold.
According to FGR Acting General Manager Peter Magaramombe achieving the 100 tonnes of gold production and the delivery target was possible but all stakeholders in the gold industry were supposed to work together to ensure that gold production increases at the same time deliveries to Fidelity increase.
He said that plans were in place for Fidelity to increase its presence in all active regions (more gold buying centres).
Magaramombe said FGR is in the process of finalising the mechanism that will result in purchasing 5 grams and below from the artisanal and small-scale miners as a measure to mop all the gold mined by the ASM which sometimes ends up in the hands of smugglers.
The upward price review (100% USD cash to small-scale miners) and reduction of royalty to 1 per cent for small-scale miners and artisanal miners have played a major role in boosting gold deliveries from the two groups.
FGR, according to Magaramombe, has already identified areas where gold buying centres will be established in the coming year to enhance accessibility and convenience to artisanal and small-scale mining groups.
Conclusion
There is a need by the government through the Ministry of Finance and Economic development to see through the plights of gold producers as this might derail or upset the achievement of the 40 tonnes gold target.
The formal market must be competitive for the government to achieve the targets projected.
Chamber of Mines CEO said that if the official markets continue to be disadvantageous to the miner there is a possibility of the miners downing tools or selling to informal markets.
“Voluntary compliance is an issue of market forces that ensures that miners are paid timeously at a fair price. And naturally, you have no incentive to participate in illegal markets when the formal market is competitive.
“Remember, we account for gold deliveries through Fidelity but some of the output that is being produced is not being delivered to fidelity. So if all output found its way to the formal market that would be a quick win,” Kwesu said.