Other African countries recorded strong economic growth spurred by rising commodity prices following high demand particularly from China and India. For example, Botswana’s economy has benefited immensely from diamond exports. It has transformed from being one of the poorest countries in the world when it got independent in 1966 to a middle-income country. In contrast Zimbabwe’s mining sector has shrunk enormously in tandem with the economy. It has remained in the doldrums and as a result the country could not fully benefit from rising commodity prices.
The mining sector plays a significant part in the economy. Currently it contributes about 4% of GDP and accounts for 50% of total export earnings. Despite the fact that the mining sector has experienced decline since 2000, the rate of decline has been slower than other sectors due to the high demand for minerals internationally prior to the global financial crisis.
The operating environment prior to dollarisation had been adverse both from the perspective of current players and potential investors. The exchange rate used to convert mineral export proceeds failed to reflect economic fundamentals. For this reason miners did not fully benefit from the, hitherto, firm international prices of commodities. Foreign exchange surrender requirements by the Reserve Bank of Zimbabwe (RBZ) were also another constraint. Above this, gold producers were not being paid for gold deliveries to the sole purchaser, RBZ. Even after the introduction of multi-currencies, the sector is still owed approximately US$30 million by the central bank. The above factors led to a number of mining houses closing operations or going into care and maintenance.
Legislation then and currently in the process of being amended is still a contentious issue, which if not timeously resolved will continue to scare away potential investors. Ironically in the 1990s, Zimbabwe was viewed as the country that had the best mining laws in Africa which led to the huge growth in the sector in terms of the number of mines. Currently, because of proposals in the Indigenisation Act, the Independent International Frazer Institute research survey ranked Zimbabwe number 65 out of 71 mining jurisdictions on its policy potential index. The Act stipulates that all companies must be 51% owned by indigenous black Zimbabweans. Furthermore, the Mines and Minerals Act in its current form is also unfriendly to foreign owners in mining businesses.
Whilst it is commendable that the government liberalised operations in the mining sector, the unclear legislation is slowing down investment. The sector remains severely undercapitalised, a factor which is hampering production. Bindura, the nickel producer which closed all its mines last year disclosed that they are in need of about US$150 million in order to resume operations. Trojan Nickel Mine which is the flagship of the group requires approximately US$20 million to start running. Being non-operational, the company has missed out on the on-going rally in commodity prices which has seen the price of nickel reaching US$19 000 per tonne. In its half-year results to June 2009, RioZim reported a loss of US$7,4 million owing to a lack of funding to increase production levels. The company held an EGM where it was seeking shareholder approval to raise US$50 million through a private placement. RioZim has a number of minerals within its stable which include gold and diamonds and its future prospects should be bright if it can get adequate funding. Currently gold is trading at an all time high of about US$1060 an ounce.
Though Hwange Colliery Company managed to push through a small profit, the company revealed that capacity utilization was low owing to the breakdown of mining and processing equipment as well as the dragline, a factor attributed to aging. It is without doubt that the mining industry has significant growth potential given that there has been very little mineral exploration during the past ten years. Revival of the mining sector critically depends on recapitalization through new investment. The major hindrance to recapitalisation even for those mining houses that have foreign shareholders is the unresolved legislation laws.
Unless this is sorted out as a matter of urgency recapitalisation will take quite a while. The government could possibly start by removing excessive administrative discretion from its mining laws like what Ghana and Botswana did. Ghana’s mining laws had been depoliticised and Botswana’s mining laws have always been clear and transparent. A key feature of the Botswana Mines and Minerals Act is that its licensing process is “predictable and automatic”, with the Minister of Mines having little administrative discretion. The Botswana laws also feature a new retention licence that accommodates people who discovered a resource but could not immediately mine it economically. The ‘use it or lose it policy’ being proposed locally could also scare away investors unless those who fail to develop mining claims within a stipulated time period are made to pay more licence fees.
Ghana and Botswana are proving that countries could still have sound social reform and state participation in the mining industry. Ghana has removed all discretion, so that if licence requirements are met, the licence is awarded with no trouble. Ghana provides automatic international arbitration for the resolution of all international investment disputes; an attractive clause for investors.
If the sector is to quickly recover there is need to have mining laws that balance the interests of private investors, government, communities and the environment in a way that promotes the exploitation of resources for the benefit of all.
By Evonia Muzondo