One year on: Zimbabwean miners’ confidence falls on deepening forex hole

A year after their confidence soared after the change of leadership, morale among Zimbabwe’s mining executives has waned as they fret over deepening foreign currency shortages and a Government that appears not to have a quick solution to the crisis.

The Mining Business Confidence Index (MBCI), used by the Chamber of Mines to gauge sentiment among its members, has dropped from 21.9% this time last year to 8%. The index scale ranges from -100 to +100, with the lowest score representing least level of confidence and the biggest score representing the highest.

Mining executives are “slightly more confident about the mining business prospects for 2019. Despite, being positive, the index for 2019 is somewhat lower than that recorded for 2018” due to weakened sentiment on political risk, the Chamber of Mines said in its State of Mining Report for 2018, released on Monday.

Key confidence indicators

  • The economic prospects confidence indicator for 2019 is -10. This means that mining executives are less confident about economic prospects in 2019 than they were this time last year. This indicator has deteriorated from +4 recorded for 2018. Some 63% of surveyed executives said they were pessimistic about economic prospects and expect the economy to contract, while 37% anticipate marginal economic growth in 2019.
  • Only 51% of executives expect to make a profit in 2019; 39% expect a drop while the rest see profits remaining flat.
  • On growth prospects, the index is +25, which means that most executives (52%) are expecting growth in the industry in 2019. Only 13% see a contraction.
  • On the key measure of investment plans, the index is +10, which is far lower than the +50 of last year. This shows that miners are pessimistic about their plans for new investment in 2019.

Last November, in the immediate aftermath of the coup that removed Robert Mugabe from power, confidence among mining executives on the future of their industry shot up. The MBCI rose sharply from minus 6.6% in 2016 to 21.9% after executives were surveyed in the days that followed Mugabe’s ouster. Under Mugabe, known for his anti-investment laws, confidence indices were consistently in negative territory.

The 21.9% recorded late last year was the highest level of mine confidence since the Chamber started the index, reflecting the hopes that swept across the economy following Mugabe’s ouster. Some 90% of mining executives, after the change of Government, had said they were “optimistic that the new Government will endeavour to resolve all legislative and policy bottlenecks affecting the mining industry”.

In the months that followed, Zimbabwe’s mining resources attracted strong investor interest, and a mining investment conference in Harare held in February was oversubscribed, as potential investors flocked in to show their interest.

However, much of that confidence has waned after a year in which the foreign currency crisis worsened and a disputed election hurt the prospects of new investment. Zimbabwe has been unable to turn much of that interest into concrete projects.

While the confidence index is still in positive territory, and still higher than the minus 6% of 2016, the 13.9 percentage point drop over the past 12 months should raise alarm for President Emmerson Mnangagwa, who came in riding on promises to grow investment by ending years of poor and unstable policies under his predecessor.

While mines cheered the repeal of the indigenisation laws, which has seen some foreign miners such as Caledonia and Prospect Resources increasing their investments, the latest confidence index shows that executives do not believe that Mnangagwa has gone as far as they expected on economic reforms.

According to the survey, the biggest worries for mining companies are foreign currency shortages, the predictability and consistency of policy, plus the prospects for economic growth and profitability.

There are some positives from the latest state of the mining report.

Diamond output is projected at 3.5 million carats in 2018, compared to 1.6 million carats in 2017. Further growth is seen in 2019, due largely to an anticipated increase in spending by the Zimbabwe Consolidated Diamond Company (ZCDC) on exploration. The company spent over $18 million in exploration in 2018, and plans to spend an additional $20 million in 2019.

“In 2019, diamond output is expected at 4.5 million carats, benefiting from capital injections over the past 12 months,” the report says.

The Chamber of Mines, overall, expects output to grow just 5% across all minerals this year.

Gold output is expected to increase to 34 tonnes in 2018, from 26.4 tonnes in 2017. But gold producers warn that continued growth will only happen if the industry gets enough foreign currency, low cost inputs and capital to ramp up output. In September, RioZim suspended operations at its three gold mines due to foreign currency shortages, but has since reopened them after central bank agreed to raise the amount of US dollars the company can keep from its exports.

The Reserve Bank of Zimbabwe recently raised export earnings retention from 30% to 55%. At the launch of the report, Deputy Mines Minister Polite Kambamura said mines might soon be allowed to keep 70% of their proceeds.

One of the biggest concerns for miners is raising capital for their projects in Zimbabwe. According to the latest report, the platinum industry needs $7 billion to sustain and grow production over the next five years. Platinum producers also want lower power charges and a cut on fees to allow them to grow production.