VZCZCXRO0444
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0947/01 3421334
ZNR UUUUU ZZH
P 081334Z DEC 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 5197
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHAR/AMEMBASSY ACCRA 3199
RUEHDS/AMEMBASSY ADDIS ABABA 3308
RUEHBY/AMEMBASSY CANBERRA 2569
RUEHDK/AMEMBASSY DAKAR 2938
RUEHKM/AMEMBASSY KAMPALA 3356
RUEHRL/AMEMBASSY BERLIN 1735
RUEHNR/AMEMBASSY NAIROBI 5804
RUEHGV/USMISSION GENEVA 2481
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RHMFISS/EUCOM POLAD VAIHINGEN GE
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RHEHAAA/NSC WASHDC

UNCLAS SECTION 01 OF 02 HARARE 000947 
 
SIPDIS 
 
AF/S FOR B.WALCH 
DRL FOR N.WILETT 
ADDIS ABABA FOR USAU 
STATE PASS TO USAID FOR J.HARMON AND L.DOBBINS 
STATE PASS TO NSC FOR SENIOR AFRICA DIRECTOR M.GAVIN 
 
E.O. 12958: N/A 
TAGS: EMIN ECON PGOV ZI
SUBJECT: ZIMBABWE MINING ON THE MEND 
 
¶1. SUMMARY: Zimbabwe's mining sector is showing signs of recovery, 
with growth this year of about 2 percent after a decade of steep 
decline.  Mining could grow by as much as 20 percent in 2010.  But 
investment in exploration has been minimal over the past decade, so 
recovery of the industry is unlikely to be sustained.  Among the 
obstacles to investment are proposed amendments to the Mines and 
Minerals Act that would force investors to sell a majority 
shareholding to black Zimbabweans.  Mining in Zimbabwe will have a 
chance to reach its potential only when the Government of Zimbabwe 
(GOZ) recognizes that this highly capital-intensive industry is 
entirely dependent on foreign investment to expand.  END SUMMARY. 
 
-------------- 
Mining Matters 
-------------- 
 
¶2. At its peak in 1995, the mining sector accounted for 7 percent of 
Zimbabwe's gross domestic product (GDP) and 50 percent of export 
earnings.  Mines employed around 60,000 people directly.  Steep 
decline in output between 1999 and 2008 saw the sector's 
contribution to GDP fall to just 4 percent as mining contracted even 
more rapidly than the rest of the economy, while employment declined 
to around 35,000 people.  Mining remains a major user of 
electricity, accounting for between 35 and 40 percent of total 
electricity consumed in Zimbabwe. 
 
 
¶3.  As the economy collapsed following the chaotic land reforms that 
started in 2000, so did mining output.  According to the Chamber of 
Mines of Zimbabwe, between 2004 and 2008 most mining houses had 
stopped production, concentrating instead on care and maintenance 
activities.  In addition to the poor operating environment at home, 
characterized by onerous foreign-exchange rules and power outages, 
in recent years most metal prices declined internationally due to a 
fall in demand caused by the global financial crisis that started in 
¶2007.  Only diamond and platinum mines operated at full capacity 
during this period, primarily because of special arrangements with 
the Zimbabwean authorities that allowed them to retain export 
receipts rather than surrender them to the Reserve Bank of Zimbabwe 
at an unattractive official exchange rate. 
 
---------------------- 
Green Shoots Appearing 
---------------------- 
 
¶4. Between January and October 2009, however, activity in the mining 
sector improved, with most mines being rehabilitated.  In his recent 
budget speech, Finance Minister Tendai Biti reported that mining 
output is expected to grow 2 percent in 2009.  Experts at the 
Chamber of Mines believe output could grow a further 20 percent or 
more in 2010. 
 
¶5. The main reasons for recovery are a rebound in mineral prices 
internationally, the dollarization of the Zimbabwean economy, and 
liberalization of gold marketing in March 2009.  Statistics from the 
Chamber of Mines show that gold output for the year reached 3.14 
tons by October 2009, compared to 3.50 tons recorded for the whole 
of 2008.  Gold output is estimated to reach 4.5 tons by year's end. 
Qof 2008.  Gold output is estimated to reach 4.5 tons by year's end. 
According to the Chamber of Mines, only the base-metals sector is 
still operating on a care and maintenance basis, largely due to a 
shortage of capital reserves.  The mines need both working capital 
and fixed capital expenditures to be fully operational, but 
shareholders are unwilling to plough in new capital because of 
continuing uncertainty in the operating environment. 
 
¶6. All three major producers of chrome -- ZIMASCO, Zim Alloys, and 
Maranatha -- have made significant progress toward reviving 
production.  Zim Alloys has managed to inject capital from a South 
African investor, while ZIMASCO succeded in bringing four out of 
six furnaces into production, with a fifth expected to start 
production in April 2010. 
 
 
HARARE 00000947  002 OF 002 
 
 
------------------------------ 
Low Investment Limits Recovery 
------------------------------ 
 
¶7. There have been significant new investments over the past two 
decades. The most notable of these are: Zimbabwe Platinum Mines 
(Zimplats), established by Delta Gold Limited; Anglo Platinum's Unki 
Mine; the Mimosa Mine set up jointly by Aquarius and Impala of South 
Africa; and Rio Zim's Murowa Diamonds.  Industry experts say there 
would have been even greater investment had the economic and 
political environment been favorable. 
 
¶8.  The main factor that discourages mining investment is the 
Indigenization Act, which compels foreign companies to sell 51 
percent of their shareholding to black Zimbabweans, even if black 
Zimbabwean investors lack the means to purchase shares.  More than 
one mining executive has told us of failed efforts to raise 
financing due to market participants' fears of the Indigenization 
Act. 
 
¶9. One consequence of the lack of recent investment is the absence 
of minerals exploration for the past decade.  Industry experts 
expect a gap in output in the short term due to the lack of 
exploration work.  Zimbabwe will require huge mining investments 
just to restore mineral output to its 1997 level.  But indigenous 
investors do not have the wherewithal to finance this level of 
activity. 
 
--------------------------------- 
New Tax Regime Will Stifle Growth 
--------------------------------- 
 
¶10. Historically, Zimbabwe's fiscal environment has been liberal, 
with corporate tax at just 15 percent. With a number of concessions 
given to miners such as the initial special allowance and favorable 
capital depreciation allowances, the effective rate of tax fell 
drastically to around 7 percent per annum. But since 2003, when 
miners started paying royalties at varying rates from 1 percent for 
coal to as high as 10 percent for diamonds, along with a 3 percent 
levy on wages, the effective tax rate rose to 45 percent, according 
to the Chamber of Mines.  Even more confiscatory were requirements 
to surrender hard currency earnings.  Finance Minster Biti's 
proposed 2010 budget will raise royalties to from 3 percent to 3.5 
percent for most minerals.  Some observers expect the higher royalty 
payments will further discourage investment. 
 
------- 
COMMENT 
------- 
 
¶11. As in other sectors of the economy, the main problems in mining 
are political.  The Indigenization Act, as it stands now, makes any 
large new mining venture an impossible proposition.  At a minimum, 
the GOZ will need to make special provisions for indigenization in 
mining to clear the way for the needed large infusion of foreign 
capital.  But even if the Indigenization Act were modified, there 
would still be enough uncertainty about the direction of GOZ policy 
in the medium term to make mining in Zimbabwe relatively 
unattractive for new players.  END COMMENT. 
 
RAY