Mines to keep more earnings, but forex scheme will keep new investors away

Gold miners will now retain 55% of their export earnings, up from 30%, after a deal with central bank. The Reserve Bank of Zimbabwe (RBZ) has also doubled the export incentive to mines to 20% of the value of their exports.

But this will only bring temporary relief, and may not be enough to attract the level of foreign investment in mining that Zimbabwe has been looking for. Miners wanted to be allowed to retain 70%, as a step towards the gradual phasing out of the retention system altogether. Government rejected this.

When the Zimbabwe Government put 17 of its mines up for sale earlier this year, a total of 151 potential buyers put in their bids. The mines may be old, but the assets they sit on are a major attraction.

Zimbabwe has an unusual selling point; the fact that it has seen scant investment over the past 20 years means it is ripe for new exploration. Other regional peers are either mined out or, like in Tanzania, hobbled by uncertain regulation. While other economies are enacting tougher laws, Zimbabwe is relaxing hers desperate for investment as it plays catch up. Key to this was the repeal of the indigenisation law.

But industry players are telling the Government to face up to reality; no quality investment will be realised in mining as long as the current foreign currency retention regime remains.

Government ended all controls on gold trade when the economy moved to US dollars in 2009. Gold miners could sell their own gold and keep their own money, as long as they first declared all their gold output to RBZ’s gold refinery, Fidelity. This move allowed at least a dozen mines that had suspended operations at the height of the currency crisis in 2008 to reopen.

But, desperate for cash, the Government soon restored the retention scheme. It was ordered that mines could only keep 30% of their earnings.

For an investor looking at the numbers from the outside, it all does not make sense. It means they will not realise what is due to them. Mines have been losing money to the forex retention system, as the local RTGS balances lost value against the US dollar.

At the current gold price of $1,206/oz, 55% of a mine’s earnings translate to US$663.30 per ounce. The balance, $542.70, if converted to USD at 1:3, is US$180.90. This means a mine will get US$844, or 70% of the actual gold price.

The 20% incentive, paid in local money, adds a cushion, bringing the price per ounce to US$924.60/oz, which is still short of the market price.

Following the revision of the retention thresholds, RioZim is now reopening its three gold mines, which suspended operations due to RBZ’s failure to remit the mine its foreign currency.

But these are the reports that prospective investors will look at. They will look at what they need to import to run a mine efficiently. Currently, that retention scheme makes it almost impossible to run a mine profitably over a sustained period.

Because of the decimation of local industry, the bulk of inputs is imported. Zimbabwean companies that used to supply chemicals and explosives have either shut down, or scaled down to a level unable to sate demand.

A gold mine needs chemicals such as cyanide, caustic soda, spares, sulfuric acid, and a range of solvents used to strip minerals from ore. Zimbabwean mines spend US$1250 per tonne to import mill balls, which are used to crush ore for processing.  These are not manufactured locally.

Explosives are also now imported. GML, based in Kwekwe, previously known as Dyno Nobel, cannot meet the demand in the country. Another company, Intrachem, is in the process of setting up a plant, in partnership with a US firm Austin Powder.

Zimbabwe’s mines are old, with some built over 70 years ago. They need to retool, and the Government is trying to secure a $1 billion bond in London to held do that. In total, the country needs up to $11 billion over the next five years to modernise plants and bring production to capacity, according to the Chamber of Mines.

If investors are to buy Zimbabwe mining bonds, they will need to be sure that the mines will be profitable. Likewise, any new investor into Zimbabwean resources will need to be guaranteed that they will get their money’s worth.

As it is, a prospective investor will ask existing miners whether they are getting full value for their investment in Zimbabwe. As long as they have to surrender their earnings to Government, while earning less than what they could earn elsewhere off the ounce, their answer to that will be obvious. And this is what will determine whether the much hoped for new investment in mining will happen or not.