A new study of one of the first mine to indigenize reveals that Zimbabwe is losing significant mineral resources revenue due to a lack of mandatory disclosure of data by companies in the extractive industry.
The research, conducted through Zimbabwe Environmental Law Association (ZELA) Publish What You Pay Zimbabwe and Oxfam, focuses on Caledonia Blanket Mine, a gold mining Company operating from outside Bulawayo but registered on the Toronto Stock Exchange in Canada.
Lead researcher Don Hubert, president of Resources for Development Consulting, said the research will increase knowledge on mining economic modeling by analyzing open data mainly the cash flow model of Caledonia Blanket Mine.
He made the remarks on the sidelines of data extractive workshop for civic activists in the extractive sector, where he urged for the need for project assessments to understand the clear picture of the sector.
Resources for Development seeks to assist citizens in resources rich developing countries to secure a fair share of extractives sector wealth by analyzing contracts and broader fiscal regimes and conducting integrated economic analyses in order to assess plausible government revenues.
“It is one avenue through which can understand the mining sector, because all people care about are the specific country issues, specific project issues and this will bring into scope the state of a sector,” he said.
In a statement released by PWYP Zimbabwe coordinator Darlington Muyambwa, the research comes at a time when Zimbabwe is ceased by the challenges of financial outflow, in the shaky but lucrative sector.
He said cash flow modeling is a global standard technique for making investment decision, as a marker for contract negotiations, extractive sector fiscal reform as well as monitoring projects for potential tax evasion.
“The research comes at a time when the country is grappling with a sector highly described as opaque with challenges of corruption and loss of mining revenue but also ceased with an opportunity to address some of the loopholes through the ongoing law reform process
“Cash flow modeling is an industry standard technique for making investment decisions. It is increasingly used by donors (IMF and World Bank) as well as developing country governments seeking to negotiate contracts, redesign extractive sector fiscal systems, monitor projects for potential tax evasion, and undertake medium term budget planning.
“The study analyzed revenues the government of Zimbabwe received and should expect from the project with forecasts based on differing gold price assumptions and the impact of changes in fiscal terms on potential government revenues,” read part of the statement.
According to the new report, Zimbabwe is lagging behind African counterparts in the disclosure of mining contracts, with the only public source of information being filings to investors.
There is an urgent need for the release of data relating to mining operations to the general public, the report also states.
“The study highlights the continued revenue transparency shortcomings in Zimbabwe’s mineral sector. This analysis was possible only because Caledonia is required to provide economic data to its investors.
“The government should publish revenue payments disaggregated by company and source. Mining contracts and project specific fiscal terms should be disclosed. Citizens of Zimbabwe have at least as much of a right as Caledonia’s investors to know the terms under which their natural resources are being exploited.
“Zimbabwe has not kept pace with other African governments in disclosing mining contacts, the only public source of information on tax terms that apply to the project come from Caledonia filings to their investors.”
The Blanket Gold mine, operating outside Bulawayo, has contribute over $50 million in revenue since it resumed operation in 2009, is partly owned by Caledonia Mining Corporation (49%) which is listed on the Toronto Stock Exchange.
The research has also revealed that Government revenues from Blanket mine are from 3 sources namely a 5% royalty on the value of gold sales, a 25% corporate income tax, and withholding taxes on payments to non-residents companies (5% on dividends and 15% on management fees).
“Blanket mine has generated more than $50 million in government revenue since it reopened in 2009. The Blanket mine was the first of the Zimbabwean projects to complete the indigenization process (2012). It is now 51% owned by Zimbabwean groups. Caledonia has disclosed the contracts that set the terms for the economic benefits that should accrue to the Zimbabwean owners.
“Government revenue declined significantly in 2015, even though production remained high, as all available income was devoted to mine expansion and no income or dividend withholding taxes were paid. Government revenues should increase in the coming years due to mine expansion, though they will be heavily dependent on the price of gold,” read part of a statement released by Muyambwa.
Muyambwa said the analysis further suggests that Zimbabwe is failing to secure significant potential revenues from the gold mine due to the use of subsidiary companies, while non-payment of withholding tax is another avenue for tax loss.
He said the methods used in this analysis could have much wider application in the mineral sector in Zimbabwe with possible room for fiscal terms to special mining leases, could be ideally tested.
“The use of a UK subsidiary allows Caledonia to pay reduced dividend withholding taxes and could cost Zimbabwe between $10 million and $25 million over the life of the project. As Caledonia does not pay a withholding tax on interest payments, it appears that more than $3.5 million in annual interest payments on the indigenisation loans leaves the country tax-free.
“Finally, the Blanket mine pays extremely high management fees (+7% of annual project revenue) to Caledonia’s South African subsidiary, at the expense of greater tax payments to the government and greater dividend payments to indigenous partners.
“A comparison could be made of the fiscal terms that apply to the special mining leases and the appropriateness of potential changes to the future mining fiscal regime (e.g. capital depreciation and interest withholding taxes) could be tested. Project economic analysis should also be used as part of risk based audits in order to ensure that government revenues are not lost to aggressive tax planning,” read part of the statement.