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Experts urge caution on black empowerment in mining

THE crisis in Zimbabwe’s mining sector has been brewing for several years. Initially the crisis was said to be a result of declining production and investor wariness due to the country’s rapidly worsening economic climate.

But the sector’s continuing deterioration is now punctuated by political faction-fights over public and private assets, deals involving the takeover of mineral producers by quasi-state organisations, and more recently, proposed laws to nationalise mines under which foreigners will be required to cede 51% of their shareholding to a local partner.

Businessdigest reporter Chris Muronzi (CM) last week spoke to the new Chamber of Mines president Victor Gapare (VG) about issues surrounding the sector.
CM: Is Zimbabwe ready for empowerment in the current economic and political situation?
VG: The best conditions for empowerment entail a functional economic and political situation. Empowerment entails that those being empowered have to raise capital on the market to buy into existing businesses or to establish new businesses. In South Africa, for instance, the financial sector was ready to fund BEE transactions. In addition, there were strong public sector institutions which assisted a number of deals and some of these include the Industrial Development Corporation, the Public Investment Fund and the Development Bank of Southern Africa.
In the case of Zimbabwe, at the moment financial institutions don’t have the resources to finance economic empowerment transactions. In fact, the banks are struggling to finance working capital for existing companies, let alone provide buyout debt. Foreign financial institutions have been hesitant to fund Zimbabwean companies mainly because of the perceived risk associated with the country at the moment. Where debt has been provided, the interest rates have been near diabolical at over 14% per annum and the tenure has been very short up to say 90 days. Buying equity in a company requires long-term debt as in most cases the returns are over a long period of time. It’s impossible to fund empowerment with 90-day debt.
In short, what we need is a stable political and economic environment to ensure that economic empowerment deals are successful. In the current unstable political and economic environment, it’s difficult to see how empowerment deals can be done successfully.
CM: Does the country’s financial services sector have the capacity to back black economic empowerment (BEE) deals should government introduce indigenisation?
VG: Banks rely on constant flows of deposits from the public for them to be able to advance loans to companies and individuals. We know that the whole economy is working at less than 20% of capacity at the moment. At that low capacity, there are few individuals in full employment, which means there is less disposable income and less is deposited into banks. Banks will therefore have very little to lend. In fact most people withdraw their money from the banks as soon as it is deposited. Companies that are working are still trying to build their working capital and they use their revenues as soon as they receive them. It follows that financial institutions will therefore not have funds to advance to individuals and companies wanting to carry out empowerment deals at the moment.  
As already alluded to, the banks need to be recapitalised to support working capital requirements of existing operations. It will take time for Zimbabwean financial institutions to be able to finance long-term capital required for the empowerment deals.
Those individuals currently looking at empowerment deals will need to look at other alternatives as financial institutions are currently not in a position to finance them.
CM: What is the chamber’s view of how best to pursue an indigenisation policy which promotes growth in the mining industry?
VG: Let me say from the outset, the Chamber is not against empowerment in the mining industry. What we want is a process which will result in the industry growing rather than the growth of the industry being stunted. There are less than 10 foreign-owned mining companies in Zimbabwe, so the existing mines do not provide much scope for many empowerment deals. The principle which we want to achieve is to share a bigger cake rather than a smaller cake.
The bulk of empowerment deals have to come out of the creation of new mines and these have to be partnerships between local people or consortiums and foreign investors who will bring the capital.
The Chamber of Mines has a subcommittee which is dealing with the issue of empowerment in the mining industry. Broadly speaking, the principles being discussed cover the various ways in which empowerment can be achieved and include equity ownership, assistance in the development of small-scale miners to graduate them into formal mines, sourcing goods and services from local suppliers, skills development, infrastructure development etc. Equity participation, while important, is not the only way to achieve empowerment in the mining industry and invariably equity holders are the last to get income from a business.
CM: Where does capacity utilisation stand in the sector as an industry and in sub-sectors?
VG: Out of say 88 mines in the country, only three are operating at near full capacity. Most minerals other than gold have been hit by low prices as a result of the slump in demand in response to the global economic crisis. In addition, the adverse economic conditions that existed in the country in the last few years where exporters were having to give up a part of their export earnings at subeconomic exchange rates contributed to the crisis that mines face today.
The two platinum mines and Murowa Diamonds are operating near full capacity. While platinum prices have somewhat recovered, the mines could do with higher prices as these will aid the cash flows for expansion. Platinum mining is still in its infancy and is in the expansion phase in Zimbabwe.
The base metal mines are virtually on a care and maintenance basis in response to the dramatic fall in global metal prices following the global economic crisis. As metal prices recover, we expect to see most of these mines coming back on line but it may not be too soon. The nickel and chrome mines have been hit hardest.
Virtually all gold mines had closed following the RBZ-induced crisis but most of them are slowly limping back into life and capacity utilisation is still less than 20%. However, it’s still a long way before we see capacity utilisation rising significantly. Over the last few years when the RBZ failed to pay miners their dues for gold sold, most mines stopped exploration and development and virtually closed. As you are aware, gold production peaked at 27 tonnes in 1999 but fell back to just over three tonnes in 2008. This is an indictment on the policies pursued by the RBZ with regards to gold. For production to get back to reasonable levels, gold producers will need to recapitalise and carry out exploration and development. This is not something which will happen overnight. I have already spoken about the difficulties being experienced in securing working capital and this is not making it any easier to restore production.
CM: Had it not been for the country’s political and economic crisis how much would have been realised from gold production and sales in the last decade?
VG: Estimates made in 1999 based on gold mines’ future plans suggested that with adequate investment in exploration and development, Zimbabwe was capable of producing up to 50 tonnes within a 10 to 15-year period. On the contrary, 10 years later we only produced just over three tonnes. I am optimistic that with a stable political and economic environment, we can still achieve these production levels over time.
CM: How much gold did Zimbabwe produce between January and May this year?
VG: The total gold production for the period 1 Jan to 15 June 2009 is 861kg with about 600 kg having come out of primary producers and the balance from the small-scale producers.
CM: Have gold miners been paid the outstanding payments (US$30 million) for gold deliveries in the past few years and what impact has the unavailability of these funds had on the gold sector on an operational level?
VG: The amounts owed by the RBZ are still outstanding and regrettably no progress has been made on this particular subject. Ultimately gold producers have been made forced lenders to the RBZ. We were promised gold bonds but to date none have been issued. But again even if they had been issued, would there have been a market to trade the bonds?
What is unfortunate is the fact that gold producers are struggling to secure working capital and yet they are owed a substantial amount by the RBZ. Ultimately the rate of recovery of production is being slowed down at a time when the nation needs to see production going up. The stock levels are either very low or non-existent and the restart of operations is a real challenge.
The effective interest rate supposedly being earned on the bonds is less than what gold producers are having to borrow from the banks.
CM: What initiatives has the chamber made to secure external funds to revive the gold sector after getting the nod from authorities to market gold directly to the international market?
VG: The new marketing arrangements where producers have control over the marketing of their gold means they can use the gold as security for borrowings. Afreximbank for instance has already offered gold loans to gold producers using future gold production as security. When we recommended to government the current marketing arrangements for gold, the securing of foreign loans by producers was one of the objectives.
The chamber has been talking to banks and we have seen some facilities being offered to individual companies. Ultimately, the discussion is between the banks and the individual producers.
The difficulty at the moment is most foreign financial institutions still regard Zimbabwe as a high risk country and are unwilling to play in this market. However, as confidence in the political and economic situation picks up, we should see more money flowing into the country.

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