Zambia tax claim adds to Africa policy jitters, but it’s not all bad

Edgar Lungu, president, Zambia

THE risk of an audit similar in nature to one that has saddled Canada’s First Quantum Minerals with an $8bn tax claim could be launched by the Zambia Revenue Authority (ZRA) on other miners operating in the southern Africa country, including Glencore and Vedanta.

This is the view of Goldman Sachs which said: “This could have a negative read-across for Glencore and Vedanta which have operations in the country and should the tax authorities look to initiate tax audits against them”. Glencore declined to comment.

However, the bank believed the ZRA’s activity, coupled with demands from a number of other African country’s for a greater share in the proceeds of improved commodity prices would be a positive for the market. “The demands from governments across our coverage for higher taxes and royalties have increased which, in our view, supports commodity prices as it can lead to disruptions and is inflationary,” it said.

Discussions regarding how promulgated royalty increases on metals exported from the Democratic of Congo are currently underway with representatives of Glencore, Randgold Resources and other miners operating in the country. Discussions are also underway in Tanzania which last year changed mining related laws which will affect Acacia Resources, the listed subsidiary of Barrick Gold, another Canadian firm.

There is the prospect of Mining Code changes in Mali whilst Ghanaian government representatives have suggested a government agency check the value of minerals assayed and exported from the West African country.

 

According to a report by JP Morgan, the ranking of these countries in terms of the Fraser Report, an annual study of the most investment-friendly mining districts around the world, are likely to slide when the 2019 study is published in February next year.

“Since the questionnaires [for the Fraser Institute study] were completed between August 22 and November 10, 2017 we feel the results are somewhat backward looking so we’ve begun to put out own twist on these numbers,” said JP Morgan analysts, John Bridges and Siddharth Mishra who authored the report.

On the basis that the Fraser Institute survey is already slightly outdated, JP Morgan implemented its own ‘override’ study in which it lowered the rating for the DRC “… to recognise the new higher taxes in the DRC and the recent decision to limit the payment for domestic coal to $70/t for the next two years”. It also lowered the ratings for Tanzania, but suggested the ratings for South Africa and Zimbabwe could both increase next year.

First Quantum said earlier this week it was unaware of other companies facing the kind of tax audit to which it was subject. That’s because such audits are normally conducted confidentially. Phillip Pascall, CEO of First Quantum commented that whilst disputes with the Zambian authorities had occurred in the past, it was unusual in this case that its findings be made public, issued through a press release. He declined to speculate as to whether there was a political motive behind the move.

The economic backdrop to the ZRA’s claim, however, is of improved conditions for Zambian copper mining. The country, for instance, expects to produce more than one million tonnes of copper this year after revising its 2017 copper production upwards from some 800,000 tonnes previously – an increase based on commissioning of a new shaft by Mopani Copper Mines, owned by Glencore, and an expansion at China Non-Ferrous Africa Mining.

This was owing to more stable power supply as well as rising copper prices. These factors would boost the country’s revenue collection.

First Quantum is one of Zambia’s biggest copper producers and consequently one of the biggest revenue contributors to the exchequer, having paid an estimated $3bn of taxes to date and some $200m in annual royalties.