Miners sing the blues as prices tumble

HARARE - Volatility in global metal and commodity prices has raised its ugly head and is likely to wreak havoc on the local recovering mining sector.

According to the International Monetary Fund (IMF), the near-term outlook for commodity prices, as reflected in future prices, shows broad declines across all main commodity groups, with prices projected to decline by two percent in 2013 (year-over-year).

Global banker, Credit Suisse lowered its commodities’ price forecasts for this year and next, saying the commodity complex would likely remain under pressure mostly on depressed global growth and prospects of slower Chinese activity.

The bank reduced its 2013 and 2014 average price forecasts for commodities including oil, precious metals and base metals.

Already gold producer, New Dawn Mining has warned it might shut or sell its operations in the country if the gold price continues to slide and its cost-reduction measures fail.

With Goldman Sachs projecting yellow metals price fall to around $1 050 by the end of 2014, the outlook is not good for miners such as New Dawn which has announced salary cuts and pondering on the prospects of its continuance with operations of its five local mines.

The Toronto Stock Exchange-listed miner, which employs over 3 000 people in the country and owns 100 percent of the Turk and Angelus, Old Nic and Camperdown Mines, in addition, through its Falcon Gold Zimbabwe Limited subsidiary, the company currently owns 84,7 percent of the Dalny, Golden Quarry and Venice Mines, and a portfolio of prospective exploration acreage in the country, also says it has frozen all capital development projects and negotiated temporary price reductions with suppliers of various critical supplies, ranging from five percent to 15 percent.

The company, which reported a 4,7 percent year-on-year increase in gold production to 9,986 oz and registered a 10,2 percent decline in gold sales for the June quarter, added that it would eliminate, or reduce, certain administrative positions in Canada and Zimbabwe, and that it had already reduced, or deferred, certain costs at its corporate offices in Toronto, including management compensation and board fees.

Continuing with the swan song is Mzi Khumalo’s Metallon Gold, the country’s biggest gold producer, which is reportedly linked with a planned salary cut for its work force, spread across its five operating mines, as a cost containment measure.

Mwana Africa plc, parent company for listed Bindura Nickel Corporation, has also issued a trading warning on the planned revival of its Trojan Mine, due to poor gold and nickel prices.

“…due to a sustained decline in… the prices of gold and nickel, we have embarked on a significant cost-cutting exercise at corporate and project levels ,” Mwana chief executive Kalaa Mpinga said in his report for the quarter ended June 2013.

Nickel has dropped 22 percent since the start of the year, while gold reached a 34-month low of $1 180,50 an ounce on June 28.

The big question on many people’s minds is how bad can it get for the miners, with outgoing Finance minister Tendai Biti having slashed growth targets for the sector, from an over-ambitious 17 percent to a paltry 5,3 percent for the year.

If that was not enough, the economic growth targets that had been premised on the extractive industry, also took a knock, with the country now chasing a mere 3,5 percent growth rate from an initial five percent.

This comes as global auditing and advisory firm Ernst & Young warns that a planned economic revival hinged on the country’s mining sector will not be possible due to a turbulent metal and commodity outlook.

“The sector is no longer in growth mode but is maximising on what is already there. Most mining companies are focusing on survival and most expansion projects such as Zimplats’ Phase 11 and Mimosa’s Phase V1 have been put on hold due to low prices and lack of long-term funding,” said Nqaba Mkwananzi, Ernst & Young’s Mining and Metals sector leader for Zimbabwe.

He warned that a review of mining taxes and fees — by more than five times in the past three years, with those for gold and platinum increasing by more than 100 percent and 200 percent respectively, compounded by other charges such as corporate income tax, Value Added Tax, customs duty, Environmental Management Authority (Ema) charges, was weighing down mining operators.

“For large miners, the rapid decline in commodity prices in 2012, rampant cost of inflation and falling returns have created a mismatch between miner’s long-term investment horizons and the short-term return of new yield-focused shareholders in the sector,” Mkwananzi said.

Zimplats in its latest quarterly results ended June 2013, has seen a 66 percent slump in operating profits to $22,5 million, due to lower sales volumes and reduced metal prices, while its revenues suffered a 26 percent knock to close the period at $126 million.

Economist Eric Bloch however, remains optimistic about the prospects of the country’s extractive sector and the slump on metal and commodity prices.

“Undoubtedly, as global economies recover, commodity prices will rise, responsive to increasing demand. As investors into mining have regard to medium and long-term benefits, the present uncertainty over global commodity prices will not be a significant investment deterrent,” he said.

Bloch said the sector will continue to attract investment in tandem with the country’s growth.

“Although the mining sector can and should be a major contribution to economic growth, such growth can also be very markedly enhanced by positive developments in the agricultural, manufacturing, and tourism, sectors,” the economist said.

With its total mineral production in the first quarter of 2013, down 11,2 percent year-on-year and revenues for the half year declining 18 percent to $931 million, the Chamber of Mines of Zimbabwe paints a positive picture on the sectors growth factors despite the negative effects of a global slowdown on its members.

“Industry faced some material challenges earlier in the year. Lower production combined with depressed commodity prices for minerals such as gold will naturally have an impact on state income. But we are hopeful that going forward we will be able to meet our respective targets,” the miners grouping said.

The Chamber — which still requires over $6 billion in recapitalisation funds — however, said despite a raft of challenges facing its members, it remained committed towards increasing production levels and meeting its growth targets in line with the 2013 budget.

“Just like other sectors of the economy, mining continues to face a myriad of systematic challenges that include steep cost structures, energy shortages and inadequate capital. These factors weigh down on the potential output from the mining sector. Certainly the commitment to meet targets is there,” it said.

“Without doubt, there is a lot that mining can contribute to the development of our economy and society — and we as miners we stand ready to do our part.”

As competition continues to intensify over attracting investment into the sector, the miner’s body said a common understanding of constraints, opportunities and current realities of the minerals was required when formulating policies and measures that will allow business to invest and increase volumes.

“Firstly, The Chamber of Mines members require an operating and investment environment that is regionally and internationally competitive to be able to increase production.

“Lowering the cost of production in the face of reductions in prices of mineral commodities is crucial. The Chamber will continue to engage stakeholders in efforts to achieve a common understanding of the drivers and challenges of the mining business,” it said.

The Chamber said it supported calls for value addition on minerals but required more consultation and clarification with regards to amendments to the Mining Act, especially the role of government.

“The Chamber is in discussion with its parent ministry, the ministry of Mines and Mining Development regarding amendments to the Mines and Minerals Act.

“However, as you know, the government is also currently crafting a Mineral Development Policy, which will articulate the state’s role in the exporting of minerals. The Chamber is in engagement with the ministry of Mines and Mining Development on this issue too.”

Planned amendments to the country’s mining laws, according to the proponents, aim to provide for an improved and competitive mining legislation framework offering a conducive environment to investors, guarantee increased capacity in mineral production, continuous exploration, benefaction and value addition of minerals.

With the sector having contributed over $2 billion to government coffers in 2012, up from $1,8 billion 2011, its hoped more could be harnessed with a strong legal framework.

However, the dispute surrounding the just-ended election pitting, President Robert Mugabe of Zanu PF and Prime Minister Morgan Tsvangirai of MDC, and laws such as the controversial indigenisation regulations, which require locals to control 51 percent stake in any venture, will remain sticking points for miners, both existing and potential.

 

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