Charles Needham, CEO, Metorex
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Metorex on DRC review, Zambia tax change
Allan Seccombe
Posted: Thu, 21 Feb 2008

[miningmx.com] -- METOREX’S Ruashi copper and cobalt mine contract in the Democratic Republic of Congo have been classified as “B”, with three issues to resolve with the government there, while the new Zambian fiscal regime will double Metorex’s tax burden to about 40%, CEO Charles Needham said on Thursday.

Copper and cobalt accounted for 57% of Metorex's gross sales of R1bn in the six months to end-December 2007. The metals accounted for three quarters of its R538m EBITDA.

The licence review in the DRC has caused deep unease amongst investors in mining companies with exposure to that country. It has taken longer than first thought and a leaked report last year by the commission conducting the review recommended about half of the 60 contracts be terminated because they were fatally flawed.

The government has since committed itself to speeding up the process and has sent letters to relevant companies defining their category and detailing what it needs to renew the contracts. Category “A”, which no company qualified for, means the contracts were in good order. “B’ means there were some problems that could be resolved and “C” means the contracts are heavily flawed and should be terminated.
unacceptable to us
“We are classified as a “B” category. At Ruashi we’ve done exactly what we said we would do,” Needham told a results presentation. “We are confident that we are not at risk of losing our title or that there will be a change in equity ratios.”

A letter from DRC mines department wanted Metorex to provide its feasibility study on its 80%-owned Ruashi project, which will produce between 45,000 and 55,000 tonnes of copper a year, showing that the state’s 20% free-carry stake in Ruashi is equitable, that social programmes were underway and that state minerals company Gecamines was involved in managing the project.

Metorex will reply to the letter by the end of next week, Needham said.

Metorex has looked at the company tax, royalties and import and export taxes amongst other issues in evaluating Gecamines 20% stake in Ruashi.

“The numbers we’ve come up with indicates they are not 20% participants but closer to double that. We are clear we can illustrate they are not being prejudiced by their holding in Ruashi,” Needham said.

Metorex outlined its community programmes and the involvement of senior Gecamines officials in the running of Ruashi.

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Zambia has introduced a windfall tax on base metals at a minimum rate of 25% and has upped royalties to three percent of gross value from 0.6%. The new rates are effective from 1 April. They are designed to bring in additional revenue to the government from the strong copper price.

The government has said it is not receiving full benefit because of past agreements that were skewed in favour of mining companies, especially those who partook of the privatisation in the 1990s.

Between $2.50 and $3 per pound of copper the windfall tax will come in at 25%. The tax rises to 50% between $3 and $3.50, climbing to 75% beyond that.

The corporate tax rate will increase to 30% from 25%. The government has repeatedly said the new rates will apply across the board and include companies that were operating under far more favourable development agreements.

The new fiscal regime changes the economics of projects underway in Zambia and puts a number of them in jeopardy. First Quantum’s Mopani is understood to be in jeopardy in the new regime and Equinox’s financiers. Konkola Copper Mines is also said to be deeply unhappy and could begin international arbitration.

Needham said the government there had taken every revenue stream generated by the mines and raised it, which would double Metorex’s tax rate to about 40%.

“We looked at the affect of what they are proposing on our tax rate and it more than doubles it, which is unacceptable to us,” Needham said. Metorex will not close its Chibuluma copper mine if the new regime is implemented.

Metorex signed its 15-year development agreement, with a tax stabilisation clause, in 1997 when copper prices were far less favourable than today.

“We are protected by international law,” he said. A senior foreign mining executive told Miningmx in Zambia earlier in February that international arbitration was an option if the government pressed ahead with the fiscal changes.

Metorex believes the government is open to negotiation on the rates and together with other mining companies in Zambia will offer to pay a variable tax rate at various copper prices and suggest that companies would like to see money from those taxes flowing into communities around the mines.

“The mining industry in general opposes what’s happening. The government understands there are development agreements that protect a lot of companies… and if this were implemented there are a number of new operations that will not come on line,” Needham said.

“This process is not good for the nation or for the people, but we believe through negotiations, this will be adjusted.”

Mines minister Kalombo Mwansa said earlier this month the government was standing firm on its new fiscal regime. “It won’t change. We’ll have dialogue with the mining companies, but we will not change the fiscal regime,” Mwansa said.