Mining growth opens doors to many others

06 Jan, 2023 - 00:01 0 Views
Mining growth opens doors to many others

eBusiness Weekly

The most spectacular leap forward in any major economic sector over the last five years must be in mining, which tripled in output by value between 2017, when it was US$2,7 billion, and last year, when preliminary estimates give US$8 billion.

This year the target is US$12 billion, ambitious but possible and whatever the final result the value will be close to that total and certainly at that level or above next year.

Some of the jump in value in the last five years has been through better prices for most minerals mined. But there have been significant jumps in production, especially gold, fixing up of other mineral sectors, in particular diamonds, to ensure the whole output is counted, and improvements in processing levels before export, with chrome and nickel leading the way here, along with increasing levels of platinum concentrate exports.

Much of the jump this year will come from expanding existing production, with coal production for thermal power generation for example having to more than double as the two new Hwange units come on stream. We will go from generating between 400MW and 500 MW on the old Hwange units and the three old stations to generating almost that plus 600MW on the new units, and while they are probably more efficient they will still need a lot of coal.

But besides greater output from existing mines and minerals, we are seeing the commissioning of effectively three new lithium mines, plus the firing of the Disco blast furnaces at Manhize which, whether this output is mining or industry still requires a lot of iron ore to be mined and extra coal coked to feed the furnaces.

Technically one of the three lithium companies, Bikita Minerals, is an existing company, having been in operation for around a century. But for practical purposes it is a new operation, jumping from a very limited output to becoming a major modern mine after an investment of US$200 million by its new owners.

One important point is that the biggest jump in production and so value this year comes from new minerals, lithium and iron, broadening the Zimbabwean mining base as well as growing it.

The greater the range of output, as well as the growth in output, the more stable becomes the mining sector and the more resilient it is in the event of any global shocks, erratic prices and other adverse factors.

The State also wins from this mining expansion. Zimbabwe like most mineral producers around the world now collects the bulk of mining taxes in royalties, which vary from 2 percent for most minerals, to 5 percent for gold and platinum group, with a discount for artisanal gold, and 10 percent for diamonds.

Led by Australia, where there had been a long battle against transfer pricing by mining companies, even when Australian, domiciled for tax purposes in tax havens, mineral producers where the State owns the mineral rights returned to the older royalty systems over the past three or so decades to remove arguments.

Because of the ways capital investment can be deducted from taxable revenue over a number of years, and other tax breaks, it is quite easy for a mining company to be making a loss on paper when it is in fact making good money.

Transfer pricing had become an increasing problem, whereby profits could be made to appear in any desired jurisdiction, usually one in some small country where there were no corporate taxes.

Royalties, based on a percentage of the physical output multiplied by the prevailing global price, are exceptionally easy to calculate. A tax agency in effect just needs some scales and an internet connection to the London Metal Market.

So long as the royalty is reasonable, and Zimbabwe’s are certainly in that bracket, the mining companies grin and bear it.

The mining sector will continue to expanding as investments made over the past five years move from the set-up to the production stage. In 2024 a fourth major platinum mine is expected to enter production, other mines see their expansion investment coming into production. More investments, even if they miss 2024, will be coming on stream in 2025 and there are active efforts to keep this flow of investment continuing. Generally it takes a minimum of two years from an investment decision and commitment to having the new holes dug and producing and sometimes longer.

This now regular flow of new investment is largely driven by the decision of the Second Republic to address the needs of investors, which is built on fair treatment, transparent rules, and lack of corruption. Even when it comes to the surrender of exclusive prospecting orders, we have returned to the fair position whereby once an investor has identified suitable ore bodies for the life of the mine, they are permitted to keep these, but unexplored regions in the wider belt can then be surrendered.

There are three areas where the growth of the mining industry can have a major knock-on effect on the rest of the economy, beyond the royalties paid to Zimra and the salaries paid to the rapidly expanding mining workforce.

The first is the downstream industries. As stuff is mined in Zimbabwe this can be used as raw materials for Zimbabwean industries. In part boosting the level of processing, more a mining sector activity, is required so that the purer material is available. This will vary from commodity to commodity. Coal is obviously almost all used inside Zimbabwe at one extreme, while something like platinum or diamonds will be almost all exported. We can get steel, partly used inside the country to make things, but still with a lot exported since the steelworks will be far larger than a small country can consume.

The second set of extra economic activity comes from upstream industries, companies making the things that mining companies require. This can range from protective and safety clothing to an ever wider range of products. Once the market is big enough it becomes viable to see more local production. A fair percentage of South Africa’s industrial base was built on supplying its massive mining industry.

The third set of businesses can be thought of as the sideways businesses, those who provide production related services. Much of our mining is now open cast, which opens up scope for contract digging companies, for those who maintain roadworks in a mining complex, and even to those who can contract to clean up the mess.

Zimbabwean miners have to follow some basic environmental regulations, which in essence mean cleaning up their mess and not leaving the country looking like the moon. This involves stabilising mine dumps and the backfill operations on open-cast mining. While perfect restoration is not required, following the rules generally involves grassing and creating tree cover on the dumps and backfill, and here some imaginative Zimbabwean companies could come up with lease and other arrangements to create cattle pasture, orchards and the like on the reclaimed land.

A miner might not want to be bogged down with working out viable ecologies on a mine dump or backfill, and might well want to reduce expenses on this item. This is where an ability to lease backfill for peanuts in return for creating the ecology and then exploiting that ecology for farm production could be a viable business. Everyone could win.

A lot of upstream, downstream and sideways industry and a lot of final processing of minerals was not really viable when mining output was too low. But as the value of mining rockets then viability and additional investment into the industrial processes surrounding mining becomes well worthwhile.

So a mining boost can also be an acceleration factor in expansion in other areas of the economy, all the way from growing vegetables and raising chickens for feeding mineworkers at local village level to creating a heavy industrial base based on guaranteed supplies of Zimbabwean steel. For too long our economic sectors have been detached from each other, with mining outside the coal mines the most detached.

This should not be the case. There is a massive multiplier effect if there are enough innovative manufacturers who can supply mines, enough smart industrialists who can make things from what is mined, new services to offer in partnerships.

And we should not ignore the obvious effect of building a new town, or expanding some small nearby settlement, with unfurnished mine houses and anything from a few score to a few thousand skilled workers on salary who will need everything from supermarkets and places of entertainment to television repair shops and wedding planners.

Mining involves a lot more opportunities than the Treasury examining rising tax returns and the Governor of the Reserve Bank of Zimbabwe cheering rising foreign currency inflows.

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