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Still The VAT Dossier: First Quantum says Zambia royalty hike will hit investment, jobs

Zambian copper miners wait in a lift before going to work underground in Konkola, Zambia.
Zambian copper miners wait in a lift before going to work underground in Konkola, Zambia.

 Zambia’s largest foreign investor, Canadianmining group First Quantum Minerals, warned on Tuesday that the country’s decision to raise mining royalties from 2015 would discourage future ventures and hit jobs. The Cabinet will increase underground mining royalties to 8% from 6% from next year as part of an effort to revamp the industry’s tax system, Finance MinisterAlexander Chikwanda said in his 2015 budget speech last week.

“On the face of it, the new system doesn’t incentivise investment in new capital projects,” First Quantum Minerals Zambia government affairs manager John Gladston told Reuters.

Gladston said the new tax system in Africa’s second-largest copper producer – affecting both underground and open cast mining – would inevitably lead to fewer new jobs and less opportunities for wealth creation for Zambians.

First Quantum had already delayed investment projects worth more than $1-billion in Zambia due to uncertainty over the fiscal regime, a director said in June.

“The budget address served to confirm the sagacity earlier this year of First Quantum’s postponement of additional major capital projects in Zambia,” Gladston said.

First Quantum would wait for the actual implementation of the 2015 budget in order to analyse the full impact of the new tax system, he said.

Zambia’s Chamber of Mines said in a statement last week that the hike in royalties would have a negative impact on operations, as the mineral royalty tax was on gross revenue, not companies’ bottom line. That means it does not take into account operating costs, which have risen sharply for the sector.

The new system aims to collect revenue from the industry at different stages of the production pipeline by introducing a 30% corporate processing and smelting tax.

Another 30% tax will be applied to income earned from “tolling”, industry-speak for an agreement to process another producer’s raw materials.

Open-cast mining operations in Zambia will also now be subjected to a 20% mineral royalty as a final tax.

Zambia’s mine tax system was already in focus in a simmering row with producers over VAT refunds.

Zambia has been withholding $600-million in VAT refunds owed to mining firms after companies failed to produce import certificates from destination countries.

The finance ministry has since said it plans to waive the requirement because it is impractical, but no refunds have been made yet.

Other mining companies operating in Zambia include London-listed VedantaResources, Glencore and Barrick Gold

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