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Mining in Zimbabwe: Where to from here?
23/05/2013 00:00:00
by Arthur Mutambara
 
 
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Deputy Prime Minister Prof. Arthur G.O. Mutambara's address to the chamber of Mines AGM at Nyamga on Developing and Managing the Mineral Wealth of Zimbabwe for Tomorrow

May 17, 2013

THE mining sector in Africa constitutes one of the largest industries in the world. Africa is the second biggest continent, with 30 million km² of land, which implies large quantities of resources.

For many African countries, mineral exploration and production constitute significant parts of their economies and remain keys to economic growth. The continent is richly endowed with mineral reserves and ranks first or second in quantity of world reserves of bauxite, cobalt, industrial diamond, phosphate rock, platinum-group metals (PGM), vermiculite, and zirconium. Gold extraction is the key driver of Africa's mining activities.

However, in spite of this rich mineralization, African countries are still walloping in poverty. The primary problem has been the racist and colonial natural resource laws in Africa which empower the investor at the expense of the citizenry who are the bona fide owners of the resource. Based on this flawed framework, most of the mining deals and activities on the continent have been opaque and detrimental to Africans.

Corruption by both public sector and private sector players has compounded the malaise. Secondly, mining in Africa has been largely extractive without beneficiation or value addition. This has led to African countries exporting cheaply priced raw commodities, while importing expensive refined products.

The lack of meaningful benefits to African people from their natural resources is a key part of what is currently being described as leakage of resources from the continent. African leaders and industrialists need to make a lot more noise about the leakage of money from the continent. Plugging the leaks is one of the major ways of keeping Africa's growth steady.

If this is addressed we will have enough resources on the continent. We will have sufficient investable capital from the continent. This will smash the current unsustainable over-dependence on foreign aid and foreign direct investment. Intra Africa investment and investment outflows from the continent into the rest of the world will become practical propositions.



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African governments and societies must harness the opportunities created by natural resources effectively. They must ensure the huge opportunities for economic development and prosperity provided by resource discoveries and commodity booms will never again be missed.

Some of the poorest countries in Arica have large amounts of natural resources and these can provide a pathway out of poverty. Yet in the past, these opportunities have often been missed, and resource abundant countries have consequently remained poor. Natural resources have the potential to be transformative if they are properly harnessed for development.

However, the decision and value chain from the discovery of natural assets through to their conversion into a productive economy is long and complex with many state and non-state actors involved. This is why the process has so often been unsuccessful on the African Continent. Africa is too rich to be poor.

It is within this continental context that we assess Zimbabwe’s mineral strength and how it can be leveraged to improve the quality of our people’s lives. The recent work of Paul Jordan and ZEPARU has been instructive in identifying the key policy issues with respect to the mining sector in Zimbabwe, in particular around geological and mineralization issues. Their research findings must inform and lay foundation to discussions in the Chamber of Mines.

Zimbabwe has a rich and diverse mineral resource base that should be an important contributor to sustainable growth and development. The sector has rebounded dramatically from the hyperinflation economic crisis and, with dollarisation, the value of mineral production has increased six-fold to about $3 billion in 2011. However, if this increased mining activity is to ultimately result in more than just holes-in-the-ground, the crucial mineral linkages need to be realized whilst the resources are still extant.

Zimbabwe has an extensive mineral value proposition. These mineral assets are mainly found in the following geological formations and bodies: The Greenstone Belts: Gold and silver, as well as considerable resources of iron ore, nickel, copper, cobalt and podiform chromite, also chrysotile asbestos (Mashaba Igneous Complex), limestone, pyrite and antimony; The Great Dyke: PGMs5 & Au with associated copper, nickel and cobalt. Also, chromium (chromite seams), as well as minor asbestos and magnesite; The Magondi Supergroup: Copper and silver (Dewera Group); The Karoo Basins: Considerable bituminous coal, coking coal, anthracite and coal-bed methane (CBM) resources; The Carbonatite Igneous Complexes:, phosphate (Dorowa, Showa); Kimberlite pipes: diamonds (Morowa, River Ranch);  Pegmatites: Lithium minerals, columbite-tantalite, cassiterite, et al;  Recent alluvial & placer deposits: Gold and diamonds (from Umkondo conglomerates).

Paul Jordan and his colleagues have emphasized that in order to optimize the economic linkages the current “colonial” minerals governance regime of “free mining” needs to be fundamentally overhauled to both encourage the discovery of new mineral deposits and maximise the developmental impact of known mineral assets through public tender against developmental outcomes. In this regard, a Mineral Cadastre Information Management System (MCIMS) being developed by the Ministry needs to be operationalized quickly.

The current historically high mineral prices fueled by strong Asian appetite are likely to continue for the next couple of decades, so long as the major Chinese and Indian economies continue to display robust growth. Zimbabwe needs to take advantage of this window of opportunity to use its finite mineral resources endowment to catalyze wider national economic growth and development through the maximization of the key economic linkages.

Zimbabwe’s mining sector has continued to be the lead in economic performance, contributing an estimated 16% to GDP in 2012, up from 13% in 2011. The sector also continued to lead in export earnings, rising to USD2 billion in 2012, from USD1.8 billion in 2011. The major drivers of this growth in export earnings were diamonds, platinum and gold. Overall, mineral production maintained its upward trend, meeting most Medium Term Plan (MTP) projections for 2012. This year, 2013, looks no different, assuming the current momentum is maintained.

Militating against higher growth rates, however, is the unavailability of medium to long term credit facilities for working capital and recapitalization requirements, as well as perennial power shortages. These enablers, if they remain unresolved, will continue to be major impediments to potential growth targets. Being number six in the world in terms of diamond deposits (potential control of about 25% of world diamonds), having 90% of world platinum between us and SA, and having extensive Gold deposits, Zimbabwe has massive natural resource potential. In fact, in terms of what is called natural resource per capita, we are number one in the world. So, why are we poor? Why are we hungry?

This 74th AGM of the Chamber is fortuitous as it occurs while we are currently fashioning a new mining policy framework leading to new Mines and Minerals Act. This policy seeks to ensure the sustainable development of the mining industry and its contribution to the economy.

The current Mines and Minerals Act is clearly now an archaic piece of legislation which is in dire need of upgrading to bring it up to date with modern trends in the global mining industry and the country’s current and future aspirations. More specifically and accurately, the current Act is a colonial law that empowers the investor at the expense of national interest. The Government is working on having this Act repealed in its entirety and have it replaced by a totally new Mines and Minerals Act that caters for the dynamic modern day needs of the sector, while resolving historical institutional injustices.

Extractive mining in itself is clearly not sustainable, as it depletes finite national assets. However, mineral extraction can indirectly become sustainable in so far as it catalyses sustainable economic activity in other sustainable sectors, through maximising the economic linkages whilst the resource is still in existence. Strategies to develop these complex and diverse linkages are therefore key elements of the new mining policy.

Mining proceeds must be used to develop secondary industries linked to the minerals, and other industries not linked to mining at all. Schools, hospitals, roads and community housing must also be spear-headed by mining activities. This way, when the mineral resource is exhausted the Zimbabwean economy and its communities can continue to flourish.

In redesigning the mining policy and laws in Zimbabwe we seek to achieve sustainable exploration, extraction, utilization, management, marketing and beneficiation of minerals. The objective is to understand the status quo, and then fashion a framework for developing and managing the mineral wealth of Zimbabwe for posterity. The foundational objective is to ensure sustainable, shared and inclusive economic development of the country.

A key reform of the mining laws is that the right to mine should be linked to payment for the value of the un-mined asset. As the State, we must know the value of each mineral claim. This requires comprehensive knowledge of our geology and mineralization. Quantification and valuation of the unmined asset should be done before engaging investors. New technologies such as aero-magnetics, big data, and cloud computing must be deployed. The state must invest massive resources in exploration

The difference between working capital and equity capital must be understood and factored in all mining deals. The value of the unmined asset is the country’s contribution to equity and the investor must acknowledge and match this. The investor’s contribution to equity must not be confused with the working capital they deploy. Working capital must be separate and in addition to contribution to equity capital.

The situation where the value of the unmined asset is not reflected on the balance sheets of corporates is not acceptable. Unmined assets have value and can be leveraged. How can mining claims have no value, and yet corporates list them on foreign stock exchanges and raise billions? In some cases, the investor goes on to sell the claims (they got for free) to other investors for tonnes of cash.

Moreover, when claims (green fields) are handed back to government, serious cash is demanded. How is this possible if claims have no value or their value is said to be difficult to determine? Discovery of a mineral resource should not mean ownership. In fact, once a country has established its geology and mineralization, the mining claims can be auctioned to determine the correct market value of the unmined asset.

The management of natural assets can be improved within a given political system by both domestic and international actions. In setting the tax and royalty rates, the government faces an internal agency problem. The government must delegate the negotiation to a small group of its members and resource extraction companies have a strong incentive to bribe these individuals. To protect itself, the government needs to adopt a process that is transparent. Secret negotiations are ideally suited to corruption.

The agency problem is compounded by an information problem. The government has considerably less knowledge as to the true value of its natural assets than does the company. This is called information asymmetry. A solution to both the agency and the information problem is to auction the extraction rights, inviting bids on the royalty rate that companies would be willing to pay. The rate could be conditioned on any observable features such as the basic geology, world price, and accumulated past volume of extraction.

An auction is a way of forcing companies to reveal the true value of a right to extract by placing them in competition. Thus, once a country has established its geology and mineralization, the auctioning of claims is a way to go. There are two distinct commitment problems; one concerned with extraction companies and the other with future governments. If governments cannot make credible commitments with resource extraction companies, one solution is to establish national extraction companies.

Listing on stock exchanges of unmined assets is global best practice as done in Australia, Canada, and Norway. However, companies getting assets for free in Africa and listing them for value has been a problem. Listing of unmined assets to raise money on stock exchanges without consent of the real owners of the asset has led to the doctrine and crime of undue benefit as recently demonstrated in the Court system in India. Zimbabwe together with other African countries must address this matter head on.

In Zimbabwe’s 51% indigenisation program, shares must be ceded for value. In the mining sector, payment for the shares by the State should be from the value of the unmined asset. There should be no model or agreement where GOZ will pay for its shares from dividends.  Payment should be made from the value of the unmined asset. Dividends are neither guaranteed nor contractual. In any case, given the vast nature of the value of the unmined resource, the dividend model is absolutely unnecessary. Green fields, that is, unexploited and unimproved claims, obtained without payment for value will be given back to GOZ for FREE. We should not pay for what we gave away for free.

The government will not engage consultants to implement simple indigenisation GOZ regulations and policies. Internal capacity must be built within government technical teams. Where it is absolutely necessary to hire consultants, there must be total transparency, an open tender process, independence, clear mandate letters, corporate governance, and reasonable fees. In this scenario, the Corporates being indigensed must NEVER pay consultants hired by GOZ as this will result in conflict of interest, leading to sweetheart deals detrimental to the national interest.

On indigenisation and empowerment, we must avoid baseless and unintelligent binaries: Equity vs. Supply side empowerment; we need both, the two complement each other. Dividends vs. royalties/taxes; we need both classes of benefits. Indigenization vs. FDI; they are not necessarily mutually exclusive as evidenced in India, Norway, Australia, SA, Botswana, and Canada.

The 51% indigenisation requirement vs. No One size fits all; we can stick to the 51% regulation, while creatively applying it in and between different sectors. Empowerment vs. jobs; this is just plain foolish, the two are mutually reinforcing. Policy formulation and implementation requires innovation and creativity. We must reject all these false and unimaginative choices arising from meaningless and misconceived binaries.

The effective harnessing of natural assets for development raises complex economic issues. Societies in resource rich countries can only get these decisions right to the extent that they understand them. Just as there has been a role for the international community to address the problem of weakened governance, so there is scope for international action to improve understanding of difficult but crucial social choices. There is need to leverage global best practice.

Further reforms of the mining sector we should pursue must include the following: All mining companies in Zimbabwe must have their primary listing on the local stock exchange. Banks must keep their deposits from mining companies in the country. Mining companies must bank locally. Banks must lend to agriculture, indigenized mining entities, and in particular small scale miners and MSMEs broadly.

By way of illustrating the magnitude of the opportunity, a 2012 McKinsey report showed that in Africa, banks stand to reap over US$350bn from lending to MSMEs, including small miners. The banks just need to know how to service these sectors that are at the bottom of the pyramid. This requires volume-driven strategies rooted in different business models, products, distribution networks, and cost structures; from conventional ones used at the top of the pyramid.

In the new mining policy framework, special attention must also be given to the empowerment of women miners and their institutions, not as charity but as smart economics. Men and women bring different but complementary skills and competences to the mining sector. Furthermore, there is need to embrace and capacitate artisanal miners and de-criminalize the so-called Makorokoza. Empowerment in the mining sector must be broad-based. This means enabling ordinary Zimbabweans to be participants, not just as workers and managers, but as owners of small mining operations.

The financial resources accrued by the State in the dispensation of the new Mining Law must be channeled into setting up a Sovereign Wealth Fund (SWF). A Sovereign wealth fund is a state-owned investment fund of financial assets such as stocks, bonds, property, precious metals or other financial instruments.  It is a means of empowering citizens. Sovereign wealth funds invest globally.  As we reform our natural resource laws, there is no need to reinvent the wheel. What we want is that in a resource rich country, there must be evidence of the impact of the resource.

Let us learn from countries that have carried out this empirical demonstration, such as Saudi Arabia, Botswana, Angola, and Dubai. In terms of SWFs the following countries are good case studies: UAE oil based (US$627bn), Norway oil based (US$557bn), Saudi Arabia oil based (US$439bn), China two non-commodity based US$347bn and US$332bn), Algeria oil based (US$57bn) Malaysia non-commodity based (US$38bn), Chile copper based (US$22bn), and Botswana diamonds based (US$7bn). Surely, we should be able to build a sovereign wealth fund based on just three minerals; gold, diamonds and platinum. How can we have a sovereign poverty fund of US$9.1bn debt?

There are a lot of unallocated claims in Zimbabwe. These present a unique opportunity to apply the new mining philosophy we are developing in the country. Of the 200 000ha of potential diamond area, only 70 000ha are allocated. Hwedza iron ore deposits are still free. In the Great Dyke, of the US$52 billion worth of Platinum, only US$5 billion has been allocated. In the other Great Dyke (550km) there are plenty minerals.

Throughout the country there are many other unencumbered mineral resources (Gold, Copper, Coal, Coal-Bed Methane (largest known reserves in Southern Africa), Lithium, Tantalite, and Uranium. In allocating mining rights to all the minerals let us start applying the ideas propagated in this paper. In particular, the right to mine must be linked to payment for the value of the unmined mineral asset.

Putting value to the unmined natural resource asset is global best practice as practiced in Norway Canada and Australia. What’s Good for the Goose is Good for the Gander. Further lessons from Norway include; on how to effectively use SWF revenues, good policy and the absence of corruption, Mining vs. oil differences, handling different risk levels, marriage between private and public sectors , enthusiasm, creativity, aggression, state as guarantor of social welfare, and joint decision making.

In fact, the successful resource management models of Canada, Australia and Norway illustrate that you can get the best of both worlds, that is, fairness and profit can and should co-exist. They also show that it is possible to balance between resource nationalism and economic globalisation.

In terms of ensuring shared and inclusive prosperity, we must establish national mineral driven industrial clusters, such as the Mutare-Marange Diamond cluster, Chegutu-Ngezi Platinum cluster, Kadoma Gold cluster. We must take into account both competitive advantage (what is done best by an entity) and comparative advantage (location of resource, skills and markets). While the overall national interest must drive our mining policy, it is imperative that communities contiguous with mining operations and other local areas MUST benefit.

While we appreciate the role of FDI in driving the mining sector, the obsession with FDI as the ONLY source of capital is completely without merit. We can have investment models that are independent of foreign Investors. Why can’t we put together a State Company or Consortium of Zimbabweans, say Entrepreneurs, Financiers, Geologists, Miners, Engineers, Accountants, and Lawyers. We then give them, for example a Platinum claim worth US$2bn.

They can list on the local or foreign stock exchange and raise capital, both working and equity types. Alternatively, such a consortium can also go to the banks and borrow on the strength of the value of the claim. They can also hire contract miners and equipment. We can then repeat the process for the different minerals. Surely this can be done. The extent, quality and breadth of our Zimbabwean Human Capital is amazing. Who is running all these global and regional mining houses such as Anglo America, Mimosa, Zimplats, Lonmin, ImPlats, and DeBeers? Zimbabwean names such as Ben Magara, July Ndlovu, Winston Chitando, Alex Mhembere, and Godfrey Gomwe crop up. If we can run these giant businesses, why can’t we own them?

It is important to acknowledge the potential psychological barriers Africans have when it comes to job creation, and ownership of enterprises. Ownership is alien and unthinkable to a slave or enslaved person or a colonized person. In fact, such oppressed people are supposed to be owned. The most powerful weapon of the oppressor is the mind of the oppressed and decolonizing the mind is the hardest of tasks. Our people must graduate from being workers and managers of other people’s money and assets. They must become owners of companies, entrepreneurs and innovators, builders of businesses, and job creaters.

In fact, the most important part of our indigenization and empowerment program should be the creation of new businesses and companies, not just acquiring 51% of existing entities. We must grow the Zimbabwean economy from a GDP of US$ 10 billion to a GDP of US$ 100 billion by 2040; where we completely indigenize the growth of US$ 90 billion. That will be sustainable economic empowerment and indigenization

To ensure that the country maximises the benefits from its mineral resources in terms of value, employment creation, skills and technology transfer and sustainable economic development, the mining industry needs to promote local beneficiation and value addition. Currently, there is very limited local beneficiation and value addition of minerals in Zimbabwe, resulting in about 90% of the minerals being exported raw or semi-processed, and this is cause for concern.

As a measure to promote the growth of the local diamond industry, the Government introduced a quota system where 10% of all locally produced rough diamonds are reserved for the local cutting and polishing industry. This quota will be reviewed from time to time as the industry grows. In the Platinum Group Metals (PGMs) sub-sector, the Government is pursuing measures and policies that encourage investment in a refinery plant in the country. Our target is that in the next two years, tangible deliverables in local PGM refining should be achieved.

Beneficiation in mining cannot be achieved by a business as usual industrial mindset. It requires the development of backward and forward industrial linkages to the commodity sector, which linkages, in turn, allow movement up the regional and global value chains (GVC). Provided their resource-processing industries are internationally competitive and well integrated in GVCs, exporting countries can move into higher-rent value-chain links and extract the benefits of moving up value chains.

Forward integration confers other benefits. It can reduce the exposure of countries producing primary commodities to price fluctuations and thus yield dynamic skills-migration and cluster benefits of linkage development. By developing backward linkage supply firms to the commodity sectors and resource-processing industries, Zimbabwe can help to diversify its technological capabilities and skills base, deepening their industrial structure.

Moreover, the natural resource sector’s need for infrastructure, to extract and transport the commodities, enhances the potential for linkages. Linkage development creates an opportunity to maximize positive externalities derived from clusters. Supplier and resource-processing industries’ closeness to the extraction location generates agglomeration effects. Efficiency gains for firms in clusters include gaining access to a pool of specialist labour and networks of suppliers.

The Government should continue to formulate and implement policies that direct local and foreign investment into the mining sector. The Government will also continue to promote joint venture projects in mining between ZMDC and foreign investors.  The objective of Government participation is to ensure that the nation realizes meaningful benefits from mining operations as evidenced by a number of benefits including dividends that are accruing to the State from the joint ventures in Marange.

The Government of Zimbabwe, in consultation with its valued stakeholders, will continue to come up with policy initiatives and reforms that provide win-win solutions for both the investor and the people of Zimbabwe. The Zimbabwe Government has a duty and obligation to create a conducive and enabling economic environment and business climate. In particular, there is need for certainty, predictability, respect for the rule of law, and provision of an enabling policy framework that encourages and facilitates sustainable mining activities including beneficiation.

In addition to the specific recommendations above, Zimbabwe must embrace the global initiative around the concept of a Natural Resource Charter, a brain child of independent academics and practitioners championed by Professor Paul Collier of Oxford University. Their analysis and proposition involves precepts to inform and improve natural resource management. This will help to ensure that the opportunities provided by new discoveries and commodity booms benefit the generality of the people. Among other principles, the Natural Resource Charter framework advances the following ideas: The development of a country’s natural resources should be designed to secure the greatest social and economic benefit for its people.

This requires a comprehensive approach in which every stage of the decision chain is understood and addressed.  Successful natural resource management requires government accountability to an informed public. Fiscal policies and contractual terms should ensure that the country gets full benefit from the resource, subject to attracting the investment necessary to realize that benefit. The long-term nature of resource extraction requires policies and contracts that are robust to changing and uncertain circumstances. Competition in the award of contracts and development rights can be an effective mechanism to secure value and integrity.

Resource projects can have significant positive or negative local economic, environmental and social effects which should be identified, explored, accounted for, mitigated or compensated for at all stages of the project cycle. The decision to extract should be considered carefully. Nationally owned resource companies should operate transparently with the objective of being commercially viable in a competitive environment. Resource revenues should be used primarily to promote sustained, inclusive economic development through enabling and maintaining high levels of investment in the country. Effective utilization of resource revenues requires that domestic expenditure and investment be built up gradually and be smoothed to take account of revenue volatility.

Government should use resource wealth as an opportunity to increase the efficiency and equity of public spending and enable the private sector to respond to structural changes in the economy. Government should facilitate private sector investments at the national and local level for the purposes of diversification, as well as for exploiting the opportunities for domestic value addition. The home governments of extractive companies and international capital centers should require and enforce best practice.  All extraction companies should follow best practice in contracting, operations and payments.  These Natural Resource Charter ideas are global best practice, and must form the foundation of our new mining policy and Mines and Minerals Act.

Beyond Zimbabwe, the ideas presented in this treatise must be extrapolated to the rest of the Continent. This will dramatically advance the development of the continent. Currently the African narrative has not been all gloom. Seven out of ten of the fastest growing economies in the World for the period 2011-15 are African. These are Ethiopia, Mozambique, Tanzania, Congo, Ghana, Zambia, and Nigeria. In the period 2001-10 there were six African countries in the top ten; Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda. These countries are experiencing what has been called China or Asia type growth rates of around 10%. Africa is the second fastest growth region after Asia, and it is projected to overtake Asia within a year’s time. Africa’s middle class is poised to be greater than that of China in ten years’ time. All these new statistics about the continent point to new economic growth and improved country competitiveness leading to new business opportunities. It also presents scope to uplift African communities out of poverty.

What Africa has an opportunity to do is not just keep the GDP numbers going between four and ten percent. It's about the quality of that GDP growth. African countries are growing at good rates, but growth alone would not lead to prosperity.  While foreign direct investment (FDI) numbers look good, diversification is needed to increase trade numbers. If we want to increase intra-African trade country to produce something that is trade-able, which other countries want. This speaks to the importance of value addition. Where are our comparative advantages? Are we able to produce the right type of quality and quantity at the right price? One of the major problems is producing a new growth model that is more inclusive, especially of the jobless and poor.

While Europe remained a big trading partner, countries in Africa needed to create export opportunities between themselves. The economic growth Africa is experiencing needed to reach more people on the continent. How do we make sure people are not left out? How do we arrest the growing inequality? Effectively leveraging Africa’s vast natural resource base will play a significant role in the sustainable development of Africa where there is strong, shared and inclusive economic growth. As Zimbabweans, we must be part of this great narrative.

Developing and managing the mineral wealth of Zimbabwe for tomorrow requires Leadership. Now that brings us to the age old leadership debate. Are leaders born or are they made?  Leadership philosophers, academics and practitioners have grappled with this subject. Those trying to be clever and half have posited that “It is all of the above!”  Well, the answer is simply “NONE OF THE ABOVE!” Leadership is a decision. It is a choice. Anyone can lead. I therefore urge both individual and institutional members of the Chamber of Mines, together with the rest of the mining sector ecosystem, to decide to lead, and champion the issues I have raised. It will take leadership.

We had animated debates throughout the country when we were crafting the new National Constitution. Why are we not having the same excitement and vigorous discussions as we develop a new Mines & Minerals Act? In fact, given the immensity and critical nature of mineral resources in our economic development, it is imperative for the entire citizenry, government, private sector, and civic society to be actively engaged in the development of a new mining dispensation in the country which will guarantee shared national prosperity.

I thank you

Arthur G.O. Mutambara
Deputy Prime Minister, Republic of Zimbabwe


 
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