Players in the mining industry expect to ramp up their production by over 40% in 2021 but says loss of value on the surrendered portion of export proceeds is making it difficult for them to procure from local suppliers who use parallel market rates.
Zimbabwe’s mining sector is highly diversified, with close to 40 different minerals. The predominant minerals include platinum, chrome, gold, coal and diamonds.
The government expected the sector to drive economic growth in 2020/2021, but the Covid-19 pandemic and unresolved long-standing labour disputes have dampened such optimism. However, the central bank has projected a 3.4% growth of mining growth from a negative of 9% in 2020.
A survey by the Chamber of Mines showed the majority of minerals are expected to record increased output for 2022 compared to 2021. Analysis of responses by sector show that output is expected to grow by an average of 5% for PGMs and up to 43% for the diamond sector.
“Driven by new projects and expansion of existing projects particularly in gold and platinum,” reads the state of the mining report.
The Chamber of Mines revealed that nearly 55% of the respondents are planning to use retained earnings to inject more capital in 2022.
Overall mining business confidence index (MBCI) for Zimbabwe’s mineral output growth projections stood at 9.8 in 2021 and 17.0 in 2022.
Mining industry capacity utilization was at around 80% in 2021 and anticipated to be 83% in 2022. Identified constraints include capital shortages, high cost structure, inadequate foreign exchange retention, loss of value on the surrendered exports, power outages and Covid-19, according to the Chamber of Mines.
While operating costs are anticipated to increase at a rate more than increase in revenue, the respondents anticipate profitability to improve. MBCI for profitability prospects stands at 27.3 in 2021 and 25.0 in 2022.
The major cost drivers identified by respondents are procurement (45%), labour costs (22%) and electricity (17%), among others such as amortization and eternal contractors, according to the report.
Miners are less confident about the prospects of a competitive investment environment. The findings show that about 70% of the mining executives expect the investment environment to remain depressed as in 2021 while only 30% expect it to improve in 2022.
Fiscal regime is expected to remain suboptimal by over 64% of the respondents. Key issues reported to undermine viability include high royalty, beneficiation taxes, high environmental management levies and misaligned Rural District Council charges.
“All respondents universally agree that the Environmental Impact Assessment fee of 1.2% of the project cost with a US$2 million cap is prohibitive for new projects and it discourages investment in the sector,” said the Chamber of Mines.
Respondents indicated that foreign exchange retention of 60% is inadequate due to royalty, electricity costs, taxes, statutory obligations and suppliers’ preference for forex.
“All respondents indicated that the value of the surrender portion that is liquidated into local currency at the official auction rate has been significantly eroded making it inadequate to procure from local suppliers who use black market rates. The respondents highlighted that the exchange rate disparities have caused a loss of at least 20% of gross export proceeds.”
Survey findings show that mining executives are anticipating the infrastructure and energy situation for the mining sector to worsen in 2022. Reasons provided include “fragile electricity supply, ZESA’s push for an increased tariff as areas of concern and exporters inability to meet ZESA’s additional requirements to import power from the region.”
“Significant number of respondents (33%) reported that they face daily outages of at least 6 hours. Respondents experiencing significant power outages indicated that they are not connected to dedicated power lines,” reads the report.
Most respondent executives, 74%, are expecting the mining policy environment to remain unpredictable and inconsistent, citing Government’s failure to finalise outstanding policy matters including Minerals Development Policy, mining cadaster.
Findings show that 70% of inputs were procured locally and 22% of the 70% were produced locally. – Report available on request – Harare