Mining windfall buys critical time

ZAMBIA

With Levy Mwanawasa back in the driving seat, Zambia is reassessing its fortunes and how best to get on with business and life, neither of which has been particularly easy. Now Zambians will be watching closely to see if he can improve on his first term. Report by Tom Nevln.

Economically, Zambia is on an upswing, riding the positive cycle of commodity performance and cashing in on copper prices not seen since the 1960s and 70s. Levy Mwanawasa's most urgent job now is to ensure that Zambia's newfound wealth, coupled with recent debt forgiveness and a fresh flow of development aid, finds its way to the millions of very poor Zambians.

Although the election was one of the roughest on record in Zambia, Mwanawasa, 59, in power since 2001, banked on his image as safe, dependable and proven and this was sufficient to tilt the ballot in his favour. On his watch GDP rose by nearly 5%, with inflation in single digits, while next-door Zimbabwe's surpassed 1,200%.

"There's great poverty in Zambia that has to be tackled," Mwanawasa conceded, and he called for more time to make further inroads against poverty, of which "I have only just scratched the surface".

The mining industry, most of it comprising copper extraction and refining, blossomed suddenly when the China-led demand for base metals exploded two years ago sending prices through the roof.

According to the Insight Africa website, Chinese investment in copper mines and other industries amounts to some $300m.

The election highlighted the sensitivity of industrially and strategically important metals, such as copper, cobalt and zinc and the extent to which they have risen in prominence with growing demand and the sustained run-up in metals prices. These sent waves rippling across international relations, politics, economic development and human rights communities.

At latest estimates, some $lbn will be invested in new and existing mining operations in Zambia over the next three years. According to the country's permanent secretary for mines and mining development, Lennard Nkhata, Zambia's copper mines are currently producing some 400,000 tons of the metal a year and are expected to exceed 700,000 tons next year, a production level not seen since the 1970s.

Canadian, Australian and South African mining houses are showing renewed interest in the Zambian mining sector and are dominating exploration and mining of copper and other base minerals, along with gold and gemstones.

In the forefront is Equinox Minerals, developers of the $800m Lumwana copper mine, one of the world's largest undeveloped copper deposits. The project, due to go on stream in 2008, has an anticipated yield of nearly 170,000 tons a year in the first six years of its projected 37-year life. Uranium as a by-product will also be extracted, adding to the project's viability. The current price of uranium is about $50/lb.

"While Zambia has favourable mining legislation and incentives comparable with other African mining destinations, the government will need to continue investing in infrastructure to fully exploit the country's potential," says Andrew Maggs, Africa Business Intelligence consultant. "Reliable sources of power and water as well as efficient road and rail links are a prerequisite for any new mining venture." Of concern also is Zambia's poor showing in the World Bank's Doing Business in Africa 2006 where it is listed as one of the most bureaucracy-bound trading and investing destinations.

Sudden riches may not be all they are said to be, the Zambian government is finding. Increased copper production and sky high LME prices have triggered a flood of hard currency into Zambia's Treasury resulting in a significant strengthening of the kwacha, knocking the bottom out of other exports.

Zambia is the fourth-largest copper producer in the world and exports of the metal will earn the country $2.7bn this year, about a third of the national income. Debt relief and development aid of $750m will further harden the kwacha. The danger to Zambia's currency value is in spending too rapidly causing exchange rate spikes that could hammer carefully nurtured export industries.

One such early victim is the price-sensitive vegetable and flower industry that exports mainly to European markets. The director of the Zambian Export Growers Association, Luke Mbewe, says the kwacha's sudden strength has meant a 25% loss in foreign sales and forced the layoff of around 6,000 workers. The tourist industry has lost ground for the same reason.

Mwanawasa's real challenge is to transform Zambia, specifically its mining industry, into a real money-spinner through further and real beneficiation of the ore it extracts.

A step in the right direction for many is Mwanawasa's intention to renegotiate mineral royalty taxes from the current 0.6% to 2.5%, along with new legislation that would compel companies to pay qualified Zambian miners higher wages.

Foreign mining companies are notoriously ruthless in their financial dealings and mindful of equally rich pickings in competing emerging territories, Mwanawasa has pledged that Zambia will maintain "cordial relations", with the global mining community and that they would be dealt with "very carefully".