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Ten advantages of government getting royalties in the form of minerals

Ten advantages of government getting royalties in the form of minerals

Lyman Mlambo

The Government of Zimbabwe has recently gazetted that half of the mineral royalties for gold, diamonds, platinum group metals (PGMs) and lithium will be paid in the commodities themselves and the remaining half paid in cash split between 40% Zimbabwe Dollars and 10% foreign currency.

by Lyman Mlambo, Private Consultant (Mineral Economics & Policy)

Royalty payments for the rest of the minerals will be split 50:50 between Zimbabwe Dollars and foreign currency.  This article highlights ten advantages of the Government receiving royalties in the form of the products themselves:

  1. Stable royalty receipts: The move, which essentially introduces a partial unit-based royalty model, ensures that the Government receives stable and certain value from mineral production, as argued by a 2006 World Bank Report on Mining Royalties (A Global Study of Their Impact on Investors, Government, and Civil Society)” co-authored by Otto, J and others, and published in Directions in Development (Energy and Mining) Journal. This is because production-based royalties are not affected directly by international mineral commodity price fluctuations.

 

2. Development of the local jewellery industry: If the Government has significant reserves of gold, PGMs and diamonds it can craft a clear strategy to develop the country’s jewellery industry as all three minerals are used in this industry. This would be in sync with the beneficiation and value-addition thrust of the country. The jewellery industry is a highly lucrative industry, with 70% of gold produced globally going into this industry as reported by this author in a 2012 article on the price dynamics of the world gold market published by the Chinese Business Review-Journal.

3. Green energy transition and industrialization: Building reserves of lithium, especially for a country that is so greatly endowed with the mineral, is foundational to the development and strengthening of the local lithium value chain including the production of petalite concentrate, lithium carbonate, lithium-ion batteries and eventually the electric vehicles (EVs) themselves. This will aid the green transition thrust in the country. The strengthening of local value chains for the other minerals specified will also spur industrialization as these minerals, besides their application in jewellery industry, have many industrial applications in automotive, computing, electronics, dentistry, chemical industry catalysts and heavy underground works (such as drilling).

4. Gold as an investment asset: Gold is the main competitor to hard currency, especially the USD, as a store of value as indicated in the 2012 report alluded to above. With Zimbabwe using USD as a currency, the country is exposed to the risks associated with US economic (especially exchange rate) and political volatilities, and having a big reserve of a safe haven such as gold is a big buffer for such risks. Gold is also a better store of value than purely monetary assets because its value is not fiduciary, but intrinsic (since it is useful as a commodity in itself) as compared to say, bonds, securities, equities and legal tender (paper money).

5. Gold coins and macroeconomic stabilization: Closely related to, albeit subtly different from, the above point, is the fact that Zimbabwe has embarked on the use of gold coins as a store of wealth for individuals and companies in the country. Getting royalties in the form of gold itself automatically supplies the Government with the raw materials it needs to produce the gold coins in greater numbers than it is currently doing. Thus, it will be possible to broaden the benefits of this policy to a greater percentage of the population when the Government receives raw gold from a source where there is no direct competition with the export market. Gold coins have become an important macroeconomic stabilization tool as they mop up excess liquidity in the economy and exerts downward pressure on inflation.

6. Broadening of gold trading options for Government: With the Government as an independent holder and exporter of gold given that the Fidelity Gold Refinery is a partially privatized entity, it can choose various appropriate ways of trading its gold without the pressure of private shareholders. It will have the liberty to engage in spot trading, forwards contracts, futures contracts, options, or hedging (against unfavourable price movements).

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7. Reduced transaction costs: This policy avoids the cost which would be associated with the sale of the four mineral commodities (the half that now constitutes royalty) and the various processes involved in the payment and collection of royalties in monetary form. Basically, it reduces transaction costs both for government and mining companies associated with the processing of royalty payments, which, if gross value-based would include exporting the minerals first.

8. International loan repayments: The International Monetary Fund indicates on its website that it may accept gold in loan repayments by member countries, though it will be evaluated at prevailing prices in the market (“Gold and IMF”, https://www.imf.org/…, retrieved on 10 November 2022). This to some extent could simplify the repayment process for Zimbabwe if the country manages to build a big reserve of gold from product royalties as it avoids many transaction costs related to money-based royalties.

9. Education and training: These mineral reserves can be used as samples in the promotion of minerals-related education and training, which is a component of one of the eight principles underpinning the Zimbabwe Artisanal and Small-Scale Gold Mining Strategy 2022-2025 as indicated in the October 2021 draft.

10. Production Sharing Model: Receiving royalties in minerals already sets the stage for the implementation of Production Sharing Agreements (PSA) in the oil and gas sectors which could be considered as a viable option in those sectors in future, as is the case in many other oil and gas producing countries.

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