Zimbabwe Mining Report Q3 2009

A slowly-stabilising political environment should do much to improve the outlook for the mining sector in Zimbabwe. Following months of stalemate and tough negotiations, the opposition Movement for Democratic Change (MDC) and Robert Mugabe's Zimbabwean African National Union-Patriotic Front (ZANU-PF) finally formed a new coalition government in the middle of February 2009. While a positive development in itself, the list of challenges that the new unity government faces is long, and a renewed breakdown can by no means be discounted over the coming months, with the most potent threat coming from the military (for more detail, see the Political Environment section of this report). It should also be reiterated that Zimbabwe still suffers from hyper-inflation and frequent power shortages. The Zimbabwean dollar is no longer widely accepted as a valid source of any real value and the economy now only deals in the South African rand or the US dollar.

Addressing the annual meeting of Zimbabwe's Chamber of Mines in May 2009, Prime Minister Morgan Tsvangirai said that Zimbabwe could attract up to US$16bn in exploration and mining investment, provided it corrects policies that have deterred foreign investment. The premier said that the government should use the next 12 months to come up with a policy environment more conducive to mining investment, so the country can receive higher inward investment over the coming decade, once the current global economic crisis has passed.

Certainly, it remains to be seen how the new government will handle the issue of black empowerment.

The previous policy of the Zanu-PF government is that local investors should hold a 51% stake in all Zimbabwean mining activity. However, this has been rejected by mining companies, who believe they should be allowed to set lower empowerment stakes, with a maximum ceiling of 40%, according to reports in the local media. Tsvangirai has said that any new programme of black empowerment should be implemented in line with international norms and should not discriminate against non-black Zimbabweans. In BMI's view, there is a pressing need to negotiate with mining companies and thereby resolve the issue of mining ownership, so foreign investors can work within a clear legal framework.

The geology of Zimbabwe is very richly endowed. Of the 40 known metals and minerals that it is home to, gold, platinum, and chrome form the principal endowments. The country's gold reserves are among the largest in the African region, while it hosts the second largest platinum reserves in the world. Another segment that has caught the attention of miners in Zimbabwe is diamonds after the discovery of a number of significant kimberlites.

Gold sector liberalised One recent positive development was the announcement by the central bank in February 2009 that it would relinquish its role as mandatory sales agent for gold sales. At the same time, it was announced that gold miners would be allowed to hold on to foreign currency earnings. These moves will provide a badlyneeded shot in the arm to the depressed gold mining sector. Already, Mwana Africa has said that it will look to restart production at its Freda Rebecca mine as a result of these liberalising moves.

Global overview On page 9 of this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector and what this means for the industry moving forward.

Industry Forecast Frequent power cuts, a shortage of foreign currency, and labour shortages are further country-specific factors which are having a hugely negative impact on the sectors performance. Coupled with this the slump in global metal prices is forcing mines to cut back production. Under these conditions, it is no surprise that BMI is pessimistic about the prospects of Zimbabwe's mining sector in the short term.

Indeed, in 2008 we estimated that the sector fell by almost 6% in real terms, while 2009 should see a further decline. Two areas which look particularly stricken are gold mining and nickel. The former is on the verge of collapse due to funds being withheld by the Reserve Bank of Zimbabwe. Meanwhile, the country's largest nickel producer shut all its mines in November 2008 due to falling prices for the metal.

However, the nation has abundant mineral resources and a well-developed, albeit deteriorating, infrastructure network. In this sense, there is hope that the country's mining sector can begin to recover, especially when the global economy returns to growth. However, it must be remembered that many problems in the country are self-inflicted and, until the political situation resolves itself, it is hard to hold anything but a negative prognosis. In 2013, we expect the industry to be worth around US$0.18bn, although this depends on how the currency will fare over the next five years.