Zambia trebles mining royalty tax to 20% – mines start closing

Every action breeds reaction. In economics, the response tends to be rapid. As the Government in Zambia is discovering after overplaying its hand by trebling its royalty tax on open pit mining. Poor timing is partly to blame. But the reality is capital flows to where it is best rewarded. And for Barrick Gold the tax has tipped its margins at Lumwana below an acceptable level. So it has simply stopped operating. The closure will wipe out an estimated 12 000 jobs. Politicians with short memories may even suggest taking back the mining licence so the State can start operating the pit itself – the kind of option often proposed by radical politicians to the south. Referencing back to Zambia's disaster in the 1960s created by a similar approach would quickly put that idea where it belongs. In the trash can. Better to address the real cause. Excessive taxation chases away capital. Fast.  – AH  

LUSAKA (Reuters) – Zambia's decision to hike royalty rates on open pit mining from 6 percent to 20 percent will lead to shaft closures and 12,000 job losses, the chamber of mines said on Friday.

Barrick Gold Corp. said on Thursday it would suspend operations at its Lumwana Copper Mine after royalty increases were passed into law in the 2015 budget. Lumwana produced around 118,000 tonnes of copper in 2013.

The International Monetary Fund (IMF) estimates that economic growth in Africa's second largest copper producer will dip to 5.5 percent in 2014, from around 6.5 percent last year, partly due to mining outages.

Mining accounts for 12 percent of gross domestic product (GDP) and 10 percent of formal employment in the country.

"The imminent implementation of the 2015 budget measures may make a number of other operations economically unviable, potentially leading to more mine closures," said the chamber, which represents mining companies operating in Zambia.

The suspension of Barrick's Lumwana operation is also expected hit output at three copper smelters which depend on metals from the mine, the chamber said.

It estimates that the tax hike would next year result in total production losses of 158,000 tonnes of copper, the loss of 12,000 jobs and cost the government $1 billion in lost earnings.

Mines minister Christopher Yaluma said the government would not change the law because the level of royalties the mines were currently paying was too low.

"We are not getting sufficient proceeds from our mineral resource and we felt we would only be able to do so by hiking the royalties to the current levels," Yaluma told Reuters.

"They are crying that this is too much but too much is a relative term," he said.

Mopani Copper Mines, owned by Glencore, and Canadian firm First Quantum Minerals both have big copper projects that could now be at risk, the chamber said.

Other mining companies operating in Zambia include Vedanta Resources and Vale.