SCHOOL OF EARTH & MINERAL SCIENCES (SEMS) UZ Presented at the - PowerPoint PPT Presentation

LYMAN MLAMBO Chairman of Institute of Mining Research SCHOOL OF EARTH & MINERAL SCIENCES (SEMS) UZ Presented at the Zimbabwe Annual Mining Conference themed “Realising Vision 2030 through Mineral Resource Led Growth”, Hosted by Chamber of Mines of Zimbabwe, 29 May – 1 June 2019, Elephant Hills Resort, Victoria Falls

Pres esen entation on O Outline • Brief background to the platinum sector in Zimbabwe (to see the potential) • Zimbabwe platinum sector among leading world producers (to see potential) • Platinum production trend (time) in Zimbabwe (to see potential) • What could be the role of Platinum world price in achieving this target (to see potential)? • Challenges facing the platinum sector in Zimbabwe (to see the hurdles we have to overcome) • Imperatives for growth of the sector to 50t by 2030 (the solution)

Backgroun und • Zimbabwe has the world’s second largest reserve of PGMs in the Great Dyke after South Africa’s Bushveld Complex (Valliers 1993, as cited in Chamber of Mines of Zimbabwe, 2015). • There is also potential elsewhere outside the great Dyke as evidenced by 16 platinum EPOs granted in the 1990s (Chamber of Mines of Zimbabwe, 2015). • Thus, the geological prospectivity for PGMs in Zimbabwe is undoubted. However, this satisfies only the first necessary condition for investment attractiveness (Mlambo, 2019). What is the second sufficient condition? This is the question we seek to answer.

Zimbabwe Platinum Sector among World Producers Zimbabwe ranks third after South Africa and Russia (Chamber of Mines of Zimbabwe, 2015; Statista, 2019).

Produc uction T n Trend end Zimbabwe Platinum Production Trends Over past 19 years (Chamber of Mines) Tons 15.5 15.1 14.29 14.639 13.1 12.6 12.5 10.8 10.5 8.6 6.9 5.5 5 5.1 4.8 4.3 4.4 0.51 0.52 2.31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 PROJ • The platinum sector has the greatest potential to expand, besides gold, judging by (see in Chamber of Mines of Zimbabwe, 2015; Makochekanwa & Mlambo, 2018; Mlambo, 2019).  its geological prospectivity,  the several expansion programs by the current three producers (Zimplats, Mimosa and Unki), and  the influx of new entrants into the sector (Great Dyke Investments, Karo Resources and several other projects which are at various stages of planning and evaluation). • 50 tons of platinum by 2030: What is really the magnitude of the TASK ahead in the context of the production trend we have seen?  In the last five years (from 2014 to 2018), platinum production has grown by an average of 2.63% yearly.  Assuming the average growth rate continues, platinum production would grow to about 20t by 2030, which falls far short of the 50t target.  To achieve our target we need to grow the sector by an annual average of 10.78%.  This requires a significant transformation of the current conditions under which the platinum sector is operating.

What c could be t e the r e rol ole of of the p platin inum p pric ice i in a achieving this t target? Price, US$/Oz 2,000.00 1,721.86 1,608.98 1,800.00 1,573.53 1,551.48 1,486.91 1,385.70 1,600.00 1,303.05 1,203.49 1,400.00 1,142.31 1,053.56 988.74 948.86 880.53 840.16 1,200.00 845.31 896.87 1,000.00 691.31 800.00 544.03 529.04 539.13 600.00 400.00 200.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 • It is very dangerous to assume that platinum prices (which we do not control) will increase sustainably in the near future. • Therefore, achievement of the 50t by 2030 cannot be premised on either:  The existence of large reserves of platinum in the country (comparative advantage)  An assumed increase in world market price of platinum • The sufficient conditions for growth of the platinum sector:  deliberate actions to influence the competitive advantage of the sector from within (that is, independent of world price).  In short, we must create conditions that make it greater business sense to invest in the Zimbabwe platinum sector than in other countries or other sectors. • Before we can identify these deliberate actions ( imperatives for the growth of the sector), lets give them a firmer background by looking at the challenges being faced by the platinum sector in Zimbabwe.

Challeng enges es F Faced by d by t the Platinum num S Sector 1. Poor International Ranking of the Investment Environment (Mlambo, 2018) • Fraser Institute’s 2015 rankings put Zimbabwe on (Trench et al (2015):  5 th -last on ‘Policy Perception Index’ (looks at the whole policy environment in the mining sector)  2 nd -last on ‘Taxation Regime Index’ (which is a micro perception index) – average effective rate of tax at 65%  Therefore, the current attractiveness of Zimbabwe as a destination for platinum investment clearly comes only from the simple comparative advantage we have in geological resources, and not from any competitive edge. • Perceptions may not be accurate, being perceptions (not measured), but UNFORTUNATELY they drive investment. 2. Specific Fiscal challenges Comparison of PGM royalty regimes in the SADC Region (Mlambo, 2018. See the various other original sources as cited in Mlambo, 2018) • Platinum royalties in Zimbabwe are based (charged) on gross sales revenue ( in-rem ) rather than on profit ( in- personam ), which:  Obligates even marginal and loss-making firms to pay them .  Makes them a variable cost (as they are exacted also on the cost component of gross revenue), which can then sterilize mineral resources by causing high-grading.  Is a drift away from the general global shift towards the profit basis.  Is less competitive compared to the neighboring South Africa where, though revenue-based, provides some formula to link the actual rates exacted to mine profitability - the rates vary by mine, thus taking into account ability to pay.

• Platinum royalties in Zimbabwe are non-deductible for computation of corporate tax, which results in double taxation of profits. In several countries in the region they are deductible, for example, South Africa, Zambia and Tanzania. • They are currently the highest in the Region at 10% compared to a range of 0% in South Africa (for marginal and loss makers) to 6% in Mozambique and Tanzania. • The royalty regime does not provide for stability clauses , unlike in countries like Mozambique and South Africa. Other Fiscal Challenges (Mlambo, 2018) • High burden of compliance due to a multiplicity of tax heads, regulatory/legislative instruments and collecting agents; • Other fees and ground rentals charged for PGM miners are very high; • An export tax on non-refined PGMs, if effected before establishment of the planned centralised beneficiation facilities, would be a serious disincentive to investment in the sector. 3. Power Challenges • The serious power shortages being experienced in the country have also affected the platinum sector. • Currently peak demand is at 2,400MW at a time available generation had gone down to about 1, 120MW (Nyoni, 2019). • Mining and industrial sectors are the main consumers of energy in the country (40%) (Magombo, 2014). With the establishment of expanded PGM beneficiation facilities this % is going to increase. • In general, a mine requires on average at least 16 hours of uninterrupted power supply every day to ensure that production levels are maintained and that machines run optimally (minor power outages affect machines) (Chipumho, 2011; Chamber of Mines of Zimbabwe, 2015). • It is estimated that the cost of power outages to a mining firm can be as much as 5-6 % of revenue (International Monetary Fund (IMF), 2008; Chamber of Mines, 2015).

4. Water challenges • For the platinum sector as well as the whole mining sector bulk water charges are pegged at US$50/ megaliter, which is too high compared to the US$6/ megaliter charged for other users (Mlambo, 2019) 5. Transport Infrastructure Gaps • It is common knowledge that all forms of transport infrastructure in Zimbabwe have suffered dilapidation over the years. This includes road, railway and air. 6. Finance Challenges • The 2015 World Bank’s Doing Business Report showed that access to finance was the greatest obstacle to doing business in Zimbabwe due to (Chamber of Mines, 2015) :  Limited opportunities for offshore lines of credit (high country risk profile)  Inadequate local funding, of a short term nature and at very high interest rates • The PGM sector is currently operating at almost full capacity (Makochekanwa & Mlambo, 2018):  which implies that the growth to 50 tons would be achieved only if adequate capital is attracted.  Required capital for the sector over the next five years, both for sustenance and ramp up, stands at about US$7 billion (Mlambo, 2019. Also Makochekanwa & Mlambo, 2018). 7. Indigenization requirement (Mlambo, 2019) • All minerals including platinum have now been pronounced to be exempt from the indigenization policy requirement. • However, clarity on this should be established by clear legislation, otherwise the tag of indigenization could continue to linger.