Undermined by forex crisis, Zimbabwe gold producers warn of mine closures

Zimbabwe's mines will invest more in 2023, but concerns remain over policy and costs

Zimbabwe’s gold miners have warned that they may suspend operations if they are not allowed to keep a larger share of their export earnings, as currency volatility hits an industry that Government is banking on for economic recovery.

Large scale gold producers are allowed to retain 30% of their export proceeds, but “these retention thresholds are no longer adequate to cover production costs, the majority of which have become dollarized”, the mines said in a statement after a Wednesday meeting of top producers.

Suppliers of key inputs such as processing chemicals, spares and other equipment now demand foreign currency, and the few that still accept local RTGS payments have raised their prices six fold.

“If this situation is not addressed, the majority of gold mining houses, whose going concern (status) has been undermined, may find it impossible to continue in operation,” the mines said.

“In order to restore viability, we are proposing an upward revision of the foreign currency allocation to mineral producers in line with the actual US dollar costs that are obtaining in the market.”

At the meeting, gold producers resolved to press for the liberalisation of gold marketing, allowing producers to sell their own gold and retain all their earnings.

Zimbabwe produced 17 tonnes of gold in the first half of 2018, valued at US$715 million, and was on course to beat the 2017 output of 24.8 tonnes and this year’s 30 tonne target. But a deepening foreign currency shortage has left miners unable to keep their mines running efficiently and stalled expansion plans.

Government has plied small scale producers with cheap credit, some of it coming from a US$150 million gold development fund. Informal miners, many of whom are part of networks connected to politicians, take away 70% of their earnings in US dollars in cash, while the rest is paid in bond notes. Small scale producers also want Government to allow them to retain 100% of their US dollar earnings. Government claims small-scale miners account for 60% of gold output.

Zim quarterly gold output trends: 2017-2018 (Fidelity, Min of Mines; Chamber of Mines)

A mining executive said Sunday that by insisting on allocating miners just 30% of what they earn, “Government is in reality stealing 70% of our money”.

The executive’s remarks reflect the frustration that has been building in the industry. Gold producers sell their gold to Reserve Bank of Zimbabwe (RBZ) subsidiary Fidelity Printers & Refiners, which has sole right to sell the gold abroad. Fidelity is then required to pay producers 30% of the proceeds. Miners then have to queue at RBZ for forex allocations to pay for critical imports. These allocations have since slowed down, with some producers going for months without receiving any allocations.

Earlier in October, RioZim announced it could take RBZ to court over its failure to pay the 30% forex earnings due to the gold producer. “The situation is thus unsustainable and prohibits the Company’s ability to operate viably and maintain its production,” the company said, adding it was only receiving half of its allocation.
RioZim says its plan to build a new Biological Oxidation Plant at Cam & Motor Mine was now at risk.

“There are other similar capex projects which are absolutely critical for the Company to sustain and grow its current production which have not been triggered as a result of foreign currency not being available.”

With mines only retaining 30% of their earnings while suppliers raise prices and demand forex payments, Government’s efforts to attract new investment into the sector are under threat, as is a bold plan to raise a US$1 billion bond in London to recapitalise the industry.

Investor interest in Zimbabwean mining was strong in the first half of 2018. At least 150 potential buyers have placed bids for the mines, run by the State-owned Zimbabwe Mining Development Corporation, which the Government recently put on the market as part of its privatisation drive.

In April, London-listed Vast Resources, through its interest in Dallaglio Investments, bought 95% of Eureka, a gold mine near Guruve that had been closed down for close to a decade. Boosted by the repeal of the Indigenisation Act, Canadian mining group Caledonia Mining Corporation in August raised its interest in Blanket Mine and pledged further investment to expand production.

The country has already been struggling to turn most pledges of new mining investment into a reality, as investors remained sceptical of the post-election policy environment and the lack of guarantees on repatriating their earnings. Sticking to the 30% retention in the current environment makes Zimbabwe even less attractive for investment.

It will also make it harder for Zimbabwe to succeed in its plan to raise money offshore to refurbish mines. Mines Minister Winston Chitando has been holding meetings with advisors on the London Stock Exchange on raising US$1 billion on the London bond market, a bid that was already bold given Zimbabwe’s long isolation from global capital markets.

Zimbabwe needs up to $11 billion over the next five years to modernise plants and bring production to capacity, according to the Chamber of Mines. The mining industry requires US$400 million in 2018 just to sustain operations, Chamber officials say.

Zimbabwe forecasts mining output growth of 26 percent in 2018 and a further 16 percent in 2019.