News from the Mining Sector

The Chamber of Mines recently held its Annual General Meeting. The Chamber President, Winston Chitando, who is also the CEO of Mimosa Mining Co, one of the country’s three major platinum producers, criticised unfriendly Government policies, including substantial increases in mining fees and the indigenisation regulations, as having stifled growth in the mining sector. However he also said that there is an opportunity for the development of a world-class mineral development policy that will guide the formulation of legislation, fiscal measures and other interventions to help the continued recovery of the mining sector. The mining sector will be making submissions to the Government on this.

The Minister of Mines and Mining Development, Hon Obert Mpofu, told the meeting that amendments to the existing Mines and Minerals Act will shortly be published. These, he said, will be designed to promote investment and sustainable development in the sector.

The Chamber of Mines has also announced the formation of a sub-sector association, the Platinum Producers’ Association (PPA), which will be specifically looking at the question of beneficiation of platinum minerals in Zimbabwe, to add value inside the country. The question of a platinum refinery being established in Zimbabwe has been raised on a number of occasions but current production levels will have to be increased to make such a project viable. There is also a clear reluctance on the part of foreign investors in the platinum sector, such as Impala Platinum, to consider investing in such a project until outstanding indigenisation issues have been finally resolved.

The demand for beneficiation inside the country is in line with a current international trend of resource nationalism, with many countries, Indonesia being one of the latest, claiming that mineral resources are national assets which should provide maximum benefit to domestic economies through beneficiation, taxation, increased local ownership or similar means. Resource nationalism has popular appeal for populist politicians.

Hwange Colliery expects to earn US$ 5 million per month from the export of coking coal and intends to use contracted port terminal space in Maputo for these exports. The National Railways of Zimbabwe is now reported to be operating a daily train to Maputo to carry the coking coal from Hwange to the port.

Government has announced that three joint venture companies between foreign and local investors have been shortlisted to resume mining operations at the Kamativi tin and tanatalite mine in north-western Zimbabwe. Kamativi closed in the mid-1990s as a result of depressed world prices for tin.

More Business and Economic News Snippets

The investment by Essar Africa Holdings in Ziscosteel and iron ore mining in Zimbabwe remains on hold due, reportedly, to disagreements between the Ministry of Mines and Mining Development and the Ministry of Industry of Commerce over the release of mineral rights to Essar. The major stumbling block appears to be large iron ore deposits in the south of the country, to which a former Ziscosteel employee has also laid claim.

Hwange Colliery Company has announced that it has established markets for coking coal in Europe and will be exporting 40 000 tonnes per month through Maputo in Mozambique. The company has also said it has confirmed markets in the Democratic Republic of the Congo and India. The biggest challenge remaining to this is the ability of the National Railways of Zimbabwe to move the coal.

Zimbabwe’s international debt problem remains of concern to the IMF, which is due to send its annual Article IV consultation team to Zimbabwe shortly. At the end of 2010 external debt stood at 118% of GDP, of which arrears made up 80% of GDP. While the economy has expanded, so has the external debt, which now equates to 103% of GDP – not as bad as Greece but more than enough for guaranteed economic stability in Zimbabwe. Other concerns expressed by the IMF are reported to include financial sector vulnerabilities, liquidity, high wage bills, ghost workers in the public sector and indigenisation.

Work on refurbishing the road from Plumtree on the Botswana border with Mutare on the Mozambique border was expected to start at the end of last month. The road links Plumtree to Bulawayo, the Midlands, Harare and then to Mutare. It is the first of two major road projects planned for Zimbabwe, the other being the Northern Corridor road from Beit Bridge on the border with South Africa through Harare to Chirundu on the Zambian border. The Plumtree-Mutare road is being financed through the Development Bank of Southern Africa and the work is being carried out by a South African contractor. The project is expected to be completed within 3 years at a cost of US$ 206 million.

The Zimbabwe International Trade Fair took place in Bulawayo at the end of April. The biggest foreign exhibitor was China, with 200 participants from 32 companies. South Africa was the second largest exhibitor and the South African pavilion was officially launched by the South African Deputy Minister of Trade and Industry. Other countries exhibiting at the Fair included Brazil, Kenya, Indonesia, Germany, Poland and Italy. However both Russia and India were absent. One press report, from the BBC, has suggested that this was a deliberate boycott “in protest against the country’s policy of taking control of foreign companies”.

Yet More on Indigenisation

A recent development in the on-going indigenisation saga has been a proposal by the Indigenisation Minister, Hon Saviour Kasukuwere, for a levy to raise funds to finance the purchase of shares in foreign-owned companies. How such a levy would work has not been made clear. The Indigenisation and Empowerment Act does make provision for the imposition of such levies, but they require the approval of the Minister of Finance, presently Hon Tendai Biti. Minister Biti clearly has no intention of doing anything about this, to the chagrin of Minister Kasukuwere, who has accused him of sabotaging the indigenisation drive. Minister Biti told a public policy group in the US, the Atlantic Centre, last month that the policy of acquiring 51% of foreign-owned businesses should be reviewed and that the best way to empower people at the present time is to expand the economy to create as many sectors as possible.

The Prime Minister, Hon Morgan Tsvangirai, has also emphasised that Minister Kasukuwere has no power in terms of the Indigenisation and Empowerment Act to unilaterally nationalise private businesses.

African Development Bank Monthly Economic Review – April 2012

In its latest monthly review of economic issues in Zimbabwe, the African Development Bank has focused in particular on Zimbabwe’s continuing negative trade balance. The Bank emphasises the need for Zimbabwe to develop policy strategies to incentivise value addition for exports. For the period 1 January – 2 March 2012 the value of export shipments increased by 6,2% over the same period the previous year. But it is the mining sector that is driving this. Mining contributed over 70% of these exports and the growth in mining sector exports grew by 23,4% from the first two month period on 2011 to the same period in 2012. In other words, non-mining exports are in relative decline. Tobacco exports declined by 42,6% and horticulture exports declined by two-thirds over the same period. Manufacturing exports increased by nearly 57%, but only contributed 8,1% of total exports. The Bank comments that this demonstrates limited value addition by local industries.

On the agriculture sector, the Bank noted that some 45% of the maize planted this season was written off due to irregular rainfall and drought in parts of the country. This is expected to lead to a deficit of one million tonnes in the country’s maize requirements for the year. With maize the biggest problem remains not so much drought but low productivity and low yields. The average yield for maize grown in Zimbabwe remains at about 750 kg per hectare. Good farmers do achieve yields in excess of 5 tonnes per hectare and some achieve yields as high as 10 – 13 tonnes per hectare. But the average yield remains appallingly low – for a number of reasons including reliance on inputs supplied by Government which are usually late or insufficient and lack of technical and extension services, as well as poor weather. If the average yield could merely be doubled to 1,5 tonnes per hectare, Zimbabwe would be easily self-sufficient in maize.

The tobacco sector is doing well this season, with 36,4 million kg having been sold through the auction floors at an average price of US$ 3,70 per kg as at the end of March 2012, compared to 30,1 million kg at an average price of US$ 3,03 per kg in the same period the previous year.

Gold deliveries grew at an average rate of 5,8% for the first three months of 2012 to reach a cumulative total of 3 127 kg. This represents an increase of 21,6% over the same period the previous year. The Bank attributes this partly to the more positive macroeconomic outlook in the country.

Interest rates for borrowing remain high in the financial sector. The commercial bank weighted average base lending rate over the period February 2011 – February 2012 was 12,1% per annum. The average base lending rate from merchant banks over the same period was 20,4%. The average rate of interest paid on 3 month deposits over the same period was 8,8%, reflecting the shortage of long-term deposits in the banking system. The savings deposit rate remained low at 2,3%. Banking sector deposits reached US$ 3,38 billion at the end of February 2012, of which long-term deposits made up only 8,8%. 59,6% of deposits were demand deposits. The average bank loan-to-deposit ration declined to 82,2% in February 2012, compared to a peak of 88,9% two monthe previously. As the major international banks in Zimbabwe tend to be cautious in their lending, this would indicate that there are banks in Zimbabwe with loan-to-deposit ratios in excess of 100% – not a healthy position to be in!

The Bank noted that Zimbabwe is the third largest country in respect of tourism receipts in Southern Africa, after South Africa and Botswana. As such the country needs to increase its infrastructure and tourism products.

Business and Economic News Snippets

The role in the Zimbabwe economy of remittances from Zimbabweans living outside the country has been highlighted by a recent report. The report, published by an organisation called People Against Suffering, Oppression and Poverty, estimates that remittances from South Africa to Zimbabwe in 2011 totalled around US$ 800 million. This conforms to the estimate in a Working Paper published by the UNDP that the value of total annual remittances to Zimbabwe from all Zimbabwean migrants abroad was US$ 1,4 billion annually. These figures are higher than estimates made by the IMF and the World Bank and could suggest that remittances play a more significant role in the national economy than generally thought to be the case. Many of the remittances are made through informal channels.

Nestle has announced its commitment to continue growing its business in Zimbabwe. An Nestle executive said that Zimbabwe is number threein Africa in th company’s core business and number two on nutrition. The company has announced plans to invest US$ 14 million on both commercial and small-scale dairy farming in Zimbabwe over the next seven years.

The Tobacco Industry and Marketing Board has announced that tobacco sales at the auction floors to date have increased this year in terms of both volume and value. Volumes have increased by 20,9% to 38,1 million kg while the average selling price has increased from US$ 3,02 per kg to US$ 3,72 per kg.

Tourism is being increasingly seen as a potentially valuable sector of the Zimbabwean economy. The Minister of Tourism, Hon Walter Mzembi, believes that tourism can contribute 15% of Zimbabwe’s GDP over the next few years. The Head of the UK’s Department for International Development office in Zimbabwe, Dave Fish, has described tourism as a key area of “massive potential” in the country’s economic recovery. A regional eco-tourism consultant has described Zimbabwe as being ahead of South Africa in hospitality, particularly in the lodges sub-sector. The proviso is, as always, that political stability is maintained and that there is no increase in the level of political violence before the next elections.

Positive Developments in the Mining Sector

Despite the ongoing issue of indigenisation, there has been some positive news from the mining sector recently. Mwana Africa, which is quoted on the Alternative Investment Market (AIM) in London and which holds a 53% shareholding in Bindura Nickel Corporation, has announced that it will raise US$ 35 million through a share offer that will bring China International Mining Group Corporation in as a shareholder. Part of the funds raised will be used to re-start operations at BNC’s Trojan Nickel Mine and concentrator in Bindura, which were put on care and maintenance in 2008.

Blanket Mine, owned by Caledonia Mining Corporation, announced a seventh successive increase in quarterly production for the fourth quarter of 2011. Production increased by 8% in volume terms. Turnover for the year increased by 150% to US$ 55,7 million and gross profit increased by 358% to US$ 29,1 million.

Metallon Gold Zimbabwe, a subsidiary of Metgold Ltd, which is South African owned but domiciled in the UK, has announced plans to restart operations at its How Mine South open pit mine outside Bulawayo.

It has been reported that there are currently 19 coal exploration projects in progress in Zimbabwe. However an industry expert has told a Zimbabwe coal conference that the future of the coal mining industry in Zimbabwe will depend on the construction of more thermal power stations to utilise low grades of coal.

Apart from indigenisation, Government has been pressing the platinum mines in Zimbabwe to establish a refinery in the country to process the mineral rather than send it to South Africa for processing. The cost is estimated to be US$ 2 billion. Zimplats has confirmed that it will commit to establishing a refinery “once issues to do with the indigenisation policy” are finalised. It has already set aside US$ 500 million for the project. Platinum production in Zimbabwe will have to be increased to make a refinery viable and both Zimplats and Mimosa have announced plans to increase production.

Gold production in Zimbabwe in 2011 was 12,8 tonnes. Platinum was 10,8 tonnes, palladium 8,2 tonnes, nickel 8 000 tonnes and chrome 600 000 tonnes. Coal production declined slightly to 2,56 million tonnes. Gold production for 2012 is forecast to remain unchanged at 13 tonnes. Mineral exports in 2011 totalled US$ 2,1 billion and are forecast to grow to US$ 2,6 billion in 2012. In value terms platinum accounted for 41,1% of exports, gold 38%, chrome 13,3%, coal 7,7% and diamonds 3,4%, although that last figure is certainly understated.

Business and Economic News Snippets

Difficulties continue to delay the conclusion of Essar Africa’s investment in Ziscosteel and iron ore mining. President Mugabe is reported to be concerned over the matter and to have instructed ministers responsible to find a quick resolution to outstanding problems. One problem seems to be that some of the iron ore mining claims due to be transferred to Essar are being claimed by local individuals who are seeking to confirm their claims in the courts in Zimbabwe. Essar has been reported to be frustrated over the delays and even to be on the point of cancelling the investment. That, however, would seem unlikely to be allowed to happen, given Government’s interest in getting steel production under way again and Essar’s interest in Zimbabwe’s iron ore reserves.

It has been reported that Government has finalised a loan arrangement with a Chinese contractor for the construction of a water pipeline from the Zambezi River to Bulawayo at a cost of US$ 900 million. The Matabeleland Zambezi Water Project (MZWP) was first proposed 100 years ago but has never been implemented. The objective is to bring water from the Zambezi River to the low rainfall areas of Bulawayo and its surrounds. Successful completion of the project, the first stage of which will take four years, will have a significant impact on economic activity in the areas of agriculture, tourism, mining and manufacturing in Matabeleland.

Zimbabwe is reported to have short-listed eleven bidders for the expansion of the Hwange and Kariba South power generation plants. These two projects are expected to increase the country’s power generation capacity by 900 MW. Tenders are expected to be awarded by the end of the third quarter of the year.

The Ministry of Finance has published the “Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy” (ZAADDS) through which it hopes to engage its international creditors in reducing its debt and clearing its debt arrears. Zimbabwe’s external debt is reported to be US$ 9,1 billion, or approximately 90% of estimated GDP for 2011. The country’s creditors include the World Bank, the African Development Bank and the IMF with respectively 45%, 21% and 22% of the country’s multilateral debt. US$ 3,3 billion is owed to the Paris Club, making up 85% of the country’s bilateral debt. According to the Minister of Finance, Hon Tendai Biti, the strategy includes both the adoption of traditional debt resolution initiatives and leveraging of the country’s national resources.

Government has also officially launched an Industrial Development Policy and a National Trade Policy. The draft Industrial Development Policy was published last year and places priority on development of agribusiness – comprising food and beverages, clothing and textiles, leather and footwear and wood and furniture – fertilisers and chemicals, pharmaceuticals and metals and electrical products as key industrial sectors. Growth in the manufacturing sector has been stagnating, due largely to a lack of access to capital for working capital purposes and for investment in new plant and equipment. It remains to be seen how effective any Industrial Development Policy can be, however well intentioned, unless the capital issue can be full addressed and overcome. The National Trade Policy focuses on increasing export levels – again issues of capital and competitiveness have to be addressed.

Euromoney Zimbabwe Investment Conference 2012

The second annual Euromoney Zimbabwe Investment Conference was held in Harare on 21 and 22 March. The first morning of the conference was taken up by speeches from Ministers. The Minister of Finance, Hon Tendai Biti, announced that Government had finalised a debt retirement/settlement strategy for presentation to international creditors. He also announced that Government is looking for an investor/technical partner for Air Zimbabwe. Government wishes to retain a 26% shareholding in the airline but will allow a technical partner to take a majority shareholding.

The Minister of State Enterprises and Parastatals, Hon Gorden Moyo, said that Government is moving ahead with plans for the commercialisation and/or privatision of state enterprises and parastatals. Public/private partnerships are open for discussion and, according to the Minister, a policy framework is in place.

Minister Biti addressed the thorny issue of indigenisation and said that a 51% majority shareholding by indigenous Zimbabweans in businesses is stated in the Act to be an objective. He described it as an aspiration. It is a general message and is not cast in stone. He made it clear that, in his opinion, there is no question of indigenising foreign-owned banks. He also emphasised that Government will not unilaterally seize or take over any foreign investment.

The Minister for Economic Planning and Investment Promotion, Hon Tapiwa Mashakada, placed emphasis on Zimbabwe’s economic growth rate, which is targeted in the Government’s Medium Term Plan to average 7% per annum over the next 5 years. He referred to Zimbabwe’s diversified economy, its undervalued assets and its strategic geographic location. Government’s target is to raise annual investment levels from the current level of 4% of GDP to over 25% by 2015.

Key areas of discussion during the conference included the financial sector, financing investment and the need for investment in Zimbabwe’s infrastructure. Topics covered included the need for development of a market for bonds in Zimbabwe, the creations of links between the Zimbabwe Stock Exchange and regional and international markets and exchanges, and the involvement of development financial institutions in financing infrastructure development in Zimbabwe. For example, the Development Bank of South Africa is currently involved in providing finance for the development of the road from Mutare to Plumtree through Harare and is looking at the financial requirements for the Beit Bridge-Chirundu highway (the Northern Corridor).

The general impression given at the Conference was that there is an increasing level of interest among international investors in investment opportunities in Zimbabwe. Zimbabwe is increasingly seen as both a viable long-term investment destination and a key part of the southern Africa region. However, emphasis was still placed on investors’ needs for policy consistency and predictability, about which concerns remain for Zimbabwe. Although they were not specifically mentioned – in fact the topics almost seemed to be avoided – investors clearly retain concerns about indigenisation rhetoric and political uncertainty in Zimbabwe, particularly with regard to forthcoming elections.

Business and Economic News Snippets

It was announced last week that the Commercial Farmers Union (CFU) and the Bankers’ Association of Zimbabwe (BAZ) are working on a financing arrangement involving the use of real estate as collateral in order to obtain long-term financing from international investors for the country’s productive sector. The arrangement, according to the BAZ, would involve the creation of a cluster that would pool together real estate assets held by the banking sector as security against loans they have made to customers. However country risk needs to be underwritten.

New Dawn, a mining company quoted on the Toronto Stock Exchange which has several gold mining subsidiaries in Zimbabwe, has announced that it is working with indigenous investors to sell them 36% of its equity as part of its indigenisation plan. An additional 15% will be transferred to an employee share ownership scheme. New Dawn intends to use the additional capital to increase its annual level of gold production in Zimbabwe to 100 000 ounces by December 2014.

A World Bank report has said that the development of coalbed methane gas in the Lupane area of north-west Zimbabwe has the potential to increase the country’s energy generation capacity, provided enabling policies are put in place to attract investors. The project is seen as a good candidate for a public-private partnership and could start generating revenues early from an initial relatively low-level and low-risk investment.

ZABG Bank, a small and struggling commercial bank, is to be restructured and renamed Minerals and Miners Bank, with a 30% shareholding in the bank being taken by the Zimbabwe Mining Development Corporation, a parastatal, and 49% being taken by South Africa-based investors.

Tobacco prices on the auction floors in Harare are higher than last year, due to a reduction on global production. The Minister of Finance, Hon Tendai Biti, has estimated that tobacco sales this year should reach US$ 300 million.

Zimbabwe Monthly Economic Review – Feb 2012

The African Development Bank has published its Monthly Economic Review for Zimbabwe for February 2012. As usual the link to the full review is available on this site. Highlights of the review are as follows:

Increasing exports of diamonds to India from Zimbabwe have caused a decline since November 2011 of about 25% in the price of rough diamonds.

As I have mentioned in previous posts, the level of total banking sector deposits has continued to rise slowly. According to the AfDB review, 57,4% of deposits are demand deposits, 33,0% are savings and short-term deposits and 9,6% are long-term deposits. The review comments that “this composition of bank deposits in unfavourable for long-term investment given the asset liability mismatch.” The overall loan-to-deposit ratio in the banking sector in December 2011 was 87,4%. Given that some banks will be more conservative in their lending and that there is also a risk of non-performing loans, it seems clear that there must be a number of banks in Zimbabwe which are over-extending their loan book and are therefore at severe risk.

Revenue collection in 2011 by Government reached US$ 2,92 million, with Value Added Tax at US$ 911,7 million being the largest contributor to gross revenue. Total expenditures for the year were estimated to be US$ 2,89 billion.

The Zimbabwe Stock Exchange continues to be affected by political and economic uncertainty. The Mining Index dropped to 70,09 at the end of January 2012, its lowest level since 2009. In early 2011 it reached levels close to 250 before starting a steady decline in March, co-inciding with the announcements on indigenisation of the mining sector. The Industrial Index closed at 138,52 at the end of January, the lowest level since August 2010. However turnover value recorded its highest level since July 2009, with 383,2 million shares traded during January, with a value of US$ 55,8 million.