Warm words from Zimbabwe’s mining minister belie questionable plan

By all accounts, Amos Midzi, Zimbabwe’s minister of mines, is a mild-mannered soul.

Throughout his recent half-hour speech at Mining Indaba 2006 in Cape Town, South Africa, the minister’s voice remained only slightly above a whisper. Until, that is, he breached the subject of foreign investment.

“Zimbabwe welcomes all, and I want to emphasize all,” he stressed, “to come and help us develop our country through mining.”

But Midzi’s emphatic words belie Zimbabwe’s recent economic record – and its questionable future plans for the mining industry.

The minister’s appeal was directed to members of an investment community grown weary of runaway inflation, rising poverty and crime, land expropriation and the growing influence of Chinese business practices – all hallmarks of President Robert Mugabe’s regime over the last five years.

The Fraser Institute’s annual survey of mining companies ranks Zimbabwe dead last with a record low score of 2.4 – down from 7.6 last year – out of a possible 100 for its government policies, viewed from an exploration manager’s perspective.

In the question period following his speech, Midzi skirted around the question of how far the government might go in its proposed “indigenisation plan” — a policy akin to South Africa’s Black Economic Empowerment (BEE) program. But just three weeks later, he made the severity of the program known.

In Harare, on March 3, Midzi announced the government plans to take over 51% of all mining operations in the country. What’s more, the plan calls on the government to pay for only roughly half of that stake.

Chris Pearson, an analyst with ING Financial in London, covers Impala Platinum (IPLA-L, IMPO-J) – the world’s second-largest producer of platinum, and a company with significant operations in Zimbabwe.

Pearson says Impala had anticipated losing roughly 30% of its project to “indigenisation,” but now that the government is talking about 51%, the company will likely slow down operations and take a wait-and-see approach.

“You could take it as just posturing on the part of the Zimbabwean government,” Pearson says. “Or, you can take another angle and ask, is this just government theft?”

Both Impala and fellow platinum producer Anglo Platinum (AGPPY-O, AMS-J) – which, as the world’s largest producer of platinum, also has assets in Zimbabwe – have been engaged in tough negotiations with the government over the policy.

“Someone will lose face,” Pearson says. “The question is who.”

Impala’s shares took the initial hit, falling roughly 15% to R9.42 from R10.81 when news of the proposed policy first broke. But since then, the market has taken a more favourable outlook on the company. Implats closed at R11.28 on March 21. Anglo Platinum shares fell roughly 8% to R47 from R50.8 on the news, but like Implats’, have since recovered.

While Pearson says companies in Zimbabwe will simply have to make their business decisions once the government decides on the percentage of mining operations it will take – Mibzi says a decision will be made in early July — other issues loom around mining in Zimbabwe, irrespective of the policy.

Alex Gorbansky, an analyst with Frontier Strategy Group, a risk assessment agency that specializes in the mining industry, says the strong political influence of the Chinese in Zimbabwe is something Western companies doing business there should take note of.

China is seeking to extend its influence in socialist-type regimes like Zimbabwe, with an eye towards securing the natural resources needed to fuel its blazing economy.

Despite a European Union and U.S. arms embargo, China sold US$200 million worth of fighter jets and other military vehicles to Zimbabwe in 2004. It also provided radio-jamming devices, which the Harare government is alleged to have used to block broadcasts of anti-government reports from independent media outlets during the 2005 election campaign.

“The Chinese don’t care about what sort of government is running the country,” Gorbansky says. “They’ve turned a blind eye to human rights abuse in Zimbabwe.”

Gorbansky says Chinese governmental institutions routinely provide equipment and aid to governments with the expectation that they will be granted the most prospective land claims. Because of the policy, Gorbansky says, Western firms in Zimbabwe can’t be sure that their mining rights won’t be lost to Chinese competition. To date, however, there have been no reported instances of this occurring.

While the part of the Chinese in propping up Mugabe and his Zanu-PF party is well known, Zimbabwe’s neighbour to the south also has a significant stake in the country.

Through financial aid and technical support, Thabo Mbeki’s South African government has tried to secure South African business interests in Zimbabwe by extending a friendly hand to Mugabe.

Analysts say part of Mbeki’s motivation is to avoid having to deal with the aftermath of a collapsed Zimbabwean state. If Mugabe were toppled, South Africa would face a flood of refugees.

“If Mugabe collapses,” Gorbansky says, “Zimbabwe would likely become a failed state on the verge of anarchy.”

Reports from African news agencies say Mbeki’s Afican National Congress (ANC) government had recently been given unofficial assurances from Mugabe that there would be no forced takeover of mines.

The proposed 51% takeover not only flies in the face of such “gentlemanly” agreements — as one analyst phrased it — but also further strains Zimbabwe’s relationship with the International Monetary Fund (IMF).

Seen by many onlookers as Zimbabwe’s last chance to achieve some semblance of economic stability, Mugabe’s approach to dealing with its substantial debt has been to scrape by with minimum payments to the IMF, and then publicly liken the organization to the Devil.

To make its latest payment, Zimbabwe’s Central Bank further stoked the flames of inflation by printing 21 trillion Zimbabwean dollars in order to buy the US$9 million it needed. The Central Bank says inflation in the country is at roughly 500%. The IMF says it is closer to 1,000%.

While the payment allowed Zimbabwe to avoid becoming the first country in 52 years to be expelled from the IMF, the fund suspended the country’s voting and borrowing rights, saying: “There is still need for urgent implementation of a comprehensive policy package.”

Zimbabwe owes another US$120 million in back payments. It is likely to be given until November to find the money.

The dire situation led David Hale, chief economist for Zurich Financial, to point to Zimbabwe as one of the worst examples on a continent that, in many ways, is beginning to round an economic corner.

“Zimbabwe is a human tragedy and an economic disaster,” Hale said at Indaba. “Its mining policy undermines investment and contact with the global world.”

Hale’s comments came three weeks before the indigenisation program was announced.

Life goes on

Despite such grim indicators, mining does go on in Zimbabwe — if at a halting pace.

Besides Anglo Platinum and Implats, Rio Tinto(RTP-N, RIO-L) is the other major with operations in the country.

While industry insiders say the company has been intentionally holding back on further exploration its Murowa project until a more positive business environment emerges in the country, the company managed to put the Murowa mine into production in 2004.

Murowa consists of three kimberlite pipes. The two larger pipes have reserves of 19 million tonnes with a grade of 0.9 carats per tonne and a value of $US65 a carat over the life of the mine.

According to Luckson Manda, project manager with Rockover Resources — a Botswana-based private company partnered with SouthernEra Diamonds (SDM-T) at the Tsholotsho diamond project — the quality and availability of labour in Zimbabwe is a big positive for Rio Tinto and other Western companies operating there.

Manda says Zimbabwe’s emphasis on education shortly after it won its independence from the United Kingdom in 1980 produced some of sub-Saharan Africa’s finest geologists.

Speeding over narrow, red-dirt roads in the backcountry outside of Bulawayo, Manda is eager to show how exploration geology is done in his homeland. He drives to three sites run by local teams – one diamond drilling for gold, one doing electromagnetic surveying and another taking soil samples at the Tsholotsho project. Rockover has been in Zimbabwe since 2001 and has roughly 12,000 sq. km of prospective orders covering gold, copper, zinc, nickel and diamonds.

The beat on the street

While people have long stopped referring to Zimbabwe as “the bread basket of Africa,” the reality on the streets of its second-largest city, Bulawayo is not what foreigners might expect.

While crime is worsening – an unemployment rate of 75% and an average monthly salary of US$20 are cited as two main culprits – its crime rate does not approach that of nearby cities such as Johannesburg.

Downtown Bulawyo, where the wrought iron balconies of brightly painted colonial buildings overlook bustling sidewalks, does not inspire fear. On the outskirts of the city, goats gather to graze at intersections where police roadblocks are passed through with the meagre bribe of a box of cookies.

“In comparison to other countries, security risks aren’t as great,” says Control Risks’ Mike Davies. “But they will continue to increase with the deterioration of the economy.”

Mugabe’s approach to tackling increasing poverty is best encapsulated by his “cleanup” campaign. The president ordered a slum in Harare to be levelled – with no plans to rebuild. When the UN tried to step in with tents for the newly created homeless, Mugabe rejected the offer as an insult. Would-be recipients of the tents who were interviewed by news agencies at the time said they took no offence at being offered shelter.

Future not so bright

With Mugabe recently turning 82 years old, some may see the end of his tenure as imminent. And while he has stated that he will step down at the end of this term in 2008, the prospect doesn’t offer much in the way of hope for observers.

Even if Mugabe is true to his word and leaves office, his hand-picked successor – Joyce Mujuru – is seen as little more than a mouthpiece for Mugabe while he retires to his palatial pagoda in Harare’s wealthiest neighbourhood.

Davies says even in the best of possible futures – if a legitimate leader were to be elected – cronyism and corruption have become so entrenched in the system, it would take many years to weed them out.

“Because of the length of time and the amount and severity of deterioration, it will be difficult for things to get better. Even after Mugabe,” Davies says. “Changing the leader won’t change the politics of the institutions.”