Barrick Gold Corp. (ABX) said plans by Zambia, Africa’s second-biggest copper producer, to more than triple royalties for the company’s local unit will threaten the viability of its Lumwana mine.
The southern African nation’s finance minister told lawmakers last week he planned to replace corporate income taxes for mines with higher royalties from Jan. 1. The current rate of 6 percent for all mines will rise to 8 percent for underground mines and 20 percent for open-pit operations, Alexander Chikwanda said.
“Lumwana is a low-grade, open-pit operation with constrained margins,” Andy Lloyd, a spokesman for Toronto-based Barrick, said yesterday in reply to e-mailed questions. “Applying a 20 percent royalty rate on Lumwana would seriously challenge the economic viability of the mine.”
Zambia wants to ensure it receives more revenue from mines that government officials and charity groups have accused of avoiding taxes, claims that companies operating in the country have denied. Charging a higher royalty on sales and removing profit-based tax will ensure money is more equitably shared between mining companies and the government, Chikwanda said in his budget presentation.
Barrick, the world’s biggest gold producer by output, acquired Lumwana when it bought Equinox Minerals Ltd. in 2011. The copper mine has disappointed, prompting Barrick to take a $3 billion writedown in 2012 after costs were higher than expected.
Double the Tax
While Barrick has said it saw improved performance at the mine last year and is targeting further gains, processing of ore was interrupted this year for about three months after a partial collapse of a conveyor belt.
If the Zambian royalty was applied to top-line revenue, it would reduce Barrick’s estimated net asset value by about 3.7 percent, Greg Barnes, a Toronto-based analyst at Toronto-Dominion Bank, said in a note on Oct. 14. At current copper prices, the proposed royalty would almost double the tax burden on Lumwana, Barnes said.
The Lumwana mine, in Zambia’s Northwestern province, produced 260 million pounds of copper last year.
First Quantum Minerals Ltd. (FM), which got 52 percent of its revenue in 2013 from Zambia, according to data compiled by Bloomberg, has also warned that the new tax system will hurt mines in the country. Glencore Plc and Vedanta Resources Plc also have mines in Zambia.
Barrick “is hopeful that the Zambian government will carefully consider industry concerns as part of the budget consultation process now under way, to arrive at a solution that maintains the viability of Lumwana mine and allows for further investment in the country’s mining sector,” Lloyd said.
The government will follow a process before the tax changes are implemented, and “the window is still open for discussion,” Kayula Chimfwembe, chief budget analyst at Zambia’s Finance Ministry, said in a speech this week in the capital Lusaka.
To contact the reporter on this story: Matthew Hill in Lusaka at [email protected]
To contact the editors responsible for this story: Antony Sguazzin at [email protected] Simon Casey