Rick Menell, CEO, Teal Mining & Exploration
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» Copper firms may consider legal action
» Zambia minister confirms 2.5% royalty lift
» Unpicking the Royalty Bill

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Miners may consider royalty arbitration
David McKay
Posted: Fri, 09 Feb 2007

[miningmx.com] -- MINING companies operating in Zambia said they expected the government’s recently increased annual royalty to apply only to mining firms newly established in the country, and exclude those falling under existing fiscal agreements.

However, certain companies’s existing tax stabilisation agreements did provide for arbitration if the Zambia government wanted to impose the higher royalty.

Zambia’s finance minister, Ngandu Magande, said today in the country’s national budget announcement that the annual royalty on mining sales would be increased to 3% from 0.6%, Bloomberg News reported.

“At the time when copper prices on the international market were low, mining companies were offered tax concessions in order to make their project viable,” Bloomberg quoted Magande to have said.

“Now that the prices are high, there is need to review these concessions so that the nation can benefit from the increased earnings from the mining companies,” the newswire reported.

However, a number of established mining companies already operating in Zambia, such as Canadians, First Quantum Minerals, had signed so-called ‘development agreements’. These agreements impose a 15-year freeze on the previously negotiated 0.6% royalty.

“We have a development agreement,” said Philip Pascall, CEO and executive chairman of First Quantum Minerals. “This probably means the tax changes are optional.” He was speaking on the sidelines of the African Mining Congress in Livingstone, Zambia.

However, Pascall expected his company would have to arbitrate with government as set down in the development agreement. “The Zambian government has always been meticulous in legal agreements,” he added.

“It is clearly a budget aspiration,” said Rick Menell, executive chairman of Toronto-listed TEAL Exploration & Mining. Commenting on development agreements with existing companies he said: “Those agreements are with ministers and are binding, issued by a sovereign state.”

TEAL owns the Konkola North copper project in Zambia and would fall under the 3% royalty when it begins generating revenue.

However, another chief executive at the conference, who declined to be named, said the royalty increase was “an opening gambit”. He believed the Zambian government would be negotiated down when it started talks with companies with development agreements.

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Miningmx reported last year, quoting Magande, that the royalty would be increased to 2.5%. The increases stem from the buoyant copper market where prices last year returned all time highs. This is a far cry from the copper price during the Nineties when ZCCM, the former state-owned copper mining company, was losing $1m/day.

Tanzania has also been considering the possibility of increasing taxes and royalties on mining companies operating in its borders, while South Africa is in the throes of introducing a royalty on mining sales.

Zambia has a relatively low corporate tax rate of about 25% which makes the slight increase in royalties look reasonable. However, the Zambian government also has direct interests in some assets, such as First Quantum’s Kansanshi mine. That means when dividends are paid, the state gets a windfall, particularly at current copper prices. Zambia’s 25% tax rate may then appear low, but it’s effectively 45%.

The Kansanshi mine, projected for a five-year payback, produced its first profits in 18 months. The consequent income tax payments, at 25%, saw a tax-take of $13m/quarter.