Zimbabwe’s platinum output has increased by 17% to 128 000 ounces (oz) during the second quarter of this year compared to last year after processing matte backlogs from Unki mine.
In a report, World Platinum Investment Council (WPIC) confirmed the development.
“Zimbabwean production increased by 17% year-on-year as a backlog of matte from the Unki smelter was processed through the ACP and refined,” the report said, noting that platinum production stood at 110 000oz during the second quarter of 2020.
The WPIC projected that Zimbabwe’s platinum output would rise by 17 000oz this year as the backlog of semi-finished inventory is refined in South Africa.
Last year, Zimbabwe produced 448 000oz of refined platinum.
Zimbabwe is currently the world’s third-largest proven platinum reserves after South Africa and Russia, and what it produces has an impact on global output and pricing trends.
Platinum is one of Zimbabwe’s biggest foreign currency earners, with South African mining companies such as Impala Platinum (Implats) and Anglo-American Platinum (Amplats) owning the biggest PGM mines in the country.
According to the government’s vision of attaining a US$12 billion mining economy by 2023, platinum is expected to contribute US$3 billion per year.
According to WPIC, global supply jumped by 65% year-on-year to 1,6 million ounces during the period, the highest output per quarter in the past two years.
The Zimbabwe Republic Police (ZRP) on Wednesday in an effort to stop the rising of illegal mining in village 5 Lornekope Kadoma, recovered abandoned mining equipment which includes four windlasses, a 30-kilowatt generator, and Jackhammer.
The area has become a haven for machete-wielding robbers who target artisanal miners and the police has been fighting to sanitize the area.
“Following the proliferation of illegal gold panning at village 5 Lornekope, Kadoma, on 15/0921, Police descended on the illegal mining site and recovered abandoned mining equipment which include four windlass, 30 kilowatt generator and Jack hammer.” The Police said.
Last week three people were arrested in Kadoma after machete-wielding gangs clashed following a gold rush in the village, which left several illegal miners seriously injured during the battle.
Most of them were armed with machetes which they used to attack each other and there are unconfirmed reports that some of them had their ears cut off while others sustained deep cuts on their heads and faces during the melee.
National police spokesperson Assistant Commissioner Paul Nyathi confirmed the arrests of the three and said they will appear in court tomorrow.
“From the information that we have gathered so far, there is a gold rush in that area and they are also rival parties who clashed between the weekend and yesterday,” he said.
He said following the clashes, the gangs decided not to make a report to the police but went to Kadoma Hospital to seek treatment.
While at the hospital, it is alleged that another confrontation erupted resulting in the officials making a report to the police.
Police reacted and managed to arrest three of the suspects who are still assisting police with investigations.
Before his death, the late chairperson of Mhandamambwe Quarry Mining Company Mr Amos Matweya agreed to get 1 percent of quarry sales on the company’s 120-hectare claim in Chegutu surrendering the other 99 percent to Mr. Li Zhongqiang of Draishing Construction who was to install a crushing plant.
According to the contract seen by this publication, Mr. Li Zhongqiang was permitted to mine the quarry mountain owned by Mhandamambwe in Jinkstown Farm paying US$1 (by means of bank transfer) per every cubic processed.
The contract which was signed in 2018 was expected to last for 20 years.
Zhongqiang was to for the purposes of crushing, set up a crushing plant and electricity requirements; supply all labour and equipment for crushing purposes; drill a borehole for provision of safe water and construct an access road from the main road.
The contract has been labeled as exploitative by many miners who saw it castigating the Chinese for pushing an imperialistic and capitalistic agenda.
The Chinese have been accused across the country and the continent at large for disadvantaging locals in mining deals with some Zimbabweans questioning the country’s look east policy.
Earlier this month Mr. Felix Tshisekedi, the president of the Democratic Republic of the Congo (DRC) called for a review of mining contracts signed with Chinese companies saying he wanted to get fairer deals.
“It is not normal that those with whom the country has signed exploitation contracts are getting richer while our people remain poor,” he said.
“It is time for the country to readjust its contracts with the miners in order to seal win-win partnerships.” Tshisekedi.
THE Zimbabwe Consolidated Diamond Company (ZCDC) has pledged to implement infrastructural development programmes aimed at improving the lives of Marange villagers displaced from the gem-mining sites.
ZCDC chief executive Mark Mabhudhu made the remarks in Chiadzwa this week after a visit by the Parliamentary Portfolio Committee on Mines and Mining Development led by Edmond Mukaratigwa.
The committee toured Marange diamond fields before addressing community-based organisations, civic society organisations, among other stakeholders at Headman Chiadzwa’s compound.
“As the leader of the ZCDC, I want to make a commitment that we will change the lives of villagers through social responsibility programmes and infrastructural developmental projects,” Mabhudhu said.
“All along, ZCDC has been struggling, but things are going to be better in the near future so we need to work together so that we achieve our main aim.”
Mining companies operating in Chiadzwa have often been accused of neglecting villagers displaced by the mining venture. Mabhudhu urged Marange villagers not to speak ill about the company’s mining activities since that would affect the marketing of the precious stones.
“There is no market of diamonds in the country, so what you say about our diamonds contributes a lot on how we sell the diamonds. So, we need to be united on what we say as a community about our diamonds,” he said
Centre for Research and Development director James Mupfumi said Marange villagers had an obligation to demand corporate and social responsibility from the diamond miner.
“We cannot solve adverse impacts of mining in communities without a sustainable policy regime. The Mines and Minerals Bill has been shelved by the Executive for personal reasons. The present Mines and Minerals Act is extractive for personal reasons.”
He added: “I have noted with concern that the Marange community is wallowing in poverty amid some human rights abuses by the State security agents.”
HIGH Court judge Justice David Mangota has dismissed an application by Chegutu West MP Dexter Nduna in which he sought to be declared the lawful owner of Danly Mine.
The lawmaker had sued RioZim Private Limited for grabbing his lucrative gold mine in Chakari.
Nduna told the High Court in an urgent chamber application RioZim had erected a fence within his boundary and carried out mining activities to his prejudice.
However, Justice Mangota ruled Nduna did not give the court any evidence to prove he was the owner of the claim, and as such his request was invalid.
“The applicant, it is evident, portrays the picture that he has a claim at the mine. He insists that the second respondent invaded his claim. He produces no evidence which shows that he has any mining claim in any part of Zimbabwe, let alone at the mine,” the judge said in his ruling.
“The prospecting license he attached to his application, it has been observed, has no relationship at all with the mine. Nor do their contents translate into conferring upon him the right to any claim in Zimbabwe. All they do is to allow him to prospect for minerals in Zimbabwe.”
The court also ruled the sequence of events as narrated by Nduna in his founding affidavit were incoherent.
Justice Mangota said Nduna’s application was contradictory and did not show a clear picture of events that led to the filing of the urgent court application.
“The application is everything which an urgent application should not be. It contains an incoherent narration of events. It is contradictory in many respects. It is panel beaten in other respects. It is a complete sham which cannot be condoned let alone accepted. The application is dismissed with costs.”
Nduna approached the High Court last month accusing RioZim of invading his claim and a building fence around the perimeter to bar him access.
He also accused the local police of assisting the mining company and one Langton Ndlovu to take over the mine.
He sought a spoliation order against RioZim, claiming that it was the only way to stop the illegal mining at the claim which was causing him to suffer irreparable financial damages.
Those that are not well-connected and cannot afford bribes end up mining without permits. They have to pay huge royalties to the owners of mining permits, normally 30% of net proceeds, after deducting costs. Ultimately, it is the government that loses out, writes Mukasiri Sibanda
Mining is the spine of the economies of many African countries. But, for all their mineral wealth, African countries are spineless concerning capabilities to mobilise resources to finance sustainable development on the continent.
The poor, and marginalised groups, particularly women, youth, people with disabilities and elderly, are the hardest hit as they largely depend on public services – health, education, water, and sanitation.
Mineral-dependant countries, as noted by the report of the High-Level Panel (HLP) on Illicit Financial Flows from Africa, are highly vulnerable to illicit financial flows (IFFs). Although there is no consensus on what IFFs are, the HLP report’s definition covers both criminal and immoral components – tax evasion and aggressive tax planning to exploit legal grey areas. Large scale mining companies are the main culprits when it comes to tax fraud in Africa as revealed by the HLP report.
A double jeopardy is suffered because on top of tax shenanigans by large scale miners, artisanal and small-scale mining (ASM), mainly informal, gives nightmares to tax collectors. A colossal annual loss of US$1.8 billion through smuggling, illegal dealing in gold and precious stones, corruption, fraud, tax evasion, and externalisation, among others was revealed by the Zimbabwe Treasury in 2015.
Unlike large scale mining, ASM is a major source of employment and income generation in Africa. More than 1.5 million in Zimbabwe directly depend on ASM, with three million people indirectly benefiting. Essentially, the ASM sector is an important buffer against poverty, lack of formal employment opportunities, limited community enterprise development avenues, and unreliable agriculture production due to climate change effects.
That is why ASM is recognised by the Africa Mining Vision (AMV), a blueprint that was adopted by African head of states and government in 2009 to leverage mining for sustainable economic growth and broad-based economic development.
This article takes special interest in taxation of the ASM sector, with Zimbabwe as the main reference point. What motivated this article is the discussion that was organised by the Zimbabwe Miners Federation (ZMF) on Thursday, 09 September 2021, to try to solve ASM taxation challenges. The speakers comprised the Zimbabwe Revenue Authority, civil society, academia, and the leader of Parliament portfolio committee on mines and mining development.
Fiddling with tax rates for ASM
The Zimbabwe government has many times fiddled with taxation of the ASM sector, a delicate balancing act of trying to ensure compliance levels by stifling the black market for gold and the mobilisation of tax revenue. Prior to 2014, the royalty rate for ASM and large-scale miners in the gold sector were similarly pegged 7%. As an incentive for selling gold on the formal market, the 2014 National Budget Statement lowered the royalty rate for ASM from 7% to 3% for gold output not exceeding half a kilogram per month with effect from 01 January 2014.
Further, the ASM gold royalty rate was slashed to 1% from 3% with effect from 1 September 2015. All along, government was lauding the impact of a lower ASM gold royalty rate as a significant driver of increased gold deliveries on the formal market.
There was a policy U-turn when ASM gold royalty were increased to 2% from 1% with effect of September 2019. Although the lowering of ASM gold royalty was well intentioned, Treasury noted that it has side effects on tax revenue collection. There was a huge risk that some unscrupulous large mining houses were selling gold through small scale producers, to benefit from lower royalty rates as well as higher foreign currency retention thresholds. Royalties for large scale gold producers were pegged at 5% and 3% for any annual incremental production. In the same period that ASM gold royalties were increased to 2%, sliding gold royalty rates were introduced – 3% for price below US$1,200 per ounce and 5% for the price above US$1,200 per ounce.
Faced with a sharp decline of ASM gold deliveries, the royalty rate was slashed back to 1% from 2% in 2021. Presumptive taxes for ASM were scrapped in 2014. Before that, presumptive tax for all informal businesses was pegged at 5% in 2009 and slashed to 2% in 2011.
A huge tax burden means informalisation and loss of revenue
According to the 2016 midterm Monetary Policy Statement, the number of registered custom millers reduced to 51 from 485 after annual registration fees were raised sharply from US$2,000 to US$8,000. The Statement noted that there are many millers who cannot afford to pay the required fee of US$8 000 but they are still operating and selling their gold on the black market and/or smuggling gold out of the country. Likewise, the number of permit holders for explosives in the ASM was about 5,000 when the fee was US$100 and fell to 300 when the fee spiked to US$2,000.
Challenging the false narrative that ASM doesn’t pay taxes
It is a stylised fact that ASM does not pay taxes. One of the major sources of government tax revenue is Value Added Tax (VAT). For the first half of 2021, according to Zimbabwe Revenue Authority’s (ZIMRA) revenue performance report, VAT contributed 23.92% to total tax revenue. Because of their strong consumptive power, artisanal and small-scale miners (ASMers) are key contributors to VAT. Notably, because of the informal nature of ASM, it is safe to say that most players are not registered for VAT. On that note, they cannot claim their VAT refunds as opposed to large scale miners.
ASM is also burdened by "underground" taxes, especially bribes. It is not easy to get a mining title with others waiting for more than three years for the permits to be processed. Some end up paying bribes to speed up the processing of mining permits.
Those that are not well connected and cannot afford bribes end up mining without the permits paying owners of mining permits huge royalties, normally 30% of net proceeds after deducting costs. Ultimately, government loses out.
Significant inroads made with taxpayer registration but no clarity of what this means for ASM
In the hunt for more tax revenue, 21,643 new taxpayers were registered in 2020 with a revenue contribution of $558,234 million, according to ZIMRA’s 2020 Annual Report. This was attributed to tax education and engagement programs. No disaggregated data was availed to sift the information on newly registered taxpayers to see how many were from ASM.
Snapshot interviews I had with local ASM leadership in Gwanda, Bubi, Shurugwi, Zvishavane, and Mberengwa, some of the key ASM gold mining producing districts in Zimbabwe revealed there was hardly any significant interventions undertaken by ZIMRA to register new taxpayers among their constituency. ZMF says that there are roughly 40,000 fully registered ASM players out of 1,5 million, and there is need to dig for more information those fully registered are also tax compliant.
An ideal scenario would be a computerised mineral rights cadastre, managing the application, award, maintenance, and forfeiture of mining titles to be integrated to ZIMRA’s data base of taxpayers. That way, ZIMRA, for example, would have a fair chance of collecting taxes like capital gains in case of changed ownership of claims or mineral rights through buying and selling as speculative practices are alleged to be rife.
Above all, ZIMRA collected ZWL$1.81.96 billion which was 5.85% above the target of ZWL$171.9 billion. Considering the strong evidence that the mining sector is highly prone to IFFs due to poorly negotiated contracts, under invoicing, abusive transfer pricing, corruption and smuggling of minerals, recording a positive revenue tax collection could be a mask the true tax collection challenge.
A worker at Fidelity’s Msasa refinery: many artisanal miners prefer the black market
Ring fence government revenue from ASM
One of the important roles of taxation is representation. It creates a social contract between the taxpayer and the government. Transparency is a key enabler for a strong social contract between government and players in the ASM sector. Several high-ranking government officials and political heavy weights are involved in ASM, and the suspicion that they are not paying taxes because of high levels of corruption can dissuade others to pay taxes.
Communities in mining areas must see the benefits of taxes.
If ASM gold deliveries amount to US$1 billion in one given year, a 2% royalty fee means that government would have collected US$20 million. Government ploughs back ASM royalties to improve rehabilitation of the environment, access to finance, mechanisation, skills building, bolster investment in education, health, water, roads, power, and communication, ASMers can be motivated to comply with their tax obligations.
Also, government must widely consult with ASMers on taxation of the sector to ensure that they have a voice on matters that affect them as part of their constitutional rights. Policy inconsistencies must be avoided.
Government must stop going around in circles concerning tax rates such as royalties and other charges. Tax administration must be simplified to ensure that ASMers are not dealing with multiple government institutions who are not coordinating their charges and tax collection.
Tax collection must be supported by fair payment methods for gold deliveries
While unfair tax rates have an acted as an impediment to ASM formalisation, or even erode some gains made, the unfair payment mechanism have pushed many to go underground and deal on the black market that pays fairly and promptly in US dollars. ASMers have been losing more money from the manipulated exchange rate when part of their proceeds was collected by government as part of the local content policy for enhances foreign currency linkages for procuring fuel, electricity, raw materials, and machinery among others.
Importantly, government is now paying ASM 100% foreign currency for gold deliveries but for roughly four years, ASMers were robbed by unfair payment methods that meant that the part payment in local currency was liquidated at an unfavourable official exchange rate compared to the black-market rate.
WOMEN in mining are a targets for sexual abuse and there is need for government and other stakeholders to come up with mechanisms to reduce gender-based violence in the sector, Zimbabwe Miners Federation president Henrietta Rushwaya has said.
Speaking at a training workshop for women in mining organised by the Women’s International League for Peace and Freedom on Monday, Rushwaya said sexual violence against women at mining sites was rampant.
“A lot of women are discriminated against especially where extensive mining takes place,” Rushwaya said.
“In places where women have mining claims, they face verbal and sexual violence from their male counterparts such that women empowerment in this important economic sector becomes difficult to achieve.”
She said women played a vital part in the upliftment of the country’s economy but were lowly represented in mining with men dominating the sector.
“But all the same, as women, we cannot continue to be crybabies and it is entirely up to us to claim a stake in the sector,” she said.
Addressing the same symposium, Parliamentary Portfolio Committee on Mines and Mining Development chairperson Edmond Mukaratigwa said women were marginalised and there was need for a holistic approach to end the disempowerment.
“Women are at the periphery of mining in Zimbabwe and we must endeavour to change this,” he said.
He blamed patriarchy and defined gender roles as some of the reasons women continued to be disadvantaged in the mining sector.
Women in Local Government Forum Midlands chapter president Idirashe Dongo concurred, saying the country is facing a crisis in terms of women representation.
A 2016-2019 Centre for Natural Resource Governance research revealed that women in mining were constant targets of domestic and sexual violence.
Experts argue that women empowerment is vital as women play a significant role in providing for their families.
Zimbabwe’s oil companies say the locally produced ethanol constitute the biggest chunk on the price of fuel as they push for the return of unleaded petrol.
The price of ethanol, which is exclusively supplied by business tycoon Billy Rautenbach’s Green Fuel based in Chisumbanje and enjoying a monopoly, is currently pegged at US$1.10 a litre.
Fuel companies this week said this is a huge cost on the price of petrol.
Official data obtained from the energy sector regulator, the Zimbabwe Energy Regulatory Authority (ZERA), shows that the landing cost for petrol is US$0.48 per litre, which includes US$0.37 for free on board cost, financing cost of US$0.02 and pipeline cost of US$0.07.
Levies and taxes, which include duty, ZINARA levy and debt redemption, amount to US$0.48. Administration costs including storage fees and clearance agency fees are pegged at US$0.02. Distribution costs are at US$0.05.
Business Times can report that the fuel companies want to revert to unblended petrol, which is cheaper.
They have since registered their displeasure with ZERA.
Several fuel companies, who spoke to Business Times this week, said they were not happy with the huge cost of ethanol.
They say the continued use of ethanol has made Zimbabwe’s fuel expensive.
Currently, petrol is at US$1.38 per litre while diesel is selling at US$1.34 a litre.
The prices are the highest in the region.
“The Green Fuel influence is one of the biggest challenges that has ever happened in the country’s fuel sector. The ethanol prices that are currently obtaining in the market were pegged to satisfy the interests of a small component of people,” an industry player told Business Times.
“How can someone justify the price of ethanol at US$1.10 when you can import the same product from Brazil at around US$0.80. We demand that we revert to unleaded petrol.”
Green Fuel legal advisor Derek Elliot told Business Times that the ethanol producer had nothing to do with the setting of the ethanol selling price which falls under the purview of ZERA.
“The ethanol price is set by ZERA. This matter has been addressed by ZERA and the Ministry. They are welcome to take it up with ZERA, which is the appropriate platform,” Elliot said.
ZERA chief executive officer, Eddington Mazambani said: “Ethanol has been at US$1.10 since 2016 there has not been any movement on the price.”
Zimbabwe introduced mandatory petrol blending in 2011. The introduction of mandatory blending came against the backdrop of a fuel crisis and the need to preserve foreign currency associated with fuel importation.
Under this arrangement, petroleum companies are compelled by law to blend petrol with ethanol before it is sold on the open market. The mandatory blending started at 5% and it was increased to the current 20%. However, the ratio can go down when there are low supplies of ethanol.
A number of companies have suspended shifts owing to rolling power cuts amid fears the use of expensive diesel generators will increase the cost of production by about 20% delivering the final blow to the already troubled industry.
Daily power cuts lasting as long as 12 hours have become the order of the day after ZESA lurched into a crisis due to low generation capacity at its hydro-powered station in Kariba and the country’s largest coal-fired plant, the Hwange Power Station.
Inefficiencies at the country’s smaller thermal power stations in Bulawayo, Munyati, and Harare have also worsened the situation.
The power utility is also battling to service debt owed to two regional power utilities, Eskom of South Africa and Hydro Cahora Bassa that hitherto supplied electricity to Zimbabwe to cover its huge deficit.
The impact of unstable electricity supply in Zimbabwe, which is one of the country’s critical challenges at the moment comes at a time when the government is on a drive to lure investment into the country amid fears the power cuts will adversely affect investor confidence.
The Confederation of Zimbabwe Industry (CZI) yesterday said power cuts will be detrimental to the industry.
Manufacturing processes rely on electric machines that require power to perform precise and repetitive tasks to increase production.
Now, the chronic shortages of electricity are starting to damage the economy.
The costs vary from direct economic costs, indirect costs and social costs. Indirect and social costs are equally important components when considering the impact of power interruptions.
Some companies have since suspended some shifts this week owing to power cuts.
“After a long period of stability, this is disrupting the performance of the industry, as power is a critical enabler.
“Power supply shortages due to load shedding will be detrimental to the industry as the gains that have been made so far in capacity utilisation will be eroded.
According to the CZI second-quarter business and intelligence report, capacity utilisation increased to 54% in the second quarter 2021 from 47% in the first quarter of 2021. It is projected to increase to 58% in the third quarter.
However, with the current load shedding, capacity utilisation will likely decline.
“Load shedding results in loss of production time, the marginal productivity of workers will decline, increased cost to businesses looking for alternative power supply and damage to industrial equipment,” CZI said.
Availability of power is one of the key cornerstones of increased production and capacity utilisation for industry, if the government entertains chances of successfully attaining vision 2030, according to experts.
Business Times can report that businesses have lost millions of dollars in potential revenue, threatening the viability of companies.
The Zimbabwe National Chamber of Commerce CEO Chris Mugaga said companies should expect to see production costs going up by between 15%-20% as they resort to costly diesel generators.
“If the load-shedding last September, cumulatively, production costs will go up to 25%. If it goes beyond, we expect the cost of energy to go up by a massive 150%,” Mugaga told Business Times.
He added: “It’s unfortunate, companies have to reposition themselves. In fact, it’s an extension of Covid-19 lockdown. On paper, we are on level 2, but technically, we are on level 5, considering operations are going to be impacted.”
The increase in the cost of production comes as local companies have failed to compete throwing into disarray government plans for an export-led growth.
An economics lecturer at the Midlands State University, Canicio Dzingirai, told Business Times that Zimbabweans should brace for sharp increases in prices of goods as companies turn to costly diesel generators.
“Electricity has been the cheapest source of energy. It’s one of the four pillars of the productive sector alongside ICT, water, and sanitation. The productive sector relies heavily on electricity. It was going to be the stimulator as firms try to recover from the effects of the Covid-19 pandemic,” Dzingirai said.
This means as power outages push costs of production up, the prices of goods and commodities will also go up.”
Domestic consumers have also been hit hard by power outages.
The Consumer Council of Zimbabwe regional manager for Masvingo Province, Ndumiso Mgutshini, said the situation was dire.
He said consumers were now being forced to use other alternative sources of energy yet they would have paid for electricity under the pre-paid method.
“Consumers are now being forced to use other alternative methods of energy such as firewood which exposes them to arrests from law enforcement agencies. The price of gas was recently increased putting the budgets of consumers out of reach,” Mgutshini said.
He said his office was inundated with complaints from consumers after their electrical gadgets were damaged during the load shedding programme.
“We are calling for ZESA to put in place a clear timetable for the load shedding programme and find a long-lasting solution to the problem,” Mgutshini said.
In my previous articles I have written about valuation of businesses using the following methods:
Discounted Cashflow Method (DCM), also called the Net Present Value (NPV) method.
Price Earnings (PE) ratio method which uses the PE ratio of comparable businesses. Market approach which involves arriving at a valuation based on recent similar transactions.
Net Assets Method, also called the Balance Sheet (or Statement of Financial Position) method.
Valuation of a gold mine
The valuation of a gold mine is known by other names such as gold mineral asset valuation and different models or methods are used. For example in South Africa an internationally recognised framework called the SAMVAL Code is used. This code uses a combination of two approaches. The first is the value in use method which basically involves determination of the NPV of the future net cashflows of the business over the useful life of the mineral asset.
The second method, usually for purposes of comparison or checks and balances, is the market approach. This is based on the principle of willing buyer willing seller and requires that consideration obtainable from the sale of the asset be determined as if in an arm’s
length transaction.
Using future cashflows to value a gold mine
This method is very popular with business valuers and in capital investment appraisals by management. It bases the valuation of a business on the current or present value of expected future net cashflows.
It is based on future cashflows, not profit. The key components of the valuation include the following:
Projected annual cashflows for the duration of the useful life of the mine, Projected annual operating expenditure for the duration of the useful life of the mine, Projected capital expenditure (to maintain or expand capacity).
Net Cashflows
Net Present Values
Adjustment for Debt to arrive at valuation of a company.
Projected annual cash inflows
The annual cashflow inflows, usually in the form of revenue are projected based on the following factors: Estimated underground gold resource. This is usually done by experts such as Geologists who estimate the underground mineral resource and document by way of geological or technical reports. One normally finds the estimated gold ore and estimates of bullion to be won from the mine, for example as so many grams per tonne.
Projected gold prices over the useful life of the mine. These prices are multiplied by the estimated bullion to be recovered from the mine. Any significant errors in assumptions made will affect the reasonableness of the valuation.
Operating expenditure (Opex)
For each of the operating future years annual operating expenditure (Opex) is estimated and matched against projected cash inflows. Opex includes mining costs, processing costs and administration costs, etc. Depreciation is excluded. It is quite normal to find known
standard opex per ounce or kilogram at a mine based on historical actuals as adjusted for the
future. Significant errors in projections will upset the valuation.
Future capital expenditure
Future capital expenditure (Capex) either to maintain or expand capacity has to be factored in as a deduction. Such future Capex takes the place of depreciation.
Annual net cashflows
Annual net cashflows will be computed as the net of projected Cash inflows (Revenue), Opex and Capex. These have to be computed per annum. It is also normal to include as cash inflows residual or salvage values to be realised from the disposal of capital equipment.
Discount factors
Annual discount factors are then derived from the estimated annual discount rate. Discount rates are normally derived from lending rates by banks. Discounting the Annual Net Cashflows has the effect of presenting those cashflows at present (current or Year Zero)
values. It is common to find “what if” analysis to show the effect of different discount rates.
Net present value
Adding the annual Net Present Value for each year gives the overall Net Present Value (NPV).
This NPV is commonly referred to as the Enterprise Value or EV. In other words this is the value of the mine assuming there is no debt.
Adjusting for debt to arrive at valuation of a mining company
When debt (amounts owed to creditors) is factored in this reduces the EV to funds or value attributable to ordinary shareholders who by their nature have residual interest in the business. This value represents what is normally referred to as the value of a business. This is widely not understood.
Business valuation versus asset valuation
The total value of a company’s assets usually as per its Statement of Financial Position (or Balance Sheet) is widely mistaken for the value of the business.
It is quite common to hear shareholders claiming that they own all the assets of the company when the company is deep in debt. No attempt is made to compute the residual interest of the shareholders after adjusting for the debt.
While I will write a future article on this aspect readers are advised to have an appreciation of how deceased estates for example are valued. It is simply total estate assets less estate creditors and the net or residual becomes available to the beneficiaries of the estate.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi, LLB(UNISA), B Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer with a local law firm, chartered accountant, insolvency practitioner, registered tax accountant, consultant in deal structuring, business management and tax and is an experienced director including as chairperson. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected].
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