Zambia’s gov’t may reinstate windfall tax

Dow Jones Newswires is reporting that a parliamentary committee in Zambia is recommending that the government reintroduce a 25% windfall profit tax on mining companies that was scrapped early last year due to falling copper prices and the global economic downturn.

In a note to clients, UBS Investment Research maintains that it is “unlikely” that the proposals will be adopted by the current government but says they “could become an election issue” in October 2011.

The parliamentary committee is arguing that tax revenues from mining are inadequate, even though the corporate income tax rate was raised from 25% to 30% in March 2008 and royalties hiked to 3% from 0.6%.

The government also introduced a variable profit tax of up to 15% on taxable income.

Dow Jones noted that the parliamentary committee was critical of the variable profit tax, which they allege is easy to cheat upon.

“Most of the mining companies in Zambia are multinationals with various subsidiaries, giving them latitude to hide costs through transfer pricing and avoid paying taxes, the committee noted,” Dow Jones reported.

The previous windfall profit tax was pegged at 25% for a copper price ranging from US$2.50 to US$3 per lb.; 50% at US$3 to US$3.50 per lb. and 75% for a price above US$3.50 per lb., local Zambian press reports say.

Gordon Simpson, a Londonbased spokesman for Vedanta Resources (VED-L), which owns four mines in Zambia and produced 507,000 tonnes of copper cathode in fiscal 2010, declined to express his views. “We’re reluctant to comment on politicians’ comments or views,” he told The Northern Miner.

Clive Newell, president of First Quantum Minerals (FM-T, FQM-L), could not be reached for comment by presstime. First Quantum’s open-pit Kanshansi mine in Zambia is the eighth largest copper mine in the world. Eighty percent of it is owned by Kanshansi Mining, a First Quantum subsidiary. The mine is about 10 km north of Solwezi and 180 km to the northwest of Chingola.

As of Dec. 31, 2009, estimated reserves using a 0.28% cutoff grade is sufficient to support a mine-life of about 13 years at a throughput rate of 24 million tonnes per year. The mine-life increases to 20 years when the estimated inferred resources are considered, the company states on its website.

Analysts at UBS Research argue that the re-introduction of a windfall profits tax would “hypothetically reduce First Quantum’s net asset value by 1% and 2011 operating cash flow by 3%,” but maintain a buy on the stock with a 12-month target price of $93 per share.

At presstime in Toronto, First Quantum shares were $64.58, trading within a 52-week range of $48.20-$100.32.