ZIMBABWE’S major mining companies are considering terminating or suspending some expansion projects after citing an unfavourable tax regime which they say is spooking investors from the capital-intensive sector, a new report has shown.
Statistics from the Chamber of Mines of Zimbabwe indicate that mining contributes 73% to foreign direct investment, 83% of exports, 19% of government revenues.
According to the Chamber of Mines 2023 State of Mining Industry report, mineral output growth for 2023 is projected at 7%, but structural issues affecting the sector are seen hampering this growth. Analysis of survey data shows that a minimum cumulative capital expenditure of US$1 billion is expected in 2023.
Of the capital projects, 72% are expected to be completed in the next 24 months.
“Survey findings expect the tax framework to be characterised by high royalty (citing recent increases in royalty for platinum and lithium), beneficiation taxes and increased demand to pay royalty and taxes in foreign currency,” the survey reads.
“Mining executives indicated that recent increases in royalty have resulted in some mining projects’ net present values becoming negative and unattractive to investors. Some executives indicated that they will suspend projects while others are considering terminating some projects.”
Net present value (NPV) is the value of all future cash flows (positive and negative) over the entire life of an investment discounted to the present.
NPV analysis is a form of intrinsic valuation and is used extensively across finance and accounting for determining the value of a business, investment security, capital project, new venture, cost reduction programme, and anything that involves cashflow.
The survey findings also show that commodity market prospects are expected to be lower in 2023 compared to those recorded for 2022. Mining executives cited the anticipated global recession in 2023 to result in tight commodity markets.
“Most executives reported that their profitability will be weighed down by anticipated high cost structure on the back of high energy costs, high royalty and sub-optimal taxes,” the report reads.
“Mining executives are expecting average cost of production to increase by 15% in 2023 mainly driven by a 42% increase in the proportion of electricity costs to total cost of production, as well as high royalty and taxes.
“Almost all respondent mining executives, including those on dedicated power lines, indicated that they are experiencing unscheduled power outages resulting in production stoppages and output losses.”
Survey findings show that electricity consumption is expected to increase by 20% in 2023, while diesel consumption is expected to increase by 39% in 2023. Most respondents cited ongoing capital projects as the major drivers of energy usage in 2023.
“Mining executives, however, are expecting the energy situation to remain depressed in 2023,” the study shows.
“Mining executives raised concern about the increase in electricity tariff to about USc12.21/ kWh [per kilowatt hour]. Mining executives indicated that the increase in electricity costs will consume on average 20% of mining companies’ stay in business capital budgets which are largely funded from retained earnings. From the survey data, the average level of optimal tariff increase was 4%, equivalent to a tariff increase to USc10.2/kWh.”