Zambia mining boosted by copper demand

Surging global demand for copper has breathed new life into the mining industry in Chingola, a short drive from the Congolese border on top of some of the richest copper deposits in the world.

Zambian miners clad in white helmets and blue jumpsuits are building a $300-million (about R2,1-billion), high-tech copper smelter at Konkola Copper Mines, right next to one of the largest open pit copper mines in Africa. Trucks stream out of town carrying sheets of copper cathode destined for growing economies in China, India and Vietnam.

With copper prices around $3 per 1 pound (about R21,63 per kilogramme), there are giddy predictions that after years of stagnation, this largely impoverished southern African nation will soon rejoin the ranks of the world’s top copper producers, a distinction it last held in the 1970s.

Fred Bantubonse, general manager of Zambia Chamber of Mines in the neighbouring city of Kitwe, says companies have poured $2-billion in new investment into mines throughout the country.

Yet in the eyes of many Zambians, their country is failing to cash in. Under mining agreements signed earlier in the decade, when copper prices were low – less than US$1 per pound – and the government of Zambia was desperate to attract foreign investors to a slumping industry, the cash-strapped nation receives 0.6 percent royalty on copper revenues from Australian, Chinese, Indian and other mining companies – far below the international norm, which is close to 3 percent.

“We are not benefiting as much as we should,” said Eddie Kapungulya, a Kitwe businessman who sells chemical and engineering equipment to mining companies, and who chairs the local chamber of
commerce. “These companies should be made to pay more tax so the government can use it to expand social infrastructure …. Where is the money that the so-called copper boom is generating going?”

Amid pressure from local communities, academics and a vocal political opposition, the Zambian government is now reviewing mining contracts with an eye to raising the mining royalty, a decision that could come early this year when the government presents its new budget.

With Zambia’s copper production nearly reaching half a million metric tons (about a half million half tons) in 2005 and mining profits now reaching into the hundreds of millions of dollars, increased taxes could mean huge new revenues for a country with a struggling health care system, a 16 percent HIV and Aids prevalence rate and a proliferation of orphans, many of whom live on city streets.

President Levy Mwanawasa, who won re-election in September despite charges that his government has allowed foreign investors to exploit Zambian workers and resources, faces a delicate challenge. He needs to spread the benefits of mining while not scaring away the international mining companies that Zambia, currently the 11th largest copper producer in the world, relies on heavily for jobs and capital.

“When the government signed the contracts and sold the mines to the present owners … the situation was a bit different,” said Venkatesh Seshamani, an economics professor at the University of Zambia.
Change “has to be done in a way that doesn’t erode your credibility as a destination for foreign investment.”

Like many other African nations, Zambia has struggled to reap the benefits of its natural resources, and critics say the government’s failure to foresee the recent rise in copper prices was just another misstep. Zambia still relies on copper for more than 60 percent of its exports. This has left the country at the mercy of the market and more than 70 percent of its population in poverty despite recent economic gains, noted a November World Bank report that contrasted Zambia with neighbouring Botswana, which has harnessed its mineral wealth to become one of Africa’s economic success stories.

In the 1990s, Zambia sold its state-run copper mines to private companies, only to see South African mining giant Anglo-American pull out in 2002. Faced with an economic crisis, the Zambian
government, with advice from the World Bank, lured potential buyers with a series of generous tax breaks.

As a result, most mining companies have paid little in taxes despite increasing profits.

Analysts expect that the government may settle on a new tax rate in the range of 2.5 percent, closer to tax rates in other copper-producing countries, like Chile. But talk of renegotiating long-term contracts has raised fears that companies will resort to legal action.

Most mining companies are taking a wary but cautious approach.

“We hope that whatever the government does, it does in sensible consultation with industry,” said a spokesman for India’s Vedanta Resources Plc, which holds the majority share in Konkola Copper
Mines. The spokesperson noted, however, “we’re here to stay.”

Mining leaders stress that mining is a long-term investment that creates jobs, and that revenues will soon start flowing into government coffers. Plus, tax incentives remain important in luring
companies to a country where the cost of doing business is relatively high, notes Michael Richards, a geologist for Australia’s Equinox Minerals Ltd.

Still, Rayford Mbulo, a former mine technician who how heads the Kitwe-based Mineworkers Union of Zambia, argues that mining companies pay Zambians low wages and give contracts to foreign firms instead of local suppliers. An explosion at a Chinese-run mine killed 51 Zambian workers in 2005. More recently, Vedanta has been accused of leaking toxins into the Kafue River.

Some residents complain that private mining companies operating in Copperbelt province are not investing in local infrastructure, particularly compared to the days when a government-run agency ran the mines as well as schools, sports teams, hospitals and roads.

Still, companies like Australian First Quantum Minerals Ltd. invest in initiatives like mosquito spraying, and some observers says it is unfair to expect too much from a private company.

The opposition Patriotic Front party, led by president runner-up Michael Sata, won control of parliamentary seats throughout the Copperbelt with scathing criticism of foreign mining companies,
particularly the Chinese.

Mwanawasa’s former trade minister, Dipak Patel, acknowledges that the mining tax has become a potent political issue. While the government should honor its existing contracts, Patel says, it should look at new ways to increase copper revenue.

“If you don’t get a good return, you don’t have enough money to do what the government needs to do in terms of infrastructure, health and education,” he said. “We can’t live on handouts.” –