News that a Malaysian passenger jet had crashed in the Ukraine on July 17, attributed in the Western media to its having been targeted by a surface-to-air missile, was met with horror the world over.
Though investigations are still ongoing over what and how it had happened, 298 innocent lives were lost.
Global financial markets were rattled triggering geo-political risk as this loss was the second disaster for Malaysia Airlines this year, following the mysterious disappearance of Flight MH370 in March, which vanished with 239 passengers and crew on board on its way from Kuala Lumpur to Beijing.
On the very same day, a local tragedy hit Zimplats, the country’s largest platinum miner. Zimplats announced that a major underground collapse occurred at one of its mines at the Ngezi site.
The collapse was triggered by the accelerated deterioration of ground conditions associated with a major geological shear and was reported to have affected nearly 50% of the current mining footprint at the Bimha Mine, the largest of Zimplats’ four mines.
Whilst there was no loss of life or damage to mobile equipment, the company upon recommendations from its ground monitoring equipment personnel, took a decision to abandon and permanently close approximately half of the mining footprint in areas where major falls of ground had occurred.
As a result, production from the Bimha Mine has been downscaled by 50% equating to 45 000 ounces of platinum in matte production. Preliminary estimates indicate that it will take 15 months to reach full production of 8 fleets and 50 months to fully recover (FY19).
Whereas financial markets locally were unmoved due to lack of depth, the event may adversely affect many facets of the economy. Firstly, immediate partial closure of Bimha Mine entails low output and revenue for Zimplats.
This is a huge blow to the company’s growth prospects and comes at a time when they were trying to ramp up production from other mines.
In its half year to December 2013 results and sales volumes had increased by 62% from 70 225 ounces to 113 876 ounces.
The high growth in sales was due to the commissioning of the second concentrator module at Ngezi in April 2013. Thus second half statistics expected to reflect the same double digit growth trends will not now do so due to this unforeseen event. Revenue projections are highly likely to drop significantly impacting heavily on profitability.
Furthermore, with Zimplats being a major player in the platinum sector, the decline in output will most likely see the mining sector failing to meet its targeted output.
In the 2014 National Budget, platinum output was estimated at 14 000 kgs compared with the 2013 estimate of 13 000kgs.
Thus attainment of the target will most likely be a colossal task coming at a time when most miners do not have the long term capital to boost their production levels. In addition, with the move by the government to force platinum players to build an estimated +US$2billion refinery for value addition, increasing output levels from the current levels may be a tall order.
The overall sector target of 11,4% may consequently become unreachable due to a combination of the possible decline in platinum output and other factors.
Tight liquidity is one of the major factors. This has affected most miners from accessing long term affordable finance for such a capital intensive industry.
Also foreign capital inflows have been timid due to the indigenisation regulations. The closure of Bimha mine subsequently worsens the scenario as platinum is a strategic resource especially when one takes into account the fact that Zimbabwe is the third largest producer after South Africa and Russia.
This could be compounded by relatively soft prices compared to prior years. It is apparent that the mining sector growth target may possibly be unattainable weighing down on the overall 6,1% Ministry of Finance growth target for the economy.
With revenue collections by Zimbabwe Revenue Authority (Zimra) on behalf of government gradually falling due to weakness in aggregate demand, the tragedy at Zimplats only worsens state coffers. Recent statistics revealed that net revenue collections for the first half of 2014 amounted to US$1,72billion against a target of US$1,74billion. This resulted in a negative variance of 1%.
The anticipated low platinum output may subsequently lead to reduced country export earnings as Zimplats is among the major contributors to the country’s export earnings.
Also, contributions by the firm in terms of royalties and most importantly corporate tax may also decline in line with reduced activity up until the 50 months’ lapse production is over. Such a scenario will only further burden the government.
For the six months to December 2013, payment to government by Zimplats in the form of income tax, royalties, customs duties and pay as you earn totalled a solid US$63 million, reflecting its huge contribution in the economy.
Overall, whilst there were no lives lost due to the mine collapse, things can only get worse for the economy. Export earnings, especially if production is not ramped up by other players, may well go down.
The sectors’ projected output target and mining sector growth as a whole of 14 000kgs and 11,4%, respectively, will become deferred goals.
There is need for policymakers to capacitate other players in the long run as a way of reducing concentration risk associated with such tragic events.