Hopes lift in First Quantum's Zambia tax wrangle

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� Zambia's tax change badly managed
� Zambia copper output hit in power shortage
� Problems underlie First Quantum's record quarter
� Freeport McMoRan walks away from Ndola
� Antofagasta makes its first African foray
� Legal defence mooted on Zambia tax shock
� Zambia govt. issues exploration warning

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Hopes lift in First Quantum's Zambia tax wrangle
Allan Seccombe
Posted: Wed, 13 Aug 2008

[miningmx.com] -- COPPER producer First Quantum posted a healthy increase in interim profit despite the weight of Zambia�s new tax regime, but the market sees a recent windfall tax development combined with legal advice the company has received as positive developments.

First Quantum�s net profit for the interim period nearly doubled to $390m from $201m a year before. Its tax expense ballooned to $233bn from $77m over the same period, admittedly off a higher production base.

The Zambian government implemented its hotly contested new tax regime from the start of April 2008.

a high probability of recovery from the Zambian government

A number of mining companies had deals in place called Development Agreements, which gave them favourable tax environments as an inducement to re-enter the country as the sector was privatised after years of neglect and under-capitalisation during government control.

The government has argued that those highly favourable tax rates in the Development Agreements have meant it is largely losing out in the high copper and commodity price environment as it seeks to invest in the country and address high levels of poverty.

First Quantum, along with other affected companies, held the option of international arbitration firmly in hand during negotiations with the Zambian government, and which are ongoing.

�The Company has, following the recent tax changes, obtained legal advice on its rights under the Development Agreements. This advice has confirmed that the Company has rights of recovery for any taxes which are levied in excess of those permitted under the Development Agreements,� First Quantum said.

�In the light of the detailed advice received, the Company has assessed there to be a high probability of recovery from the GRZ (Government of the Republic of Zambia) of certain payments made in respect of these taxes,� it said, estimating it is owed $67m as at end-June, offsetting the $87m reduction in profits because of these higher charges.

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The fresh twist in the debate over Zambian taxes came in the form of a recent letter from the Zambian Revenue Authority (ZRA), which said First Quantum had to pay a windfall tax at a flat rate of 25% on copper and cobalt above a trigger price. This was said by the ZRA to be an interim arrangement that would be adjusted at the end of the tax year, First Quantum said.

First Quantum pointed out this rate was at odds with those contained in the new tax legislation, which sets out a rate of 50% when prices top $3/lb and 75% for prices above $.350/lb.

It did in mid-July, however, pay the ZRA rate for the June quarter. The results posted today reflect only the legislated rates.

�We note that the Zambian government has indicated a potential flat windfall tax rate for FQM of 25% when copper prices exceed US$2.50/lb suggesting some flexibility,� Numis Securities said in a note.

�The Zambian situation is unclear but there appears to be greater hope than previously that the full impact of the new regime can be avoided,� it said. �However, we continue to believe that cost escalation and a declining copper price imply significant downwards pressure on consensus with or without the Zambian tax regime.�

At an operating level, the effects of the new tax laws on windfall taxes, export levies and royalties, were clearly visible, with total production costs at its largest operation, Kansanshi, jumping by $0.71/lb, or nearly a third, during the quarter to end-June compared to a year ago.

Meanwhile, another headache for the company shows no signs of abating.

The border between its Lonshi mine in the Democratic Republic of Congo and Zambia remained closed to exports of ore for a second quarter running, necessitating a continued build up of stockpiled ore at Lonshi instead of being shipped to the Bwana plant in Zambia.

The ore stockpile has doubled to 147,000 tonnes, with a grade of 5.6%. The border closure has been in effect from November 2007.

Lonshi filed a notice of force majeure with the Cadastre Minier in July regarding the border closure in relation to its obligations for tax payments and other commitments. The oxide mining will end soon and the company is investigating going underground to extract the sulphide part of the deposit and whether to ship it to the recently commissioned Frontier plant in Zambia.

�Evaluations of alternative options for the continued commercial operation of the Bwana processing facility, beyond the completion of the Lonshi oxide resource, are currently being undertaken,� it said.

First Quantum maintained its 2008 production forecast of 310,000 tonnes of copper, of which 185,000 tonnes would come from Kansanshi and 84,000 tonnes from Frontier.

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