Zambia mine tax increase will hurt production, says Chamber of Mines

Mining companies in Zambia may have to scale down their operations to cope with higher mining taxes recently imposed by President Michael Sata's new government.

Reuters quotes the general manager of the country’s chamber of mines, Frederick Bantubonse: 

“The increase in mineral royalty will significantly raise costs for the mining companies … Each mine will have to examine its own cost structure and depending on the impact of the higher tax, some may decide to shut down certain sections.”

Copper royalties in Zambia, Africa's largest copper producer, doubled to 6% on Friday, when the government introduced its 2012 budget. The increased taxes will be used to pay for social programs and farming subsidies.

Some of the world's largest mining companies operate in the country including Vale SA, First Quantum Minerals, Barrick Gold, Vedanta Resources and commodities giant Glencore.

There are also a number of Chinese-owned mines which have come under criticism lately for mistreating workers, MINING.com reported.

While foreign mining companies watch with suspicion as President-elect Michael Sata makes good on a campaign promise to extract more money from the minerals sector, Financial Post mining writer Peter Koven says the royalty increase could have been worse:

Koven observes the effect of the royalty hike on Vancouver-based First Quantum Minerals was small:

TD Securities analyst Greg Barnes dropped his 2012 EBITDA estimate by just 4% to reflect the change, which shows how minor it is. If the 2008 windfall tax was re-introduced, Mr. Barnes wrote that it would negatively affect First Quantum’s 2012 earnings by 20%, and would increase the effective tax rate to 56% from 43%.