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Digesting the 55 percent foreign currency retention threshold for small-scale gold miners

Features Reporter – Monday 25 February 2019

ANALYSIS (Mining Index) – IN the mid-term Monetary Policy statement, Reserve Bank of Zimbabwe (RBZ) governor John Mangudya slashed foreign currency retention threshold for small scale miners from 70 to 55 percent, a move that may negatively affect gold deliveries to the state-run enterprise, Fidelity Printers and Refiners (FPR).

To note, gold deliveries to FPR for the month of January declined to 1.77 tonnes from 2.56 tonnes recorded in January 2018. The decline also saw Fidelity failing to meet its average monthly target of 3.33 tonnes in January.

Fidelity’s previous payment threshold of 70:30 foreign and local currencies respectively was already promoting gold leakages as small-scale miners smuggled gold in search of the hard currency.

Effectively, both large and small-scale gold producers will now retain 55 percent of their foreign currency earnings while the rest will be paid in RTGS dollars.

Other emerging miners welcomed the development saying the 55 percent retention is not bad if Fidelity pays the 45 percent balance using the prevailing market exchange rate.

This however mean miners with higher foreign currency demand will need to buy foreign currency to supplement what is being paid for by FPR.

Some small-scale miners are of the view that the 55 percent payable as cash in hard currency is welcome although they preferred the 45 percent balance to be paid into respective FCA Nostro accounts as foreign currency.

With a further 15 percent loss in hard currency revenue in the new gazetted retention threshold, Zimbabwe Miners Federation’s (ZMF) target of achieving 50 tonnes of gold output by end of 2019 seem to have been thwarted.

Private sector and other associations have been clamouring for government to consider 100 percent payment towards the production of all minerals for both small and large scale producers.

“In small-scale mining, there are also overheads involved as in running any other business. There is a mine owner, sponsor and contractors (artisanal miners contracted to work on the mine) in which numerous transactions are involved in the day-to-day operations of the mine. Moreover, the 2 percent tax falls in this everyday value chain,” said one small-scale miner.

He added that coupled with periodic machine breakdowns and routine maintenance works which require foreign currency, the 55 percent is too low, and will likely to complicate procurement and logistical issues.

Others urged government to spearhead production of mining equipment and mining consumables to reduce procurement costs.

If only suppliers of mining consumables were in Zimbabwe, it would have been easier to negotiate with them to align their pricing to the mid-monetary policy statement.

It is unfortunate Zimbabwe is not producing mining equipment and mining consumables to service the local market. Importing such from South Africa require foreign currency.

Most artisanal miners and some small-scale miners do not have proper mining equipment. The call for artisanal miners to formalise requires foreign currency for them to buy proper equipment for safety and sustainable mining.

The new foreign currency retention threshold will most likely intensify gold parallel market among small-scale, artisanal miners, buyers and millers, distorting actual national gold output delivered to FPR.

During a Gold Mobilisation Program conducted in December 2018, Mines and Mining Development Deputy Minister Polite Kambamura revealed that 70 percent of gold buyers could not be located exposing loopholes that not all the gold produced is going through formal channels.

A 2012 report by Transparency International Zimbabwe (TIZ) unearthed massive gold leakages, noting about 97 percent of raw gold was reportedly sold illegally by small-scale and artisanal miners, adding that out of the total gold output, licenced dealers bought 3 percent of the gold while 10 percent was sold illegally beyond borders with 87 percent bought by private buyers suspected to be illegal buyers.

ZMF last year called on government to consider paying small-scale miners 100 percent in foreign currency for gold delivered to Fidelity Printers and Refiners (FPR) to curb smuggling and leakages, noting the country was losing US$50 million in gold leakages per annum.

Miners anticipated an improved gold price after the mid-monetary policy statement, with most miners favouring adoption of the South African model which pays an additional 15 percent on top of the world price.

As of last week, the world gold price stood at US$42.56. According to the mid-term monetary policy, Fidelity was effectively paying circa US$29.37, way too low compared to world standards.

Faced with 14 mining licences required to effectively mine within the confines of the law, small-scale miners note it has become so expensive to conduct their business with Environmental Management Agency (EMA), Rural District Councils (RDC), ZIMRA and NSSA being among tax obligations chewing a sizeable percentage of their operations budget. This has seen some small-scale miners evading some of the tax payments.

It is also a possibility that if large scale producers feel short changed, they may consider putting their mines on Care and Maintenance, and reopen when conditions are favourable to them.

Large scale miners were in November 2018 allowed by the central bank to retain 55 percent of foreign currency from mineral exports to allow them recoup production costs, from 30 percent of their export proceeds which they were previously getting.

This was initiated after RioZim threatened to take legal action against the apex bank after the mining giant closed three of its mines; Cam and Motor, Renco and Dalny after it could no longer afford to procure required inputs and consumables. ENDS//

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