Soft Infrastructure Critical For Success of Small Scale Miners

Harare Shamva road is largely a quiet road when compared to other busy inter-town highway. Those that drive down the road will, with no doubt, enjoy the pothole free highway. Driving with a relaxed mind, one has good chances to marvel at some beautiful hills and pollution-free man-made small dams that adorn the snaking road.  

About 80km from Harare towards Shamva, there is some activity to the right side of the road where Shamva gold mine has been operating for many years.  Just across Shamva gold mine, about 4 km away in a very bad dusty road, lies the famous Tafuna Hills. From the main road, Tafuna Hills looks serene and just like other ordinary hills in the area.  The very steep slopes and ordinary looks would, under normal circumstances, not entice a person driving down the highway to cast a second glance. Rather, the collapsed Shamva gold mine shaft that is visible from a distance may be a more intriguing attraction.

Tafuna Hills however offers much more than what meets the eye from a distance. A snaky and gullied dust road from the highway takes one to the foot of these hills and, all of a sudden, there are signs of concentrated human settlements, including shacks.  A further drive up the hills would herald the start of small scale gold mining activities. The many small scale miners that form part of the envied Tafuna Hills mining community have one thing in common – good ore yields around 8 grams per tonne and lack of mining equipment. The latter is a big problem.

The small scale miners, working in groups popularly known as syndicates, use hammer and chisel to dig into earth in pursuit of lucrative gold reefs, largely known as ‘bandi’. Very few have capacity to hire or buy compressors to drill and blast the very hard blue stones that characterise the area. Equally, an even fewer number has slurry pumps to pump out water from the shafts as they encounter more underground water the deeper they go. With this very manual and painful way of extracting gold ore from underground, many of these small scale miners end up hauling out, at best 4 tonnes of gold ore per week. The average weekly earnings therefore converge around $180 per week for most of the syndicate partners. Considering the very low alternative returns from other rural activities such as farming, this reward for labour is very high and addictive that it keeps attracting the small scale miners to shed sweat in the unsafe underground work environments. This tale is common for most small scale gold miners across the country. 

Small scale gold miners, whose definition expands to capture as well these non-mechanised producers, contribute about 50% of the total gold production in Zimbabwe. Zimbabwe gold exports rose to $627 million in 2011 and may surpass the $900 million mark in 2012. The sector is therefore very crucial after diamond and platinum mining and the government needs to do much more for the small scale gold mining sector to transform its image and improve output. A number of small scale gold mining associations have been regularly calling on the government to come up with schemes that provide funding and equipment to the small scale miners. 

The government has a history of bailing out big corporates and farmers by giving concessionary credit facilities and equipment. The small scale miners believe they deserve the same treatment because of their unquestionable contribution to GDP and exports.  These calls are genuine and seek to address the inconsistencies on part of the government market interventionist policies. But a more objective assessment of the small scale mining industry reveals that they do not need active government assistance in terms of cash hand-outs and equipment. Rather, the small scale miners need to lobby the government, through the Ministry of Mines and Mining Development, to establish efficient soft infrastructure that allows the private sector financiers to find reason to finance the rather lucrative sector. 

The mining registers at the Ministry of mines are not easily verifiable and involve huge hassles in ascertaining ownership. It takes a lot of time to establish who owns what claims, and equally, the claims are not easily transferable. The Ministry of Mines and Mining Development needs a very efficient mining register system that allows easy cross-referencing,  traceability and transferability of ownership. The absence of this soft infrastructure at the Ministry of Mines has been a major source of conflict in many mining transactions and leaves the system subject to manipulation. The Zisco-Essar deal is one such deal that has been subjected to controversy and the root cause can be easily linked to absence of efficient soft infrastructure that allows easy verification. The recent Kwekwe gold rush that grabbed headlines got more exciting not only because of the easy find, but because a number of people had ‘genuine’ certificates proving legitimate ownership of the said gold claims. 

The Zimbabwe Government and ACR disputes over diamond claims in Chiyadzwa can as well be easily linked to inadequate information systems at the Ministry of Mines. And there are many other disputes revolving around ownership of claims that emanate from the inefficient soft infrastructure that exists at the Ministry of Mines and Mining Development. 

Private sector financing mechanism thrives mainly when the underlying collateral is marketable and not easily susceptible to disputes over ownership. The inability of the small scale miners to attract private sector funding is, to a large extent, a result of their inability to prove undisputed ownership of their claims. Zimbabwe has a thriving small scale mining sector and there is no reason why the mainstream lenders should shun this for other sectors of the economy whose prospects may not be even as bright as those of the small scale mining industry. 

The government recently hiked the mining registration and renewal fees to deter speculative holding of claims by individuals and corporates who, according to the government, are disrupting the intertemporal distribution of natural resources wealth. The overall objective is right, but the government has to equally consider sanitising the soft infrastructure aspects relating to ownership verification and transferability of mining claims so that the private sector finance mechanism can easily find small scale miners a good market for lending. 

The local banking sector, sitting just around $3.3 billion deposits and riding on a precarious loan to deposit ratio of around 81%, has no meaningful capacity to finance big mining transactions off the domestic balance sheets. The big mining projects have always been and will, for some time, continue to rely on offshore financing arrangements to fund their requirements. The small scale miners are very much localised in nature and have not capacity to attract off-shore funding and therefore would need to rely on the local banking institution for funding. Expectations by some of the small scale miners associations that the government should provide sustainable funding and equipment purchase schemes for their members are justified, but far fetched. 

Yes, the government has done that before but the scale, reach and success remains very limited relative to the demands of the small scale mining industry. Working towards attracting domestic financiers to finance small scale miners should be the utmost priority for the government and small scale miners associations in search for a sustainable funding solution. And invariably the issue of soft infrastructure becomes the most important aspect that needs to be addressed by the government, without which the small scale miners will remain largely without access to finance.

Small is beautiful after all!

Zimbabwe’s big corporates have hit hard times. Profits are hard to come by, a clear sign that the high gearing levels will persist much longer than desirable. About 36 percent of the listed companies made losses last year, and this year there is no evidence that the situation is going to be much better. In any case, the outlook for this year is much worse than was much anticipated. Cumulative corporate losses have surpassed $710 million since 2009, a frightening figure considering the very low GDP of about $7 billion and the fact that these losses came from companies that contribute less than 10 % to GDP. This revelation should be a clear sign to policy makers that the growth path of this country cannot be pinned on the big corporates alone.  The German and Chinese growth models are now an envy of most countries the world over, and the Zimbabwe government, coming from hyper-inflation, needs to consider the Ministry of Small to Medium Scale Enterprises as the pivot from which sustainable long term growth of economy will emanate from.

A recent report from China reveals that 90% of the private sector businesses that contribute 70% of employment are family owned enterprises. They further contribute 60% to GDP growth and about 50% to tax revenues. The German Mittelstand industrial model, based on small SMES, have provided anchor to the German economic model and today German is one of the strongest economies in the troubled Eurozone. The case for the small companies to champion growth is easy to follow. The SMEs are more efficient in terms of operational structures and can produce, with minimal equipment, goods at lower per unit costs than the big behemoths. 

This past week I visited over 10 SMEs in Chinese light and heavy duty equipment manufacturing companies in the Shanghai and Haining industrial areas in China. I have come to understand the most important dynamic that is at the centre of successful SMEs – thus the ability and flexibility to operate efficiently with minimal multi-skilled labour force and of course optimal investment in equipment. Eight of these companies, with sales averaging around $60,000 per month each, are all export oriented and have never supplied their domestic market notwithstanding operating in very humble premises and committed multi-skilled labour force.

Because of the fierce competition that exists within China itself, most companies thrive to provide goods and services at the most competitive price in order to remain in business. China, which exported good worth $365 billion to the USA in 2010, attributes its success, to a large extent, on the resilient small companies that have not only managed to have an influential depressive role on the national wage rate, but have equally provided the most competition to the big established companies in China. This is the competition that has seen Chinese companies reaching out to the global market for survival and China has since surpassed Germany as the world largest exporter. For the first quarter of 2012, Chinese exports of goods stood at $430 billion.  

Coming back to our domestic investment markets, it is the end of the first quarter and about 46 out of the 76 companies listed on the Zimbabwe stock exchange are trading below their 01 January 2012 prices. Considering that about 36% of the companies listed on the Zimbabwe stock exchange made losses as of 31 December 2011, it therefore becomes comprehensible why the market sentiment is very negative about the prospects of the Zimbabwe Stock Exchange in generating value for investors. There are, of-course, pockets of optimism in the economy but generally when more than a third of listed companies fail to generate positive earnings in an economy that is bullish about recovery, then it is a good cause for concern for investors. 

Notwithstanding that most of the companies are trading below their historical P/E ratios and at about a third of the average P/E ratios of their regional counterparts, the bearish trends are expected to characterise the Zimbabwe Stock Market for the greater part of 2012. The current government of national unity in Zimbabwe has differed over a number of key policy aspects, with the discord growing louder as the talk of elections this year gets momentum. The stock market is the most timid of all investment markets. Its fortunes swing on the extremes of the information continuum. It has the most efficient and equally as well, the most irrational way of transmitting information into pricing of stocks. 

The bickering policy makers in the government of national unity have been sending conflicting signals over the management of the economy. With the talk of elections gathering momentum, the differences are going to be getting sharper and to some extent, will be deliberately over-exaggerated as policy makers wear their political hats and toe party lines religiously in order to retain their ministerial and more importantly, party positions. The Zimbabwe stock market performance for 2012 becomes more sentiment driven under such circumstances and will therefore most likely remain bearish.

The money market average yields during the first quarter of the year, around 15% per annum, are most likely to remain attractive for the greater part of the year. From the market data coming through, banks are most likely to be more liquid this year than they were in 2011 considering that banks controlling about 34% of the loanable funds in the market have indicated that they are engaging in massive slowdown in lending. This move should, under normal circumstances, leave more liquid assets on bank balance sheets and may reduce the banks’ appetite to engage in aggressive funding of short positions that had been keeping the money market in Zimbabwe very lucrative for the past two years as banks competed for scarce liquidity. Notwithstanding the above that points to more liquidity likely to accumulate in the market, the money market is forecast to generally remain in deficit, which deficit, when compared to the aggregate demands of industry, will likely sustain yields of above 10% per annum for investors on the money market. 

Mining and national emotions - the difficulty of separating the two

The extractive industry has become very emotive the world over. It has becomes  so to the extent that even the first world economies such as Australia that would naturally be mistaken to have soft and liberal investment regulations and taxation have taken aggressive steps towards claiming a larger share of from the extractive industry. On 19 March, the Australian Parliament, amid protests from the big mining companies, passed a mineral resource rent tax that will hit hard on coal and iron ore miners, their biggest exports. At 30% of profits, the new taxation laws are expected to rake in $11 billion for the next three years for the Australian government. 

Nigeria, faced with unstable exchange rate at a time its crude oil exports are expected to hut 2.1 million barrels per day starting May, is mooting renegotiating contracts of oil mining companies. The government believes that it is not getting the best value and renegotiating the terms would improve the fiscal revenue for the West African country that is mired in growing conflict over the distribution of oil windfalls.  Ghana, which produced 2.97 million ounces of gold in 2010 and is the second biggest producer of gold in Africa, will this year see its gold miners paying corporate tax at 35% from 25%. An additional 10% tax on windfall profits will be charged. 

Those countries with monopolies on certain commodities have equally joined the fray. Guinea is home to the world’s largest bauxite reserves, and has an estimated 4 billion metric tonnes, which is about half the estimated global reserves. In September 2011, its legislative body approved a new mining code that sees mandatory nationalisation of a 15% shareholding in mining projects, with the government still having an option to buy an additional 20%. The accompanying increases in royalties will see bauxite miners now paying up to $14 per tonne from around $3. 

Zambia, which expects to export copper worth $8 billion in 2012, resolved to double royalties on copper exports to 6%. Julius Malema and his nationalisation anthem may have been discarded from mainstream politics of South Africa, but his scent still pervades the corridors of power, with debates now centering on a proposed 50% windfall tax on super profits, among other proposals such as the 50% capital gains tax on sale of mining claims.  Zimbabwe has stuck its guns on 51% shareholding on all mining activities, with the biggest mining companies such as the mining giant, Zimplats, reported to having complied with the directives. Alluvial diamond mining in Zimbabwe has been solely reserved for the state. The rationale behind these moves by the various countries to gain a bigger share from the exploitation of natural resources is understandable, and to a larger extent, justified. 

The race for global supremacy has, until recently, been championed by technological advancement. Economies that ran ahead the pack with advanced technologies in production of good and services became wealthier and exerted more influence on global order. Commodities, on their own without much value, became very valuable when processed into final consumer and industrial goods. And those countries with advanced technology that could turn commodities into usable consumer and industrial goods enjoyed massive economic growth that transformed societies into what today is referred as the highly industrialised world. That was the industrialisation race. The period spanning between 1990s and 2000s has dramatically changed the shape of global influence as rapid technological advancement and adaptability, combined with the ease of labour mobility have all combined in stealing the competitive advantages of economies such as Japan, the US and Britain, among others, that had run ahead of the pack because of technological advantages. 

Companies in the West and US, have now relocated overseas to position themselves in close proximity to resources and cheap labour. Apple has moved its factory to China in search of cheap labour. Countries endowed with natural resources now understand that they can extract more benefits from whoever is extracting them, and that those companies extracting the resources have little choice but to comply with whatever laws are put in place. This has created a huge opportunity for resource rich countries who now can load huge taxes on mineral exports. The mining companies such as Rio Tint and Xtrata in Australia, Konkola Copper Mines in Zambia,  Gold Fields Limited in Ghana, Zimplats in Zimbabwe, among others, have little choice but to mourn and eventually comply. 

On a related note, Zimbabwe recently mooted plans to compel mining companies to bank locally, and as expected, there are divided opinions. The mining companies are not happy, and they are right.  Coercing mining companies to bank locally may not achieve the desired results on its own. Mining sector requires long term capital that is reasonably priced, especially at a time as now when some mining companies in Zimbabwe missed out on a global commodities boom that ran for seven strong years to 2007.  This was again a time when a global liquidity glut saw easy credit becoming easily available, and indeed the mining industry in Zimbabwe missed both ends due to non-progressive exchange control regulations that disincentivised production. 

Today mining companies need long term capital that is not available locally as bank loans rarely go beyond one year. Moreso, the dollar cost of capital in Zimbabwe is 3 times more expensive compared to the global average. The mining companies therefore desperately need their offshore accounts to secure offshore loans and embark on production. On the other hand, the Zimbabwean government has not been very clear regarding its policy position on the tenure of the multiple currency regime. Long term loans need predictability especially on the currency of settlement. It would be disastrous for mining companies that would have plunged into huge long-term loans to then realise they cannot meet their debt obligations after a currency may affect their ability to get foreign currency on the open market to settle their obligations. It has happened before and the risks recount fresh memories of the serious foreign exchange challenges that this country faced in the five years to 2008. 

But a closer look at all these problems facing the mining sector reflect again the behaviour of economic agents, and indeed policy makers need to start correcting the fundamental policies for a sustainable future.  The banking sector, sitting on only $3.3 billion, is impoverished liquidity wise because the mining companies, among others, have chosen to bank offshore. Zimbabwe mineral exports are in excess of $2 billion annually, and most of it never comes back. The only way to harvest these outflows and create a robust financial market is to compel the mining companies to bank locally. Zambia has a similar challenge. It exports over $6 billion worth of copper annually yet its financial markets sit on only $3.8 billion worth of deposits. And because of this, it has always fought battles with a volatile exchange rate and very high cost of credit above 25% per annum. 

These fundamental challenges need to be addressed in many African countries rich in mineral endowments, and compelling mining companies to bank locally in Zimbabwe is a step in the right direction. The decision however has to balance with other objectives that should ensure that the mining companies retain part of their proceeds to meet external loan obligations since the domestic financial markets, at least for now, remain weak to fund the mining sector