- June 19, 2020
- Posted in LOCAL
Zimbabwe’s mining sector is expected to be one of the key drivers for economic growth this year on the back of its export generation capacity.
The industry accounts for between 12 and 15% of annual Gross Domestic Product (GDP) and the diverse mineral base has the potential to generate about US$18 billion annually, experts say.
In this article, we will look at the achievements that have been made so far in the mining sector, the challenges, the good and the bad, as well as things that needed to be fixed and recommendations.
Challenges & the bad
a) COVID-19 pandemic
The year 2020, however, started on a bad note with the operating environment extremely volatile, dampening the mining sector’s full potential.
For instance, the gold sector, which is one of the largest foreign currency earners in the country ahead of tobacco, registered a 17% fall in production to 7.18 tonnes in the first four months of 2020 from 8.63 tonnes extracted during the same period in 2019.
To make matters worse, the mining industry has been heavily battered by the COVID-19 pandemic, having lost more than US$200 million in revenue during the first 30 days arising from a total lockdown, according to the Chamber of Mines of Zimbabwe (CoMZ).
Mineral production for the second quarter of 2020 is expected to decline by about 60% compared to the first quarter, with revenue losses exceeding US$400 million.
Gold and platinum are expected to have a loss of about US$160 million while potential revenue loss for nickel, ferrochrome, coal, and diamonds for the second quarter of 2020 is estimated to exceed US$100 million.
All these figures do not point to a rosy 2020.
“Most mining companies are facing reduced productivity and production due to scale down of operations on the back of lockdown in transit and buyer countries,” reads CoMZ’s report titled Economic impact of COVID-10 on the mining industry: Proposals for intervention measures.
CoMZ said the situation had been exacerbated by difficulties in securing inputs for production and replacement capital due to widespread lockdown in source markets.
Corruption is one of the biggest impediments in the mining sector. Mining claims are reportedly being allocated clandestinely or to those who are politically-connected, further putting more dents on the country’s heavily battered image.
For instance, Hwange Colliery in 2016 lost $111 million through corruption, mismanagement, reckless trading and money laundering when Mines minister Winston Chitando was the company’s board chairman, according to the audit report compiled by Reynolds Tendai Muza, a forensic auditor and investigator with Ralph Bomment Greenacre and Reynolds.
Hence, corruption among other malpractices should be done away with for the mining sector to thrive.
c) The spate of violence in the sector
Rampant violence caused by machete-wielding gangs in the artisanal and small-scale mining casts doubt on the sustainability of anticipated socio-economic development hinged on gold production.
Over the years, the government appeared to have taken a backseat whilst chaos, violence and other forms of conflict were festering in the artisanal and small-scale mining sector.
ZELA reports that Vectus Mine in Gwanda, had some machinery, water pipes, and hammer mill engines stolen during the lockdown period.
“This has forced the company to scale down its operations, reducing working hours to allow workers to complete the security process and retreat into their quarters for safety,” it said.
New cases of machete gold gangs and criminals were also reported in Maphisa in Matebeleland in May 2020 where a group of seven raided Goodcow Mine armed with machetes and axes and took away 12 x 50 kg bags of gold ore.
Failure to curb violence in the mining sector will seriously affect production.
What should be fixed?
a) Plug leakages/address price disparities
A lot needs to be done for the mining sector to realise its full potential.
For instance, the government should plague mineral leakages by addressing payment issues. The country is losing tonnes and tonnes of gold through smuggling to other countries mainly South Africa that offer better prices compared to the ones being offered by the country’s sole gold buyer—Fidelity Printers and Refiners (FPR).
According to Finance and Economic Development Minister, Mthuli Ncube close to 34 tonnes of the yellow metal were smuggled to Rand Refinery in South Africa whereas President Emmerson Mnangagwa also disclosed in 2019 that he discovered that US$60 million worth of gold was sold through informal channels to a Dubai-based company.
In a bid to please small-scale miners, FPR recently announced a gold trading framework that provided for a flat price of US$45 per gram delivered by small-scale producers and a 70/30 framework for large scale gold producers.
The fixed rate of US$45, however, was not responsive to gold price movements on the international market, the Zimbabwe Environmental Law Association (ZELA) points out.
On the day that FPR announced the new gold trading measures, the international market offered US$54.8 per gram of gold, meaning the gold buyer was paying 17.88% less than what is offered on the international market bearing in mind the price can change.
The price difference is quite significant, and it leaves a gap for illicit gold trade to continue thriving, ZELA opined.
As such, there is a need for the government to align prices for gold deliveries from artisanal and small-scale miners with the international market to promote transparency and responsiveness of its gold price.
But according to ZELA, a comprehensive reform package is needed to remove oxygen from the illicit gold trade by expanding focus to include legal and financial support to formalise artisanal and small scale mining.
b) Address electricity challenges
One of the challenges faced by the mining sector is the cost of electricity which remained high, hampering the viability of mineral producers.
Zimbabwe’s gold deliveries last year surged 17% to 27.6 tonnes from 33.2 tonnes in 2018 due to power outages which intensified in June.
Due to electricity challenges, among others, the mining sector registered a 17% fall in production to 7.18 tonnes in the first four months of 2020 from 8.63 tonnes extracted during the same period in 2019.
CoMZ appealed for a reduction in electricity tariff for ferrochrome producers in light of the depressed prices and their need to remain in business in the wake of the COVID-19.
Mining is capital intensive.
According to CoMZ the mining sector needs fresh capital investment to ensure that positive growth and viability are maintained. The mining body says mining companies need over US$7 billion to recapitalise their operations over the next five years, from 2018 to 2022.
But the challenge is that local financial institutions have not been offering long term capital, making it difficult for mining companies to borrow for recapitalisation or to sustain output growth or undertake new projects.
Most of them need to replace antiquated equipment that has become inefficient and costly.
As such, the government, through FPR, should offer cheap funding for both small and big producers.
d) Certificate Issuances
After prospecting and submitting all paperwork to the Mines Ministry Zimbabweans have gone over three years and counting without receiving Certificates. This creates a breeding ground for gold leakages and creates room for corruption and claim disputes.
Achievements & the good
a) Efforts to rejoin LBMA
The efforts being made by the government to rejoin the London Bullion Market Association (LBMA) should be applauded. LBMA is the largest over-the-counter gold and silver wholesale market in the world where investment banks, brokers, dealers, exchange-traded funds, jewellery companies, mining companies, refiners, and central banks, interact and trade with each other.
It attracts participants from all around the world and sets twice the daily global reference benchmark for gold.
LBMA is the biggest centre for gold trading, which can potentially increase Zimbabwe’s ability to sell its gold to international buyers, including its former trading partners.
Mines and Mining Development deputy minister Polite Kambamura told Mining Zimbabwe Magazine that they were making frantic efforts to be readmitted to the global market.
The country was ejected from the LBMA in 2008 following depleted gold production levels which slumped to 3 072kg tons, far below the stipulated 10 tonnes per annum required by the London Bullion guarantee membership.
Being readmitted to the LBMA can potentially increase Zimbabwe’s ability to sell its gold to international buyers, including its former trading partners.
b) Fuel allocation to miners & increase of gold centres
Zimbabwe’s gold deliveries surged 44% to 2.54 tonnes in January this year from 1.77 tonnes during the same period last year on the back of increased fuel allocations to miners and increase of gold centres across the country, according to FPR.
Miners need fuel for generators and other machines for dewatering processes. Hence, the commodity should be accessible and affordable for maximum returns.
However, a report compiled by ZELA notes that “access to fuel continues to be a challenge because suppliers are only accepting bond notes in cash, while Fidelity Printer the gold buying government arm is making payments in US dollars and bank transfer.”
“Fuel can only be purchased by exchanging the US dollars or bank balance for bond notes. As a result, the cost of fuel is high.”
For the mining sector to contribute immensely to the country’s GDP, ZELA said the Ministry of Mines and Mining Development must chip in by enhancing transparency and accountability in the administration of mining titles through computerisation of the long-overdue mining cadastre system.
It said ease of doing business in artisanal and small scale mining must be given priority by the government.
“For instance, the gold mobilisation committee is accused of choking artisanal and small-scale mining due to its rent-seeking behavior motivated by the knowledge that the bar of compliance for ASM is too high.”
“Artisanal mining must be prioritised in the long-overdue reform of the old Mines and Minerals Act with compliance burden being distinguished with those of large scale miners,” the report reads.
ZELA said FPR should not only care about the golden eggs but the goose that lays them too.
Last year, artisanal miners accounted for 63% of gold deliveries to FPR.
“Arbitrage opportunities must be removed by ensuring that the gold payment arrangements for ASM and large scale miners are not differentiated except that FPR must continue paying ASGM in cash and large scale miners through bank transfers,” ZELA said
This article first appeared in the 15 June issue of Mining Newsweek Magazine