Peter Leon is head of mining regulation at South African law firm Webber Wentzel and is a partner in the firm’s mining practice. The Northern Miner caught up with him a day before the Prospectors &Developers Association of Canada mining convention kicked off in Toronto to get his take on Zambian royalties. On Jan. 1, the government eliminated corporate income tax, but tripled royalties on revenues to 20% from 6% on open-pit copper mines, and to 8% from 6% on underground mines. Zambia is Africa’s second-largest copper producer and is home to open-pit mines owned by Barrick Gold (TSX: ABX; NYSE: ABX) and First Quantum Minerals (TSX: FM; LSE: FQM), and underground operations owned by Glencore (LSE: GLEN) and Vedanta Resources (LSE: VED).
TNM: Are there any signs that Zambia may lower the new royalty rates due to pressure from the industry?
Peter Leon: I was at the Mining Indaba conference recently and a CEO from a major copper mining company — which has a big project there — said that what was happening was really untenable and echoed what Barrick has been saying. But the new president said the government is not going to back off. I don’t know how it is all going to be resolved. One hopes sense will prevail, but the Chamber of Mines has warned there could be 12,000 job losses, so it’s not looking very good. I would have thought there will have to be some sort of compromise, but there’s been quite a lot of sabre rattling, and what is going to happen is unclear. Copper mining is such an important industry for Zambia — the second largest in Africa after the DRC — and it has huge dependence on minerals for its export revenues.
TNM: President Edgar Lungu of the governing Patriotic Front was elected in a by-election on Jan. 20 after the death of his predecessor, Michael Sata, in October 2014. Lungu will serve until 2016 when a new election will be held. His contender, Hakainde Hichilema, a businessman and leader of the United Party for National Development, was seen as more mining friendly. What can you tell us about Lungu?
PL: The election was narrowly won; Lungu won by a tiny majority, something like 2%, if I recall correctly. Unfortunately, the new president seems much like his predecessor — he has the same sort of nationalist background. His contender was much more market-friendly. But Lungu doesn’t have long in office. In Zambia, when a president dies, instead of the vice-president succeeding him, they have to hold a by-election. So there’s another presidential election in more or less a year’s time, which could see a re-run between the same candidates and a different outcome.
TNM: You’ve said that the original royalty deals Zambia struck with foreign mining companies back in the early 2000s were not fair to the government.
PL: The original royalty deals in 2002 were not fair and were originally something like a third of one percent and that was untenable. But it seems to me things have now swung in completely the opposite direction. I can’t think of a country that has a 20% royalty rate so I think there has to be a balance, and here the pendulum has swung in the wrong direction.
TNM: Barrick initiated the process of suspending operations at its Lumwana mine due to the royalty increase in December, estimating the mine’s transition to care and maintenance would be completed in the second quarter of 2015. Does the government understand their side of the issue?
PL: The copper price is down 23% over the last two years and capex is being slashed, and while Africa was very much a hot destination, the big problem in Africa, in addition to political risk, is that it’s often a high-cost investment destination owing to infrastructure issues, which mining companies generally don’t experience to the same degree in places such as Canada and Australia. So I think African mining countries need to be careful, and Zambia particularly so. If the three major operators stop operations, or mothball some or all of their mines, the government can’t force them to operate — although the President said something to this effect in the election campaign.
TNM: Is nationalization a remote possibility?
PL: Nationalization is very unlikely. Zambia experienced this in the 1970s, which was an economic disaster, and because of that the copper mining industry was privatized in the 1990s. Zambia has experienced a lot of economic hardship following the nationalization of Anglo American’s operations in Zambia in the 1970s, for which the government paid full market value compensation, by the way. I simply can’t see this happening again. In this environment of subdued and declining commodity prices, the Zambian government has to compromise, which I hope they do. What’s not yet been established is that you have a lot of press around resource nationalism and increasing government share during commodity booms. But what’s not clear is what happens when the commodity boom evaporates.
the Zambian president’s name is Edgar Lungu.
Confounded? People are not confounded? Tell it like it is…. When will people learn that bankers and financial wizards are not going to admit what is really going on, Quite simply the truth is not being spoken as no one has the chutzpah to step up and face the real issues that must be addressed.
Bloated financiers, corporate money grabbers, office sycophants and “wanna-bes”, only want one thing – Cash in their pockets and of those who pave the way forward for further crimes! Poisoned systems sitting atop pristine natural resources (agric, land, mineral, water) attract scum from all over the world with their promise of illegal business deals, payoffs, noncompliance, archaic business models, and under-the-radar prejudices assured. All are in this mix for themselves. Outsiders and sideliners, who find it impossible to penetrate this venomous circle of moral turpitude let alone conceive such ill proprietaries remain idle, safely not dealing with the real issues that plague Zambia, a true “not my baby” syndrome.
Meanwhile, the majority, mostly children, born as innocently into this world as YOU, must endure daily, rampant crime, rape, anemai, malaria, HIV, malnutrition, failed social systems, lack of adequate medical support, terrible school systems, corruption, tax avoidance, failing infrastructure, corrupt law enforcement, lack of higher education, the list goes on and on and on. Simply stated, Mining and development of Zambia’s natural resources is just GOOD for Zambia, foreign mine ownership by reputable companies have always abided by and/or elevated the legal conditions within their spheres of influence whether it is corporate and social compliance, taxation, community participation, or simply the safety and welfare of employees.
Zambians are tribal and hold faith in their leaders, but when finally convinced the tribe is being led over a cliff, with no returning and that the very future of a nation is at stake, then and only then will change begin. The colonialism of Zambia did irreparable damage, brainwashing young Zambians that grew up under the colonial shadow that they were inferior and their voice did not matter. When the Brits were finally booted out, the ones put in place were bitter. Years of discrimination led to a revenge mentality, much to the demise of future generations. Any corrupt Zambian promised bags of cash to his ilk and their kind whether from the Chinese, Indians or other will simply give rise to continued harm.
The time must come that Zambians admit that their chiefs are the ones stealing out from under them. Zambians must flush out these toxic parasites infecting the local and federal governments, refresh the nation with leadership that genuinely holds the Zambian people first in their agenda to reviving the economy. They must then extend their hard work ethics and work with international communities to stop the suffering of the women and children first, secure the country’s future, and then begin once and for all to use the natural resources of a beautiful land to take centre stage