News broke at the end of January that the Government had increased electricity tariffs for the mining sector to $10.35c per Kwh. Mining firms consume about 55% of electricity generated in Zambia at rates of as low as $5.6c per Kwh. They weren’t subject to the December 2015 raise which was reversed (for now!) in January 2016.
Mining companies are usually very vocal about changes to regulation which affect their cost-base (e.g. Barrick-owned Lumwana Mine threatened to close shop after the 2015 mineral royalty regime was enacted). And in 2014, the Energy Regulation Board (ERB) raised tariffs by 29% for mining companies – an act which was challenged in the courts of law and is still under litigation.
So why no furor? What was so different about this time?
What Miners Get in Return
Well we got a clue into what miners would be getting in return when the President's Special Assistant for PR announced that the government would be implementing a new 'sliding scale' mineral royalty regime in the first quarter on 2016. This week's cabinet meeting revealed more details:
It's difficult to quantify what the financial impact will be for respective mining companies but it's safe to say that for now, the tax changes will provide financial relief in a low copper price climate. There will also be upside WHEN prices begin to recover – the extent of which will be determined by how efficient each mine is in their operations. More light will be shed on this at the end of the first quarter when publicly traded firms start to release their financials.
What Zambia Gets in Return
Financial Relief on Energy Imports
ZESCO will have more financial flexibility to sustain and/or import more energy without significant Government support. According to the Minister of Energy, the Government was spending $13.4 million per month on energy imports between September and December 2015:
Energy from Aggrekko was the most expensive to import at $18c per Kwh. And with domestic energy consumers paying an average of $5.6c per Kwh to ZESCO, the Government had to foot the bill for the difference i.e. subsidize. With miners paying more, the Government does not need to subsidize as much which will be a financial relief because they have a significant amount of funds committed to infrastructure spending.
Stability in Mining Sector
The sector has already trimmed around 10,000 jobs. They will be less inclined to implement deeper cuts with the package of tax changes they have received. They will also be less motivated to cut their procurement budget on supplies from local registered suppliers. This will be a big boost to industries in the Copperbelt and North-Western province (to a certain extent) which are built around the mining sector.
Mining capital expenditure that was put on the back-burner because of an 'unfavorable' tax regime could be back in play again. This also applies to potential investors who were waiting to see what happens with regulation in Zambia before they made a decision on whether to put their money here or not. The sector hires over 60,000 people, contributes over 70% in foreign exchange earnings and 12% to Gross Domestic Product.
Better Global Press
Zambia, for better or worse, is linked to copper on the global stage. One will virtually always read about the 'number 2 copper producer in Africa' when opening an international article about the country. A 'favorable' mining taxation regime could mean good press (PR) on the international stage which would improve the global perception of the country. 2015 saw the country hit by a slew of bad press (plenty justifiable but some not!) which exacerbated the depreciation of the currency and uptick in yields on outstanding Eurobonds.
Reduction in Government Revenue
The biggest downside will be the potential reduction in contribution to this years national budget and potentially the few years should copper prices remain depressed. Here is what miners have been contributing from 2012 to 2014 (under a different tariff regime):
The contributions were made during a time of much higher global copper prices in comparison to today (and 2015). There is still more downward pressure on commodity prices and the Chinese economic growth will not be as turbo-charged as it was over the last decade. The Government needs as much revenue as they can mobilize in order to continue upgrading infrastructure or investing in other important sectors.
Another Delay on Cost-reflective Tariffs
It's tough to raise tariffs by 248% in an election year -- a large chunk of 948,000 electrified households who are already experiencing 8 hours of daily blackouts in addition to 21.8% inflation will not be pleased. This is something that should have been phased in over the last 7 years for obvious reasons (attract new investment and cut Government subsidies). Higher tariffs for all consumer categories will probably not be implemented until after the August 2016 elections (whether by the current or a new Government). This could slow down any talks about much-needed private sector investment in the energy.
Bottom-line: Mining companies will continue to hold all the aces for a while longer. This will be the case until Zambia diversifies it economic base. It also looks like there has been a lot of dialogue in the background between the Government and the mining sector – an interesting development whichever way you look at it!
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. * * *