"At the moment, none of us can read China” - Ivan Glasenberg, CEO of Glencore on Bloomberg.
2015 has been a tough year for commodities. Unforgiving market conditions saw global copper prices drop by as much as 20% this year to below the $5,000 per MT mark. A slowdown in the Chinese economy (which consumes 40% of global copper output) has been the key driver of this downturn.
Copper exports account for about 70% of Zambia’s foreign exchange earnings and the mining sector is about 11% of Gross Domestic Product (GDP). The effects of copper price weakness on Zambia can be seen in the trade figures (trade deficit of $508m in H1) and currency (decline of over 30% against the US dollar year-to-date).
Here’s a look at how the top 4 copper mining companies got on in the first half of 2015:
Mining companies faced two key regulatory disruptions from a new fiscal regime which significantly raised royalties and a spat over the VAT refund procedure which led to a backlog of $600 million owed to them:
The fiscal regime was revised and took effect July 1. The VAT refund procedure was amended in February by making it easier to provide proof of exports. Repayment of refunds has started – particularly on invoices post-revision – but no recent guidance has been given on the pre-revision $600 million backlog.
According to the Central Statistics Office (CSO), Zambia’s first half copper production increased by 2.1% year-on-year to 331, 511 MT:
Output was ramped up in May and June. Lumwana doubled its production year-on-year. Mopani also saw a 21% increase in production from the previous year (excluding third-party feeds). Kansanshi contributed 33% to Zambia’s total output over the period despite their production falling by 19% year-on-year.
The age of a mine and methods used to mine it play a large role in the cost of running it. In addition, costs are much higher in the first quarter of the year (which is peak rainy season) than the rest of the year. Here is how three of the miners did in terms of cash costs in comparison to 2014:
On average, all three miners saw a drop in cash costs with Lumwana having the biggest drop of 23% year-on-year. Local fuel pump prices fell by at least 28% at the beginning of the year – a major positive in the first half. Glencore did not break down cash costs for Mopani in their half year production report but revealed that costs currently exceed $2.50/lb in a statement released this earlier this month. Kansanshi and Lumwana are newer mines whereas Konkola Copper Mines (KCM) and Mopani are much older.
Here’s is a look at Kansanshi and KCM’s H1 2015 revenue performance (the only miners that broke down their H1 revenue performance):
Kansashi saw copper revenues decline by 37% year-on-year as a result of the decline in volumes and reduction of global copper prices. KCM had a marginal decline of 2%. It’s common practice by mining companies to enter into copper futures contracts in order to hedge against copper price volatility and lock in their revenues. But when prices are on a downward trajectory, it eventually shows in their financials.
Electricity: Zambia has a 795 MW energy deficit as a result of erratic rainfall which affected water levels at its largest dams. This is a 33% reduction in total generation capacity. Mining companies consume just over 50% of the country’s electricity output. State-owned utility ZESCO cut power supply to mining firms by as much as 30% until the power situation normalizes.
Over 400 MW of energy are being imported (mostly from Mozambique) to mitigate the deficit through to the end of the year. A further 720 MW in hydro, solar and thermal will be coming online at various points in the year from December 2015 to October 2016. There is also an option for mining firms to pay for imported power from Namibia at a 30% premium to the $5.31 cents per Kwh paid under ‘Bulk Supply Agreements’.
Fuel: Pump prices have seen two hikes of 15% in May and 13% in July. There is likely to be another hike before the end of the year because the depreciation of the Kwacha against the US dollar has significantly raised procurement costs.
Mining: The Ministry of Mines suspended the issuance, renewal and transfer of mining rights while it reviews the recently approved ‘Mines and Minerals Act’. No timeline was given as to when this process is likely to be completed.
Electricity: The Government has raised electricity tariffs on new generation which will now be priced at $10.53 cents per Kwh. They also announced that Bulk Supply Agreements would be adjusted as per normal consumer tariffs moving forward.
Over the last 6 years, mining firms ramped up debt in order to finance various expansion projects so as to take advantage of sky-high copper prices at the time. But now that prices have declined significantly, they have to focus on minimizing costs and cutting down debt. Here are the major moves so far:
There could be a lot more pain for the sector over the rest of the year and going into next year if the energy situation does not normalize and copper prices continue to fall. But ultimately, China will have the final say on how much pain the Zambian mining sector has to go through.
Trying to decipher this puzzle that is Zambia by using a variety of publicly available data (structured and unstructured) in conjunction with my own skill/experience. * * *