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A copper mining lesson from Zambia

History repeats itself.

Vedanta Resources is learning the hard way that when it comes to Zambia’s copper-mining industry, history tends to repeat itself.

Fifty years ago, Zambia’s first post-independence leader Kenneth Kaunda nationalised mines owned by Anglo American and Roan Selection Trust to rally his political supporters. Now populist President Edgar Lungu is taking legal steps to take over the operations of Vedanta’s Konkola Copper Mines, alleging the unit lied about expansion plans and cheated on taxes.

With Zambia mired in a debt crisis that’s made its dollar bonds and currency among the worst performers in the world this year, Lungu’s attack on Vedanta is a useful distraction from the nation’s economic woes. While copper prices are well below historical highs, the metal has more than tripled since 2000.

“Resource nationalism tends to peak exceptionally when there is a perception that commodity prices are high and countries feel they are not getting the benefit,” said Claude Baissac, the head of Johannesburg-based risk consultancy Eunomix Business & Economics. “President Lungu is undermining the gains of the 2000s.”

Zambia isn’t alone in pursuing resource nationalism. In neighbouring Tanzania, President John Magufuli has spearheaded an aggressive drive targeting gold mining companies. Staff of Acacia Mining have been arrested and the government has threatened to fine the company $190 billion.

Vedanta’s request for a meeting with Lungu has been rebuffed. The intervention by state-owned ZCCM Investments Holdings to have Konkola liquidated is “lawful, orderly and under the due process,” the president’s spokesman said.

Vedanta said in a statement that it was a “long-standing, loyal investor,” spending more than $3 billion in Zambia.

For the government, which gets almost all its income from copper, history suggests the cost could be even greater. Between 1970 and 2010 Zambia lost $45 billion in potential income from copper, Eunomix said in a report.

Kaunda’s nationalisation drive didn’t end well. By 1999 copper production had fallen 65% from 769 000 tons 30 years earlier. Anglo bought the country’s biggest mines back after companies including top producer Codelco declined to invest. Just over two years later, with copper prices at a 14-year low, Anglo handed the mines back and they were sold to Vedanta in 2004 for $48 million.

Since then, companies including First Quantum Minerals, Glencore and Barrick Gold have invested in mines, driving production up to almost 858 000 metric tons in 2018, making Zambia the second-biggest producer in Africa. After Lungu’s government announced tax increases last year, the Zambia Chamber of Mines said more than half the country’s copper operations would become unprofitable, with 27 900 jobs at risk.

Still, not everyone is unhappy with Lungu’s move to take over the assets of Konkola. Labor unions have praised the decision, which has also struck a chord with many citizens in a country where per capita income is below $1,350 a year.

“Vedanta and its peers strong-arm the Zambian state at every opportunity, allegedly under reporting their earnings in official accounting while threatening massive layoffs and unviability at any mention of a tax increase,” Mathews Muyembe, chairman of the Copperbelt branch of business lobby group, the Economic Association of Zambia, said in an editorial in South Africa’s Business Day newspaper. “Enough is enough — this is one move that is supported across the political spectrum.”

For Mumbai-based Vedanta, the impact would be minimal with its Zambian unit accounting for just 1.8% of pretax earnings in the financial year ending March 2018.

“It would be a small blip on the balance sheet,” said Sanjiv Bhasin, executive vice president at IIFL Securities in Mumbai.

For Zambia, any further economic downturn could be catastrophic.

External debt tripled to $10.1 billion over the five years to the end of 2018, with interest charges ballooning. Its dollar-bond yields have climbed to almost 20% this year, the highest except for Venezuela, which is in default. The kwacha has slumped 13% against the dollar and the International Monetary Fund’s forecast for 2.3% economic growth this year is the slowest in 21 years.

“How do we run resource rich countries?” Baissac said. “Zambia is a particular example of a country that has not managed to do this.”

© 2019 Bloomberg L.P

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Perhaps the resource rich countries should be less eager to export their resources and burn through the cash. Perhaps they should instead add value to it before exporting it. Raw material is only a small part of final value, yet these smartly dressed politicians are happy with exiting the value chain right at the beginning! Money can’t buy common sense…

Well privatization was imposed to us and only worsened the lives of the people and the country. It wasn’t about commonsense but about the greedy IMF that only care about getting a few rich

Privatization especially of our mines has brought about more poverty and unemployment and mostly benefits the foreign owners. Its about time we got our mines back..Lungu you’ve done us proud; great move!! Thank you for looking out for your people.

Ok, let me get this straight..

These countries cannot run their own nonsense and are cash-strapped so they squeeze the mines to plaster over this glaring problem of mismanagement (or mis-man-age-ment to some)?

Hope in future copper will be used less and they learn a lesson – stop killing the goose (SA is the same and going that way soon)

Agreed I have visited many mines in Africa and have been visiting the Zambian copper belt since 2003. I have seen tremendous development and improvement of facilities like roads and shopping centers etc. All of these have come about because of the mining. In general I think the mining companies pay their dues but obviously not over pay.

Well its about TIME we get back what belongs to US…Well Done Lungu!!!!! Cash strapped because our resources are stolen from us in the name of privatization. IMF do not care about the poor people privatization affects; only cares about the rich that keep taking and taking….Proud of Lungu…all the way with you!!!

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