The far-reaching amendments to Zambia’s mining tax regime announced by Finance Minister Alexander Chikwanda in his 2015 Budget Speech on 10 October 2014 and presented to Parliament on 28 November 2014, were passed by Parliament on 17 December 2014.

With effect from 1 January 2015 open cast and underground mining operations are exempt from corporate income tax, but will be subject to a final 8% mining royalty in respect of underground mining operations and a 20%  mining royalty in respect of open cast mining operations. Zambia has already doubled mineral royalties to the 2014 rate of 6% in 2011.

The new tax system aims to collect mining revenue at different stages in the production process with 30% corporate income tax to be levied on income earned from the processing of purchased mineral ores, concentrates and any other semi-precious minerals, as well as income earned from tolling (an agreement between the owner of raw materials and another party for processing such materials).

These changes will not apply to the mining of industrial minerals such as lime, sand and gravel.

Minister Chikwanda said that royalties are simpler to administer and more transparent than corporate income taxes. He added that the changes will “achieve a more equitable distribution of mineral wealth between government and the mining companies” and are expected to raise an additional 1.7 billion kwacha (USD270 million) for the fiscus in 2015.

Pan-African advisory firm africapractice’s CEO Marcus Courage has warned in November 2014 that the new tax regime would leave several mines cash flow negative and unsustainable, with mining companies with high production costs potentially having to cease operations.  Under these proposals, those mines with the highest costs and most employees would be subject to the highest taxes. Barrick Gold Corp, a Toronto-based group which operates the open-cast Lumwana copper mine, announced in November 2014 that the new tax system would threaten the viability of its operations in Zambia.

The World Bank in December 2014 highlighted that the higher royalty rates could lead to a reduction in government revenue, job losses and falling copper output as producers may start favouring higher-grade ores or shut down operations. It recommended that the government should rather focus on building capacity to monitor compliance and collection.

Despite all of this, the proposed legislation changes were approved unchanged by Parliament.

TD Securities analyst Greg Barnes points out that the increased royalty becomes punitive at lower copper prices.  He calculates that  Kansanshi Copper Mine’s total tax burden is expected to increase by nearly 50% at USD2.50 per pound copper while Lumwana’s total tax burden would almost triple.  IHS forecasts that it is unlikely for global copper prices to recover in 2015, which increases the potential tax cost for mining companies.

Barrick Gold was the first mining company to react to the legislation changes. Co-President Kelvin Dushnisky announced that it will have no choice but to suspend operations at its Lumwana mine, as the economics of the operation cannot support a 20% royalty. Major job cuts are planned to begin at the mine in March 2015, following the legally required notice period for putting the mine in care and maintenance.  The mine currently creates about 4 000 jobs, 2 000 which are mainly Zambian nationals employed by Lumwana and the remainder contactors working for the mine.  It is expected that all operations at Lumwana should be fully cancelled by the second quarter of 2015.

The Zambian mining industry has already been in turmoil since 2014 with Canadian group First Quantum Minerals Ltd, which operates the open-cast Kansanshi Copper Mine (the biggest copper producer in Zambia), announcing in June 2014 that it had put investments worth USD1.5 billion on hold over withheld VAT refunds.

Switzerland-based Glencore Plc, which run underground operations in Zambia, in October 2014 halted operations at its zinc mine and announced that its Zambian copper division suspended part of an USD800 million project to increase copper production in the country as a result of more than USD200 million VAT refunds owed to the company.

Mumbai-based Vedanta Resources Plc, which operates the underground Konkola Copper Mines, said the proposed changes may have a material negative impact on the profitability of the mine. Vedanta’s relationship with the government has been deteriorating since the Zambian Revenue Authorities announced in June 2014 that it would undertake a formal forensic audit of the company’s operations since 2007, following allegations by lobby group Foil Vedanta that Vedanta has been under-reporting production levels and under-paying taxes.

Zambia’s mining lobby has estimated that as many as 12 000 job losses could expected and the Chamber of Mines has expressed concern that mining companies could be pushed to cancel their projects in Zambia, which could cost the country over 158 000 tons in 2015.

The ongoing political instability triggered by President Michael Sata’s death in October 2014 has stalled the revision of the mining code and is still creating uncertainty regarding the future and implications of the mining tax regime.  IHS forecasts that companies suspending large-scale mining operations may face punitive measures, such as fines and further withholding of VAT refunds.  The risk of State expropriation will also increase for mines on care and maintenance. At the same time, Nevers Mumba, the presidential candidate for Zambia’s Movement for Multi-party Democracy (MMD), has promised to review the controversial royalty increase if he wins the special presidential election on 20 January 2015.  Mr Mumba said he has already appealed to Barrick Gold to await the outcome of the election before making any final decisions regarding ceasing its operations in Zambia.

Zambia in 2013 lost its position as Africa’s largest copper producer to the Democratic Republic of the Congo for the first time since 1998. Despite the short term revenue gains, the mining tax changes could only contribute to further weakening Zambia’s position in the industry.