‘Mining cost structure is unsustainably high’

THE mining sector is facing a plethora of problems ranging from power outages to foreign currency shortages and high cost of production. This has resulted in the decline of output in the first half of the year of key minerals such as gold. Zimbabwe Independent business reporter Kudzai Kuwaza (KK) caught up with the immediate past president of the Chamber of Mines and Bindura Nickel Corporation managing director Batirai Manhando (BM, pictured) to discuss, among other issues, risks facing the mining sector as well as the proposal by power utility Zesa Holdings for miners to pay its electricity tariff in foreign currency. Below are excerpts of the interview:

KK: How would you describe your term of office as president of the Chamber of Mines?

BM: I am excited to have driven the interests of the mining industry for the past two years. With the support of the Chamber’s Executive Committee and our Secretariat led by Mr Isaac Kwesu, we managed to achieve significant milestones in our engagement with Government for a conducive operating environment for the mining industry. Key among these achievements are:

Increase in foreign exchange retention thresholds across all minerals;

Deferment of export tax on unbeneficiated platinum;

Exemption of the mining sector from complying with the indigenisation law;

Reduction in royalty for gold; and

Reduction in the electricity tariff for gold producers.

Whilst there remain some outstanding matters that need finalisation, I am glad that there is convergence of views between government and the mining industry and I am confident that the new president will be able to conclude the matters having driven the matters with her in the Chamber Presidium during my tenure.

KK: What are the challenges you faced during your tenure?

BM: The deteriorating macro-economic situation particularly during the last 12 months of the year presented a big challenge to the mining industry and our engagement efforts with the authorities.

Rising inflation and inadequate foreign exchange allocations, which characterised the past 12 months continued to undermine viability of mineral producers and thus the need to continuously engage government for support to cushion the mining industry.

Power outages have also emerged significantly further worsening the viability situation in the mining industry.

These matters indeed will continue to worry the mining industry and the new leadership.

KK: What has been the impact of power outages on the sector?

BM: The mining industry requires uninterrupted power supply because it is a round the clock business. The current situation where on average the mining sector is getting four days of power per week has resulted in widespread output losses.

Production statistics for the first four months of 2019 show that all key minerals recorded output declines of not less than 10% compared to the same period in 2018 due to power outages. The use of diesel generators, which are expensive to run, has led to an increase in the cost of production impacting negatively on the viability of the mining industry.

The immediate implication of this is a decline in foreign exchange earnings from the mining industry and if the situation is not resolved, we will witness some marginal mines closing their operations in the next few months.

KK: Zesa has proposed that the mining sector pay for electricity in forex. What is your view?

BM: The mining industry is not averse to the idea of paying electricity tariffs in foreign exchange. The only challenge is that the current retention thresholds as agreed with RBZ covers procurement of inputs for production excluding electricity and assumes power is paid in RTGS dollars. Thus, any further demand for foreign exchange from the mining industry should be compensated by a commensurate increase in retention thresholds.

Meanwhile, we are engaging RBZ, Ministry of Energy and Zesa to resolve the matter and support Zesa in meeting their foreign obligations.

KK: We have seen a decline of key minerals in the first quarter of 2019. What were the major factors behind the decline?

BM: All key minerals recorded output declines during the first four months of 2019 compared to same period in 2018. This subdued performance was largely on the back of the following, among other key constraints:

Acute power outages;

Inadequate foreign exchange allocations; and

A high cost structure.

KK: What is the outlook for the second quarter in terms of mineral production?

BM: The outlook for the second quarter and indeed for 2019 in general is anchored on successful resolution of the key constraints that I alluded to in my previous submission.

KK: What progress has been made in talks with government to increase the foreign currency threshold in the sector?

BM: Our engagement with government has seen retention thresholds being increased to 55% for gold and 50% for all other minerals. We are hopeful that government and RBZ will continue to review these thresholds in line with the foreign exchange requirements for the mining industry.

KK: Wages have become a major issue with employees in the sector as they are demanding another increment over and above the agreed 80% increment agreed for 2019. Does the sector have the capacity to accommodate the mine workers demand for an increment?

BM: Our industry has always been conscious of its social footprint and approaches the process of wage negotiations with a receptive mind-set to ensure that the gains made over the past few years in terms of skills development, career growth paths and support for education, health and housing initiatives are not sacrificed in the interest of short-term gains.

The mining industry has reviewed the minimum wage rate for its employees a record 14 times in nine years since 2009, resulting in a cumulative wage increase of around 780% between 2009 and 2018.

Labour costs have remained a huge cost driver in the mining industry, constituting around 34% of total revenue in the sector. In this regard, any upward adjustment to the wage rate will have serious consequences on the cost, and hence viability of mining companies.

With most companies making losses and some having already been placed under care and maintenance, there is growing concern that there will be some company closures if the cost structure remains unsustainably high.

We will approach this matter with the need to strike a delicate balance between remaining in business as well as cushioning our workers and retaining skills.