Primary producers of gold in the country would have felt some respite in the wake of the inaugural Reserve Bank of Zimbabwe (RBZ) foreign currency auction, held on the 23rd of June 2020, when it was announced that the interbank foreign exchange rate had shot up by 128%, from Zwl$25 : US$1 to Zwl$57 : US$1.
By: Daniel Nhepera
The new exchange rate was a representation of the weighted average of the bids placed by prospective foreign currency buyers at the auction, and it would be similarly adjusted on the Tuesday of every week to represent the weighted average of bids at the auction held on the day. As such, the producers would have been buoyed further by the results of the 30 June 2020 auction, when the weighted average of bids nudged up by a further 11.8%, landing the week’s exchange rate at Zwl$63.7: US$1. As symptomatic of an ailing domestic currency as this inflating of the exchange rate might be, the narrowing of the disparity between the interbank and parallel market exchange rates pleasantly represents prospects for increased earnings from gold deliveries to Fidelity Printers and Refiners (FPR) for primary producers of gold.
The FPR gold trading framework, which took effect on the 26th of May 2020, instructs for 30% of the value of gold deliveries from primary producers to be paid in local currency at the prevailing interbank foreign exchange rate. Prior to the first RBZ foreign currency auction, the interbank foreign exchange rate of ZWL$25: US$1 was pitted against an adversary parallel market exchange rate of about ZWL$100: US$1. Making us of the June 2020 average London Bullion Market Association (LBMA) gold price of about US$59 per gram, it is notable that primary producers stood to receive an effective payment of US$45.73 per gram (US$41.30 and a Zwl equivalent of US$17.70 converted at the interbank exchange rate). This represents about 77.5% of the international value of their gold. Under the new interbank exchange rate, however, the producers are now set to receive an effective US$52.57 per gram, making up 89.10% of the international value of their gold. The situation is set to improve further for the producers as the foreign currency auction system progressively readjusts the interbank exchange rate towards convergence with the parallel market rate.
Amidst the pomp of an improving trading environment for primary gold producers, it is imperative to spare a thought the Artisanal and Small Scale miners (ASM), who, while stuck at a fixed price of US$45 per gram in 100% hard currency, evidently got the short end of the FPR gold trading framework stick. The ASM sector has seen no benefit from the bullish international gold prices, nor the welcomed introduction of the weighted average interbank foreign exchange rate, which has both evidently improved conditions for their fellow producers in Zimbabwe’s gold sector.
In the wake of FPR’s announcement on the gold trading framework, the Zimbabwe Miners Federation, an umbrella body for over 50 small scale mining associations across the country, refuted the imposition of a fixed price system and proposed for the ASM sector to be placed on the same gold trading framework as the primary producers. The disparity between the market clearing LBMA price and the FPR fixed price was cited as an arbitrage opportunity for illegal gold buyers. To exacerbate the problem, ASM gold producers have an inherently high marginal propensity to gold prices, meaning they would sooner sell their product to a buyer offering US$45.50 per gram over one offering US$45 per gram as they look to gain maximum value from their toil. Resultantly, with the increasingly widening gap between the ASM fixed price and alternative payment options, the gold leakage problem may in fact degenerate than relent under FPR’s new gold trading framework.
Credit remains due for FPR’s efforts, however, as the price-fixing model they adopted mimicked the somewhat successful Gold-Stabilization Scheme which was introduced by the Government and the Reserve Bank of Zimbabwe (RBZ), in partnership with the mining industry in 1984. Under this scheme, the RBZ would buy gold from producers at a floor price of Z$16.07 per gram (US$14.30), where global prices at the time average about US$12.50 per gram. In the event that the market price soared above the floor price, the RBZ would pay producers the Z$16.97 per gram plus 75% of the market differential. The remaining 25% was retained by the RBZ to liquidate the account they used to pay producers from when the market price fell below Z$16.97 per gram. The Gold-Stabilization Scheme is credited for aiding in maintaining gold production at a respectable average of 14.8 tonnes per year between 1984 and 1988.
The allure of the scheme to gold producers was that the floor price was initially set lucratively above the prevailing global price, albeit in an exceedingly fluctuating market. ASM producers, in particular, stood to immediately gain from formalising their operations and affiliating with the RBZ. A further appeal of the scheme was the security offered RBZ’s retention of 25% of the price differential during a price boom. This gave the producers assurance that during a price slump RBZ would still be able to meet its floor price obligations. By contrast, FPR set its 2020 fixed price well below the global price, in a strengthening market. This is unlikely to trigger the mass formalisation of operations by informal miners, nor set off gold deliveries to FPR in hordes from ASM producers. Given the liquidity challenges in the country presently, there is also the concern on whether FPR would be able to maintain payments of US$45 per gram should global prices fall below the fixed price. Suffice to say, the fixed price model by FPR has not won over many hearts among ASM gold producers.
There is a silver lining however in that FPR has stated that it is willing to take notes from stakeholders and observe trends in the market to the end of making necessary and appropriate adjustments to the gold trading framework. The continued strengthening of gold prices would thus be expected to prompt such adjustments. Taking from the submission by the ZMF, an adjustment in the ASM framework to match that of the primary producers should take precedence. This is because it allows for the strengthening gold prices to add impetus to ASM mining activity as miners will look to ramp up output to optimise resource rents. Narrowing the gap between the effective payment received by the miners and the LBMA price, US$54.94 per gram, and US$61.64 per gram, as at 30 June 2020 PM, respectively, would also close out some opportunities for arbitrage buy illegal buyers. A progressive convergence between the interbank and parallel market exchange rates is expected the close the gap further.
In appreciation of the hardship likely to fall upon FPR in meeting ASM payments in 100% foreign currency under the 70%: 30% framework, a conversation has to begin over the payment of ASM producers electronically via FCA Nostro Accounts. This will, of course, be a particularly contentious topic, given the banking public’s frail confidence in the banking system at present, as well as the numerous barriers to financial inclusion for the miners in the hinterlands who would have scant access to electronic points to make use of their funds. It would be a long road, but one worth being ventured valiantly by FPR and the RBZ for two reasons in particular, among many: 1) to imperatively meet the Eastern and Southern Africa Anti-Money Laundering Group’s requirement for Governments to minimise the use of cash in making large sums of payment as this makes the countries vulnerable to money laundering, terrorist financing, and proliferation financing; and 2) to ease the requirement for the importation of hard currency into the country, where financial embargoes have seen the process become increasingly difficult.
There is therefore much need for effort, will, and cohesion between all stakeholders in the gold sector if a workable producer payment model is to be achieved for the country’s top and most important foreign currency earner.
This article first appeared in the Mining Zimbabwe Magazine July 2020 issue