Relations between the Zambian government and its copper mining sector have just taken a turn for the worse.
“If it is the will of the Zambian people that we divorce with these mines, then we will do so.”
President Edgar Lungu has swiftly followed through on his threat with a move to liquidate Konkola Copper Mines (KCM), the local operating unit of India’s Vedanta and one of the country’s biggest producers.
Government officials have been quick to stress that this does not amount to the nationalisation of KCM’s assets but inevitably it has led to comparisons with the last time the Zambian state took control of its copper sector in 1969.
What followed were years of structural decline as systemic under-investment saw the country’s production collapse from over 700,000 tonnes per year to less than 250,000 tonnes at the end of the 20th century.
The subsequent recovery has returned Zambia to one of the world’s largest producing nations, meaning Lungu’s proposed “divorce” could have significant ramifications both on copper supply and price.
Indeed, the impact is already being felt.
KCM, which is owned 79.4% by Vedanta and 20.6% by Zambia’s state copper holding entity ZCCM-IH, has had a long, troubled relationship with its host nation.
There is a running dispute about tax payments, while allegations of environmental damage are currently being heard by England’s Supreme Court.
What appears to have triggered the move to intervene more directly, however, is KCM’s decision to reduce output at its Nchanga operations.
The government accuses KCM of breaching its operating licence and is threatening to strip Vedanta of its stake and sell it to another investor.
Vedanta is vigorously resisting the move, which it describes as “an apparent abuse of the legal process”, and is calling for urgent talks.
KCM finds itself at the heart of Zambia’s nationalist storm but it is not the only operator in the government’s sights.
The move on Vedanta should “send a strong signal to other mining companies”, according to Joseph Chewe, President of the Mine Workers Union of Zambia.
He specifically called on Glencore to reverse its decision to close two mine shafts at its Mopani Copper subsidiary.
Zambia’s Mines Minister, Richard Musukwa, has said the Mopani operations should be handed over to contractors if Glencore won’t maintain operations.
Glencore’s closure of the two shafts at the Nkana mine in Kitwe is simply down to reserve exhaustion.
The planned wind-down has been accelerated because “limited resources” at the operating company meant it could no longer afford to operate “old and inefficient” shafts.
The government’s call for the operations to be passed to local contractors is aimed primarily at preventing job losses but begs the question as to how anyone can profitably exploit copper deposits once they have come to the end of their natural life.
KCM has been struggling for different reasons.
Vedanta, which claims to have invested over $3 billion since acquiring its stake in 2004, reported an operating loss of $95 million on its Zambian operations in the half year to September 2018.
KCM’s cost of production in the period was 275.5 cents per pound, or around $6,700 per tonne excluding royalties.
Including the new higher royalty payments lifts that figure to 355.7 cents, or $7,800 per tonne. The current copper price on the London Metal Exchange stands at $5,900.
It is an example of how an aggressive raft of tax changes by the Zambian government is pushing up operating costs for the country’s miners.
Moreover, one specific tweak in the tax code has directly impacted production at both KCM and the Chambishi smelter operated by ERG Group.
A 5% import tax on raw materials has cut off the flow of concentrates from neighbouring Congo to both plants.
Chambishi has been mothballed, while KCM’s Nchanga smelter has reduced output to compensate for the loss of custom feed.
That in turn has generated a knock-on effect on KCM’s mining operations, which use the sulphuric acid generated by the smelter to leach copper.
The key takeaway is that KCM wasn’t turning a profit even before the multiple changes to Zambia’s tax code and is now struggling even to maintain normal output with them.
As with Glencore’s Mopani, it’s hard to imagine that a new owner could do anything to reverse either the underlying economics of the KCM mines or the negative impact on the smelter of the import tax.
The Zambian government shows every sign of repeating the mistakes of the past in its handling of the copper sector.
Now as then the country’s public finances are in a parlous state. Now as then the state is turning to its copper mines in a bid to boost desperately-needed revenue.
And now as then, the state seems prepared to take a coercive approach to those entities it perceives not to be operating in the national interest.
The cumulative impact of the new tax regime is already causing production issues such as those at KCM. The Zambian Chamber of Mines has warned that the country’s copper output could fall by as much as 100,000 tonnes this year because operators “cannot afford to continue producing as before.”
It’s taken more than a decade of private investment for Zambia’s copper production to return to its pre-nationalisation glory years. Production last year was 862,000 tonnes, according to the Chamber of Mines, the highest level in at least 40 years.
That means that what happens in Zambia and neighbouring Congo, which has been making its own aggressive tax demands of the copper sector, has global significance for the copper market.
With analysts questioning copper’s ability to generate sufficient supply to feed extra demand from the electric vehicle revolution, the market can ill afford the sort of collapse in African Copperbelt production seen in the 1970s and 1980s.
Much now hinges on the KCM liquidation as it winds its way through the Zambian courts.
“There will be no takeover (and) no seizure of private assets”, according to Presidential spokesman Amos Chanda.
The Zambian government must deliver the proof of that statement or face a cumulative reaction from other miners operating in the country.
(By Andy Home; Editing by David Evans)