Paying taxes, and then some

[] — NO SURPRISES in South Africa’s national budget unveiled last week in respect of the Royalty Act, a piece of legislation first promulgated in 2007 to collect a portion of mining company pretax earnings.

That’s to say, there are no changes in the calculation methodology.

In truth, there’s no need to tinker with the methodology, notwithstanding lower corporate profit performance in South Africa which pushed down collections in the 2010/11 fiscal year. According to budget documents, government’s forecast for royalty-related revenues is 38% higher for the 2011/12 year compared to the estimate it first made in 2010/11.

Clearly, the National Treasury is confident that commodity prices will continue to increase over the year. For the record, the mining sector posted 17% growth in South Africa’s fourth-quarter gross domestic product figures, a performance that bears out government optimism.

More notable, perhaps, is government’s proposed “carbon tax”, and its possible impact on pretax profits given that the mining sector contributes heavily to carbon dioxide (CO₂) emissions in South Africa. Of the top 20 CO₂ emitters in the country, eight are mining firms, while the top emitter – Eskom – burns coal in its power station and is obviously mining related.

A discussion document, Reducing Greenhouse Gas Emissions: The Carbon Tax Option was published in December and is open for comment until February 28. Hilary Joffe, spokesperson for Eskom, the electricity utility that churns out some 224.7 million tonnes of CO₂ a year, says part of the debate regarding emissions tax is whether its payment will be accounted for in the annually assessed tariff structure consumers pay.

You can see how vexed this debate could become.

Eskom will likely argue South African consumers need to start paying for the real cost of electricity, presumably in line with international levels. Equally, the mining industry will wonder why it must pay three times over for the carbon tax.

In addition to the proposed tax, it may have to pay higher electricity costs if Eskom gets its wish to be compensated, not to mention the fact that mining companies are already implementing, at their own cost, emission-lowering technologies.

“We’ve already reduced electricity consumption 10% to 15% over the last two years and have other programmes to further reduce consumption,” says Nick Holland, CEO of Gold Fields which ranks as South Africa’s tenth-largest emitter of CO₂.

“That costs money and to be taxed when you don’t even know how that will be deployed is pushing it a bit,” he says. Holland believes incentives work better.

Says ArcelorMittal SA (Amsa): “We are fully aware of government’s intentions to impose additional carbon taxes and/or perhaps even a cap trade system. It is still premature to comment on potential implications, but we anticipate that the financial burden may increase significantly.”

At present, we’re all jumping the gun. The current proposals are just an option and there’s no clarity yet at what threshold carbon tax will be applied. There is the suggestion emitters will pay from R70 to R200 per tonne of CO₂, but it’s unknown if, for instance, Anglo American will start to pay that rate at a quarter or half or three-quarters of the 8.85 million tonnes/year CO₂ emissions it pumps into the atmosphere.

Like I say, vexed.

There’s also some discontinuity with broader government policy. It’s a lesser known fact of the national budget that the Treasury believes the mining industry will produce 100 000 new jobs by 2020, many of them in the downstream, or beneficiation end of the market.

If that’s so, making it more expensive to produce metals, which is what a carbon tax does, runs counter to job creation which requires profitable, growing businesses.


Given his sudden resignation from Kumba Iron Ore’s board, his obvious relationship with the Gupta family which is invested in Kumba’s nemesis, Imperial Crown Trading (ICT), and this week’s announcement that he is behind a plan to build a steel mill in South Africa, I think the time has come to prefix any preference to Lazarus Zim as “the controversial businessman Lazarus Zim”.

I would also dearly like to see the sensitivity analysis that gives controversial businessman Lazarus Zim confidence that an economically viable steel mill can actually be built in South Africa, especially as others are struggling so.

Murray & Roberts recently closed down its Cisco mill in the Cape province, while Amsa says jobs at Saldanha Steel are at risk should it be forced to pay market-related prices for the important steel input, iron ore.

Perhaps controversial businessman Lazarus Zim’s Afripalm Resources and its Indian partner, Steel Authority of India, can secure iron ore at competitive prices; perhaps there’s beneficiation-related incentives of which only he’s aware; perhaps it’s low-cost mini-mill furnace technology. Who knows?

For certain is that Zim will effortlessly skate across any thin ice upon which he happens, just as he managed to extract himself from Kumba’s board with scarcely a public question about how ICT became privy to Amsa’s failure to renew its mining permit.