Government urged to get mining policies right

The Chamber of Mines urged the government to get its mining policies right to attract investment in the sector which at one time contributed seven percent to the gross domestic product.

Delegates urged the government to introduce indigenisation gradually through the formation of joint ventures with foreign investors rather than through legislation.

Alex Mhembere, chief executive of Zimplats, said Zimbabwe had 60 exploitable minerals but only produced two-thirds of them.

He said Zimbabwe had failed to capitalise on firm commodity prices between 1998 and 2008.

Out of a total 88 operating mines in 1998, the country was down to 20 in 2008 and only three out of these were operating at full capacity.

Gold production during that decade had dropped from 25 tonnes to 3.6 tonnes and chrome production plummeted to 311 970 tonnes from 780 150 tonnes.

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Viewing cable 09HARARE417, GOZ URGED TO ‘GET POLICIES RIGHT’ AT MINING

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P 191510Z MAY 09

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SUBJECT: GOZ URGED TO ‘GET POLICIES RIGHT’ AT MINING

CONFERENCE

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SUMMARY

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¶1. (SBU) Presenters at a mining conference organized by the

Chamber of Mines of Zimbabwe in Harare on May 7, urged

government to implement prudent policies to attract

investment and restore the sector to its former position of

contributing close to seven percent to gross domestic

product. Speakers from the industry made a case for

increasing indigenization gradually through the formation of

joint ventures with foreign investors rather than through

legislation. The experiences of Tanzania and South Africa

illustrated how good policies could contribute to the orderly

development of the mining sector in Zimbabwe. The examples

also highlighted the importance of developing mutual trust

between government and the private sector through increased

consultation. However, even under good policies, Zimbabwe’s

mining industry faces the immense constraint of electric

power shortages. END SUMMARY.

———————————

Significance of the Mining Sector

———————————

¶2. (U) At a mining conference organized by the Chamber of

Mines of Zimbabwe on May 7, Alex Mhembere, Chief Executive

Officer of Zimbabwe Platinum Mines Ltd (“Zimplats”), told

delegates that Zimbabwe has over 60 exploitable minerals but

currently produces only two-thirds of them. According to

figures from the Reserve Bank of Zimbabwe, mineral exports

(excluding gold) amounted to US$684.7 million in 2008 and

accounted for 49 percent of total export shipments of goods,

down from US$838.6 million and 52 percent of total exports in

¶2007. Economic analyst John Robertson pointed out the

importance of the mining sector beyond its contribution to

the country’s gross domestic product of about three percent,

down from a high of about seven percent: Mines provde

employment and offer contracts to suppliers, which in turn

generates demand for locally produced goods and stimulates

production. Mhembere and Chamber of Mines Vice President

Victor Gapare of GAT Investments Limited told the gathering

that the multiplier effect of mining on the economy can be as

high as tenfold. Citing the example of the towns of Shamva

and Shurugwi, Robertson also noted that mining companies had

built towns in Zimbabwe and taken on responsibilities

comparable to those of large town councils.

—————

The Lost Decade

—————

¶3. (U) Opening the conference, the Minister of Mines and

Mining Development, Obert Mpofu, lamented the deterioration

of a once vibrant sector. He said Zimbabwe’s excellent

mineral endowment had the potential to drive economic

recovery if the country could attract domestic and foreign

investment. Mhembere said that Zimbabwe had failed to

Qinvestment. Mhembere said that Zimbabwe had failed to

capitalize on firm commodity prices between 1998 and 2008.

He noted that out of a total of 88 operating mines in 1998

only 20 were still open in 2008; of those, only three were

operating at full capacity. Illustrating the decline in

output of a number of minerals during this ten-year period,

HARARE 00000417 002 OF 004

Mhembere pointed out that gold production fell from 25 MT to

3.6 MT in 2008, and chrome production declined by more than

half from 780,150 MT to 311,970 MT. Almost all the minerals

he analyzed showed a similar declining output trend at a time

when most commodity prices had been rising.

———————————–

Poor Policy Environment to Blame…

———————————–

¶4. (U) In Mhembere’s view, poor government policies were at

the heart of the precipitous decline in the mining sector.

As a result of the policy failures, very little exploration

had been carried out over the past ten years, which would

further negatively affect production “not long from now.”

Mhembere quoted the Fraser Institute Survey of Mining

Companies for 2008/2009 which ranked Zimbabwe last in the

world with 2.4 points out of a possible 100 in the area of

investment environment in the mining sector.

¶5. (SBU) The immediate past president of the Chamber of Mines

Jack Murehwa criticized the introduction of the

Indigenization Act, which seeks to compel companies to sell

51 percent of their shareholdings to black Zimbabweans. He

called the Act regressive and said it frightened away

potential investors. He criticized the extension of the Act

to the mining sector through the proposed amendment to the

Mines and Minerals Act, arguing that no indigenous Zimbabwean

could raise sufficient capital to purchase a 51 percent

shareholding in a significant mining company given the highly

capital-intensive nature of the industry. Paul Chimbodza,

Chairman and Chief Executive Officer of Geo-Associates

Private Limited, concurred, noting that inconsistent and

wrongheaded government policies had failed to stimulate

investment.

———————————-

… And Electricity Shortages, Too

———————————-

¶6. (U) Wayne Waterworth, Managing Director of Falcon Gold

Limited, pointed out the negative effect of electric power

shortages in the past years on the performance of the sector.

Power outages had disrupted production and led to flooding

of some mines. Earnest Muchayi, Managing Director of

Zimbabwe Electricity Transmission and Distribution Company, a

subsidiary of the Zimbabwe Electricity Supply Authority

(ZESA), told the conference that even with the mining sector

operating at very low capacity, Zimbabwe could not generate

sufficient power to satisfy demand. He attributed the

problem to a number of constraints faced by ZESA such as old

equipment, unreliable coal supply, inadequate working

capital, loss of skills, and power cable theft.

————————————-

What Chance for Increased Investment?

————————————-

Q————————————-

¶7. (SBU) Niels Kristensen, Managing Director of Murowa

Diamonds, described to delegates the four-stage investment

cycle in mining and attendant risks. He stated that the

payback time for a typical mining project could be as long as

five to seven years. Both Mhembere and Kristensen made the

HARARE 00000417 003 OF 004

point that no investor would commit money to a project that,

in addition to being subject to unclear and vacillating

policies, did not have the assurance of property rights, as

was the case in Zimbabwe today. In their view, Zimbabwe’s

investment climate was characterized by high technical,

marketing, and political risks that would continue to drive

away foreign investors.

¶8. (SBU) Emmanuel Jengo, Chief Executive Officer of the

Tanzania Chamber of Minerals and Energy gave an eye-opening

account of the Tanzanian mining experience from the colonial

period of very low investment through independence,

&Ujamaa,8 and the post-1990 era of pro-market reforms.

Jengo’s message was that pro-market reforms had helped boost

investment in Tanzania’s mining sector, particularly in gold

mining where production had risen from practically nothing to

the current level of 50 MT/year. He emphasized the “power of

implementing correct policies” on private sector development

in mining, and the importance of developing trust between the

private sector and government.

——————————-

Indigenization Lobby Speaks Out

——————————-

¶9. (U) A number of small organiations that lobby for

indigenous rights were represented at the conference and

expressed support from the floor for the proposed

indigenization amendment to the Mines and Minerals Act. Supa

Mandiwanzira, the President of the Affirmative Action Group

(AAG), for example, accused managers of locally-based mining

conglomerates of being fronts for foreign owners. In reply,

Paul Chimbodza noted that 60 percent of the mining claims in

Zimbabwe were, in fact, in Zimbabwean hands. Chimbodza

voiced concern that the amended Act would be used to empower

only a few highly-connected individuals, as had been the case

in fast-track land reform.

¶10. (U) On May 14, the Indigenous Business Women’s

Organization (IBWO) echoed Mandiwanza’s sentiments at a

meeting attended by economic specialist. IBWO

representatives called on the government to “give” them 51

percent of shares in mining companies. Rising to IBWO’s

support at the meeting Saviour Kasukuwere, Minister of Youth

Development, Indigenization and Empowerment, promised to push

for the proposed controversial changes to the Mines and

Minerals Act.

¶11. (U) Most vexing to the majority of delegates at the

Chamber of Mines conference was the prospect of being forced

to sell company assets to meet indigenization requirements.

They argued that policy should focus instead on creating

opportunities for individuals to start their own businesses,

thus widening the country’s economic base. Joel Mungoshi of

Mvelaphanda Resources Ltd of South Africa told delegates that

QMvelaphanda Resources Ltd of South Africa told delegates that

the best option for empowerment and indigenization was for

government to encourage indigenous Zimbabweans to enter joint

ventures with foreign investors rather than set empowerment

thresholds. He described how Mvelaphanda Resources had

evolved from a minerals extraction company to become a

manufacturer of catalytic converters for cars with the help

of German investment underpinned by an enabling environment

created by government.

HARARE 00000417 004 OF 004

———–

Way Forward

———–

¶12. (U) Mhembere stated that for the mining sector to

contribute effectively to Zimbabwe’s economic recovery the

investment climate had to be improved by putting in place

attractive mining laws buttressed by a supportive regulatory

framework and consistent monetary and fiscal policies. On

mining legislation, Murehwa and Chimbodza suggested the

removal of empowerment limits from the proposed amendment

bill to the Mines and Minerals Act. Murehwa also said

government’s role should be reduced to encouraging business

deals between interested parties rather than setting

indigenization thresholds.

¶13. (U) The problem of generating sufficient electricity for

the industry remains one of the most difficult constraints

confronting the sector. Muchayi emphasized the need for

industry to pay economic tariffs, but it was not clear

whether this step would resolve ZESA’s operational

deficiencies, including the problems of indebtedness to

regional utilities, obsolete equipment at most of ZESA’s

power stations, plus disruptions in transmission and

distribution. It was clear to the delegates that, good

policies or bad, without adequate power the mining sector

would continue to operate well below its full potential.

——-

COMMENT

——-

¶14. (SBU) Although the mining sector could be a major

contributor to Zimbabwe’s economic recovery by generating

employment, taxes, and foreign exchange, the poor and

uncertain policy environment under ZANU-PF Mines Minister

Mpofu and the country-wide power shortages present onerous

constraints. Moreover, the proposed amendments to the Mines

and Minerals Act with respect to indigenization, while

popular with affirmative action groups, constitute an attack

on property rights that will continue to inhibit investment

in existing mines and scare away new investors. At a time

when the private mining sector could be leading economic

recovery, Zimbabwe risks more years of missed opportunities

in this potential pillar of the economy. END COMMENT.

MCGEE

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