Zambia is optimistic it can renegotiate terms with foreign mining companies operating in the country, finance minister Ng’andu Magande has told Emerging Markets.
Speaking on the sidelines of the Renaissance Capital investor conference on sub-Saharan Africa, he said several companies had been showing “signs of flexibility” and he hoped to start formal talks as early as next week. “We are not looking at any worst-case scenarios right now,” he added.
Under deals signed in 2000 by the previous administration of president Frederick Chiluba – who has since been convicted of corruption while in office – the Zambian government has received royalties equivalent to just 0.6% of the mines’ earnings from copper and cobalt. The mines were sold so cheaply because they needed massive investment to restore output, at a time when copper traded at just $800 per tonne.
But the recovery in the global technology sector and the industrial surge in Asia have prompted prices soar to more than $3,000 per tonne today, turning Zambia’s mines into highly profitable ventures. This has led the authorities to seek new contracts that would transfer a larger proportion of revenues to the public purse, to ensure that the country’s population can benefit from the copper boom.
“At least some of the companies recognize that circumstances have changed, investment in copper is so much more attractive today. Even if they pay more to the government, they will still have a good deal,” said Magande.
He noted that, with 14 different firms operating in Zambia’s copper and cobalt sector, the government only needed to reach agreement with just a few initially to make a breakthrough. “After that, there will be pressure on the remaining companies to explain why they will not move.”
The high price of copper exports has also contributed to appreciation pressures on the Zambian kwacha, which has risen by more than 8% year-to-date, to 3,730 per US dollar. But Magande reiterated the government’s commitment to a free exchange rate, emphasizing that the central bank would only intervene to smooth short-term “violent movements” on an occasional basis.
“These interventions have helped build forex reserves up to five months of imports, from one month a few years ago. But overall movements are market-determined, we should not manipulate the exchange rate,” he said.
Although the stronger currency can put pressure on Zambian exporters, the country had also benefited significantly from cheaper imports, Magande pointed out.
This echoes comments made by Bank of Zambia governor Caleb Fundanga in an interview with Emerging Markets earlier this year. He said exporters had enjoyed lower costs for imported fuel and capital goods, helping them to compete in global markets despite the stronger kwacha.
“There were many agricultural firms that were able to buy extra tractors, for example, so productivity has been improving. Non-traditional exports grew almost 30% in 2006; that’s the bottom line,” Fundanga explained.