growing anxiety over the mines in zimbabwe
TRANSCRIPT
Growing Anxiety over the Proposed Indigenisation of Mines in Zimbabwe. What are the Implications?
Charles Shonayi, Research Analyst
MiningMining
11 May 2011
Functional Expertise� Experience in market research and growth strategy consulting projects. Particular expertise in:
- Qualitative and quantitative market analysis
- Project Management
- Writing and Presentation
Industry Expertise� Experience base covering broad range of sectors, leveraging long-standing working relationships with leading
industry participants’ Senior Executives
- Analysis of the South African HMI Market
- Analysis of the South African Heat Exchangers Market
- Production and Investment Trends in the East African Cement Industry
- Sub- Saharan Mining Industry Trends
Charles Shonayi
2
What I bring to the Team
� Strong research and analytical skills
� Ability to focus and prioritize on the project
Career Highlights
� Joined Frost and Sullivan in August 2010
� Economist with the Exchange Control and Economic Research Divisions of the Reserve Bank of
Zimbabwe from 2002- 2007
Education
� BSc . Economics Hons f rom University of Zimbabwe (UZ).
� Master in Business Administration with Edinburgh Business School (UK) (In Progress)
Charles ShonayiResearch Analyst
Industrial Automation &
Electronics, Mining
Frost & Sullivan
Africa
Cape Town, South Africa
3 What are the opportunities?
1
2
4 What the Implications of the Indigenisation law if foreign owned firms are nationalised?
Overview of Zimbabwe’s Mining Industry
Industry Challenges, Drivers and Restraints
Agenda
3
4 What the Implications of the Indigenisation law if foreign owned firms are nationalised?
5 Conclusions
� In 2010, Zimbabwe’s mining industry accounted for 4.7% of
the Gross Domestic Product (GDP) and contributed 46.0% of
the country’s foreign currency earnings.
• Zimbabwe’s economy grew by 8.7% in 2010 and is forecast
to grow by 9.3% in 2011.
• A key contributor to this growth is an increase in production
output of the country’s mining sector which recorded a
47.0% increase in production output in 2010 and is expected
to grow by a further 44.0 % in 2011.
Overview of Zimbabwe’s Mining Industry
Introduction
Gross Domestic Product by Economic Activity (Zimbabwe), 2010
Agriculture,
18.1%
Mining, 4.7%
Manufacturing,
17.1%Transport,
17.7%
Services, 8.6%
Other , 14.7%
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Source: Frost &
Sullivan
to grow by a further 44.0 % in 2011.
� Mineral export receipts for 2010 amounted to $1.3 billion
compared to $600.0 million in 2009.
� The platinum and gold sectors accounted for 45.0% and
22.0% respectively, of the export receipts in 2010.
• Going forward, Zimbabwe’s platinum, gold, chrome and
coal mining sectors are anticipated to continue to play a
significant part in the economy’s turnaround between 2011
and 2015.
Mineral Export Receipts by Sector (Zimbabwe), 2010
Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan
Electricity, 5.7%
Construction,
0.7%
Tourism, 12.7%
Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan
Platinum,
45.0%
Gold, 22.0%
Diamonds,
11.0%
Chrome, 10.0%
Other
Minerals, 12.0%
• In 2010, platinum production output increased sharply from
146 700 ounces in 2004 to 275 000 ounces in 2010.
• The increase in output was supported by the commission
into production of Phase 1 and Wedza Phase 5 at Zimplats
and Mimosa respectively.
• Outline plans have been developed for Phase 2 and 3
expansion at Zimplats.
• If these occur together with Wedza Phase 6 at Mimosa and
production from Unki, Zimbabwe would become the third
Platinum Production Output (Zimbabwe), 2004 -2010
Overview of Zimbabwe’s Mining Industry
Platinum
146.7 153.5 162.3174.7 170.9
187.5
275.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2004 2005 2006 2007 2008 2009 2010
Production Output Growth Rate (%)
Production Output ('000' Tonnes)
Production Output ('000' Ounces) Production Output Growth Rate (%)
5
production from Unki, Zimbabwe would become the third
largest producer of platinum in the world.
• Gold output stood at 9.6 tonnes in 2010 compared to 4,2
tonnes in 2009.
• Most of the country’s gold mines that closed at the height
of the political and economic crisis in 2008, have resumed
production.
• The liberalisation of the marketing of gold has improved
the business climate within the sector.
• The government anticipates gold production to increase to
13 tonnes by 2011.
Gold
2004 2005 2006 2007 2008 2009 2010
Year
23.75
15.17
11.85
7.98
3.70 4.20
9.6
-100.0
-50.0
0.0
50.0
100.0
150.0
0.0
5.0
10.0
15.0
20.0
25.0
2004 2005 2006 2007 2008 2009 2010
Production Output Growth Rate (%)
Production Output Tonnes
Year
Production Output Tonnes) Production Output Growth Rate (%)
Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan
Gold Production Output (Zimbabwe), 2004 -2010
• Approximately 12 per cent of the global high grade of
chrome reserves are found in Zimbabwe, but the country
ranks low in terms of output.
• Chrome output increased from 201 000 tonnes in 2009 to
450,000 tonnes in 2010, owing to hoisting of production
capacity at Zimasco.
• The beneficiation of chrome to produce ferrochrome
following the recent ban on chrome ore exports is expected
to boost exports.
Chrome Production Output (Zimbabwe), 2004 -2010
Overview of Zimbabwe’s Mining Industry
Chrome
194.0222.0
202.0 190.0155.0
201.0
450.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
2004 2005 2006 2007 2008 2009 2010
Production Output Growth Rate (%)
Production Output ('000' Tonnes)
Production Output ('000' Tonnes) Production Output Growth Rate (%)
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to boost exports.
• Coal production output increased from 1.6 million tonnes
in 2009 to 2.6 million tonnes in 2010, representing a 38%
rise.
• A boost in output is expected from the efficient use of
dragline and resumption of underground production at
Hwange Colliery.
• Hwange Colliery commissioned a new coal screening
machine in 2010, and this boosted its monthly output by
260,000 tonnes.
Coal
Note: All figures are rounded; the base year is 2010. Source: Frost & Sullivan
Coal Production Output (Zimbabwe), 2004 -2010
2004 2005 2006 2007 2008 2009 2010Year
2.5
2.9
2.1
2.4
1.5 1.6
2.6
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2004 2005 2006 2007 2008 2009 2010
Production Output Growth Rate (%)
Production Output ('000' Tonnes)
Year
Production Output (Million Tonnes) Production Output Growth Rate (%)
• Key industry challenges that are affecting Zimbabwe’s
mining industry include infrastructure constraints, political
instability and uncertainty over the indigenisation law.
• Substantial upgrades to the road network and railway
signaling system and investment in
locomotives, wagons and rail sidings are required to
support the efficient movement of minerals.
• Intermittent power supply challenges have resulted
in production stoppages in mines, smelter shutdowns
and damage of heavy duty electrical equipment.
• Lack of agreement by the government of national
Key Industry Challenges (Zimbabwe), 2010 - 2015
Key Industry
Challenges
Railway Capacity Constraints
Political Uncertanity
Power Supply Constraints
Uncertainty over
Indigenisation law
Poor Road Network
Challenges, Drivers and Restraints
Market Dynamics Analysis
7
• Lack of agreement by the government of national
unity on key issues such as the indigenisation laws is
negatively affecting the investment climate in the
economy
• Key drivers expected to influence the growth and
progression of the Zimbabwean mining industry include the
burgeoning demand for mineral commodities from the rapid
industrialisation and urbanisation of China and India.
• Factors that might inhibit growth of the Zimbabwe’s mining
industry include technical skills shortage, limited access to
capital and regulatory concerns
• At the height of the political and economic crisis
skilled professionals left the country in search of
more lucrative compensation packages within the
region and overseas.
Market Drivers and Restraints (Zimbabwe), 2010 - 2015
Abundant mineral resources
Increased demand for
raw materials from China and India
Rising commodity prices
Promising economic recovery
Limited Access to Capital
Skill Shortage
Regulatory Concerns
Poor Business Conditions
• According to the government of Zimbabwe , the country’s
mining industry requires approximately $5.0 billion to
recapitalise existing mining infrastructure over the next five
years.
• A significant amount of capitalisation is required to improve
capacity utilisation by refurbishing processing plants
equipment and machinery.
• A sizeable portion of this expenditure will also be channelled
What are the opportunities?
Recapitalisation Requirements by Mineral Sector (Zimbabwe), 2010 - 2015
Sector Recapitalisation
Requirement ($ Billion)
Gold 1.000
Platinum 2.000
Chrome 0.350
Addressable Market Opportunities
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Source: MOF, Frost & Sullivan
• A sizeable portion of this expenditure will also be channelled
towards building new production facilities, particularly
within the platinum , diamond and coal mineral sectors.
• Over the past decade, the mining sector was largely
characterised by lack of exploration and continuous mine
development, particularly in the gold sector.
• Potential for growth exists within the current operations and
from Greenfield investments.
Chrome 0.350
Nickel 0.300
Coal 0.500
Diamond 0.450
Others 0.400
Property RightsProperty Rights EconomyEconomy
• The country’s national income, foreign exchange
earnings, government revenues, flow of
investment and market access to fresh low cost
funding might be negatively affected.
• The country’s ability to service its external debt
might be compromised.
• This will trigger disinvestment from stocks of the
affected foreign owned firms.
• It is anticipated that the country’s tentative and
fragile economic recovery will be derailed.
• The country’s national income, foreign exchange
earnings, government revenues, flow of
investment and market access to fresh low cost
funding might be negatively affected.
• The country’s ability to service its external debt
might be compromised.
• This will trigger disinvestment from stocks of the
affected foreign owned firms.
• It is anticipated that the country’s tentative and
fragile economic recovery will be derailed.
What are the implications if foreign owned mining firms are nationalised?
• The ceding of 51% stake by foreign owned firms
to locals entails relinquishing control over the
enterprise and the sovereign rights to the
minerals underground.
• This is anticipated to result in the increased
perception that the country is a high risk
investment destination.
• If private property and property rights are not
observed it dissuades foreign investors.
• The ceding of 51% stake by foreign owned firms
to locals entails relinquishing control over the
enterprise and the sovereign rights to the
minerals underground.
• This is anticipated to result in the increased
perception that the country is a high risk
investment destination.
• If private property and property rights are not
observed it dissuades foreign investors.
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ProductionProduction Socioeconomic Development ProjectsSocioeconomic Development Projects
fragile economic recovery will be derailed.fragile economic recovery will be derailed.
• Production output is anticipated to fall due to the
government’s lack of capital and expertise to
successsfullly run the mines. An example would
be state owned enterprises such as ZISCO.
• The government’s has limited ability to secure $5
billion for recapitalisation.
• Similar to the land reform, lack of exploration and
continuous mine development will lead to
creation of shallow production assets.
• Production output is anticipated to fall due to the
government’s lack of capital and expertise to
successsfullly run the mines. An example would
be state owned enterprises such as ZISCO.
• The government’s has limited ability to secure $5
billion for recapitalisation.
• Similar to the land reform, lack of exploration and
continuous mine development will lead to
creation of shallow production assets.
• The Government of Zimbabwe has refused to
adopt a hybrid indigenisation model.
• For example, Zimplats has invested $163 million
in community projects which include roads,
housing for employees, clinics, electricity
infrastructure.
• Companies such as Zimplats expect the
government to take social investments into
consideration during the renegotiations
• The Government of Zimbabwe has refused to
adopt a hybrid indigenisation model.
• For example, Zimplats has invested $163 million
in community projects which include roads,
housing for employees, clinics, electricity
infrastructure.
• Companies such as Zimplats expect the
government to take social investments into
consideration during the renegotiations
Source: Frost & Sullivan
Contract ReviewContract Review JobsJobs
• Mining contract reviews for foreign owned firms
are anticipated to lead to higher taxes and
royalties.
• Mining companies are expected to release mining
claims to the government. In May 2006, Zimplats
released to the government part of its
undeveloped mining claims.
• Offshore foreign currency accounts especially for
platinum producers are likely to be banned. These
were operated to give comfort to the lenders.
• Mining contract reviews for foreign owned firms
are anticipated to lead to higher taxes and
royalties.
• Mining companies are expected to release mining
claims to the government. In May 2006, Zimplats
released to the government part of its
undeveloped mining claims.
• Offshore foreign currency accounts especially for
platinum producers are likely to be banned. These
were operated to give comfort to the lenders.
What are the implications if foreign owned mining firms are nationalised?
• The mining sector is anticipated to lose jobs due
to viability problems in the ensuing years.
• Programs to facilitate the transfer of knowledge
for local mining professionals through
apprenticeship or training will be hampered.
• Skills shortages are likely to result as skilled professionals migrate to higher paying countries. The government ‘s ability to retain highly skilled
professionals is limited. ...
• The mining sector is anticipated to lose jobs due
to viability problems in the ensuing years.
• Programs to facilitate the transfer of knowledge
for local mining professionals through
apprenticeship or training will be hampered.
• Skills shortages are likely to result as skilled professionals migrate to higher paying countries. The government ‘s ability to retain highly skilled
professionals is limited. ...
10
Look East Policy Look East Policy TradeTrade
were operated to give comfort to the lenders.were operated to give comfort to the lenders.
• In recent years, Zimbabwe’s Look East Policy has
seen investments from new players, such as
Chinese and Indian companies, but few projects
have been commissioned into production.
• Investments in Zimbabwe’s mining industry by
Chinese and Indian firms is expected to increase.
• In recent years, Zimbabwe’s Look East Policy has
seen investments from new players, such as
Chinese and Indian companies, but few projects
have been commissioned into production.
• Investments in Zimbabwe’s mining industry by
Chinese and Indian firms is expected to increase.
• Nationalisation of foreign owned mines might
affect trade between Zimbabwe and other
countries.
• Bilateral Investment and Promotion and
Protection Agreements (BIPPAs) might be
violated during the takeover of firms.
• When the land reform exercise was undertaken,
property rights under BIPPAs were affected.
• Nationalisation of foreign owned mines might
affect trade between Zimbabwe and other
countries.
• Bilateral Investment and Promotion and
Protection Agreements (BIPPAs) might be
violated during the takeover of firms.
• When the land reform exercise was undertaken,
property rights under BIPPAs were affected.
Source: Frost & Sullivan
Project Finance and Capital
• The availability of capital in the local market to finance the equity transfer deals is limited.
• The financial sector is struggling to survive in the face of liquidity problems resulting in
Country Risk
• Foreign investors
place a lot of value in
policy stability and the
sanctity of contracts
which is lacking in
Zimbabwe.
• Foreign companies
considering investing
in Zimbabwe will need
Implementation Modalities
• The government needs to be transparent in shaping the discussion on indigenisation.
• The implementation modalities are not very clear and are at the discretion of a
Quality of Institutions
• The quality of institutions in Zimbabwe responsible for economic management, governance and policy are poor.
Conclusion
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problems resulting in short term lending at exorbitant interest rates which is not sustainable.
• Foreign capital is required to sustain investments in the mining sector which are long term and capital intensive in nature.
in Zimbabwe will need
to gain a deeper
understanding of the
unique challenges
facing the country and
assess risk
comprehensively.
the discretion of a single ministry.
• In particular, the clarity on how the sovereign wealth fund will be administered.
Zimbabwe is unlikely to benefit from indigenisation or nationalisation of the foreign owned firms because of the observations cited above.
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