VZCZCXRO2039
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0499/01 1691026
ZNR UUUUU ZZH
P 181026Z JUN 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 4606
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHUJA/AMEMBASSY ABUJA 2316
RUEHAR/AMEMBASSY ACCRA 2889
RUEHDS/AMEMBASSY ADDIS ABABA 3008
RUEHBY/AMEMBASSY CANBERRA 2271
RUEHDK/AMEMBASSY DAKAR 2638
RUEHKM/AMEMBASSY KAMPALA 3056
RUEHNR/AMEMBASSY NAIROBI 5499
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 2184
RHEHAAA/NSC WASHDC
RHMFISS/JOINT STAFF WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEFDIA/DIA WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK
RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 05 HARARE 000499 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
AF/EPS FOR ANN BREITER 
NSC FOR SENIOR AFRICA DIRECTOR 
STATE PASS TO USAID FOR L.DOBBINS AND J. HARMON 
TREASURY FOR D. PETERS 
COMMERCE FOR ROBERT TELCHIN 
ADDIS ABABA FOR USAU 
ADDIS ABABA FOR ACSS 
 
E.O. 12958: N/A 
TAGS: EMIN ETRD ECON PGOV ZI
SUBJECT: GOLD'S POTENTIAL TO CONTRIBUTE TO ZIMBABWE'S 
ECONOMIC RECOVERY 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) Zimbabwe is in dire need of substantial foreign 
currency inflows.  Looking ahead, the country's once 
significant gold mining industry is a potential source of 
foreign exchange earnings, provided the problems of access to 
capital, power shortages, and protection of property rights 
are addressed.  The recent liberalization of gold policy has 
helped revive the industry, but producers still face serious 
constraints.  Moreover, they are calling for consistent 
implementation of more market-friendly policies that will 
attract the foreign investment needed to increase exploration 
and production.  Foremost, the Indigenization and Economic 
Empowerment Act and the proposed amendment to the Mines and 
Minerals Acts require substantive review to make them more 
investor-friendly. END SUMMARY. 
 
---------------- 
Gold Offers Hope 
---------------- 
 
¶2. (SBU) Zimbabwe's dire lack of foreign exchange is 
threatening the survival of the inclusive government.  The 
collapse in value of the local currency after the explosive 
growth in money supply in 2008 forced the GOZ to abandon the 
Zimbabwe dollar as a medium of exchange.  No longer able to 
print local currency with abandon to buy hard currency, 
Zimbabwe must now quickly develop alternative sources of 
foreign exchange.  As the international donor community 
remains on the side line with economic assistance until the 
inclusive government introduces bolder political and economic 
reforms, the resuscitation of Zimbabwe's gold mining industry 
offers hope as a potential source of foreign exchange in the 
near term. 
 
--------------------------------- 
Output Crashed under Bad Policies 
--------------------------------- 
 
¶3. (SBU) According to David Matyanga, chief economist of the 
Chamber of Mines of Zimbabwe, Zimbabwe's gold production fell 
by 49 percent from 7.018 MT in 2007 to 3.58 MT in 2008. 
Matyanga attributed the decline from the most recent 
production peak of 27 MT in 1996 to the overvalued Zimbabwe 
dollar and a government policy of paying producers far less 
than the world gold price.  Gold producers whom we 
interviewed identified further constraints on output from 
both large- and small-scale miners. 
 
-------------------- 
Arrears to Producers 
-------------------- 
 
¶4. (SBU) Paul Markham, Technical Director and board member of 
one of Zimbabwe's major gold producers, Rio Tinto Zimbabwe 
Limited, told economic specialist that an acute lack of 
working capital had adversely affected production in 2008. 
He attributed the shortfall to the Reserve Bank of 
Zimbabwe,s (RBZ) US$30 million in arrears to producers for 
gold delivered to Fidelity Printers and Refiners (Private) 
Limited as of end-2008.  Caxton Mangezi, General Manager of 
QLimited as of end-2008.  Caxton Mangezi, General Manager of 
 
 
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* Missing Section 002 * 
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HARARE 00000499  003 OF 005 
 
 
developed countries, such as Australia, as a result of the 
global financial crisis.  Mangezi added that his large 
company had not lost a significant number of managerial 
staff, and agreed with Markham that Zimbabwean geologists and 
surveyors had begun to return from abroad. 
 
---------------------------------------- 
New Gold Marketing Rules Roundly Praised 
---------------------------------------- 
 
¶8. (SBU) The industry roundly applauded as progressive the 
liberalization of gold marketing introduced by the RBZ in its 
January 2009 Monetary Policy Statement.  Markam told us that 
the policy shift and the subsequent removal of the 7.5 
percent foreign currency surrender requirements per Budget 
Review Statement of March 2009 made gold production 
profitable once again. (NOTE: Previously gold producers had 
to sell 7.5 percent of their foreign exchange receipts to the 
RBZ at a highly overvalued exchange rate. END NOTE.) 
Matyanga told us that most large-scale gold producers now 
send their gold to the RBZ's Fidelity Printers and Refiners 
through the Chamber of Mines.  Fidelity does the assaying, 
consolidates the output, ships it to the Rand Refinery in 
South Africa, and credits each producer's account with the 
sales revenue.  Mangezi felt that the new marketing and 
payment arrangements would stimulate gold output, especially 
given the current high gold price.  Gura of Metallon, on the 
other hand, saw the liberalization of gold marketing as a 
temporary measure brought about by Zimbabwe having failed to 
produce 10 MT/year which caused Fidelity to lose its gold 
license at the London Bullion Marketing Association.  He 
believed that once the industry reached the 10 MT threshold 
again, Fidelity would seize back the independent marketing of 
gold. 
 
¶9. (SBU) Chimbodza told us that the changes to gold marketing 
were equally positive for small-scale gold producers who 
could now get the world price on delivery of their product. 
He added that the policy shift would encourage small 
producers to sell gold through official channels.  (NOTE: The 
small-scale sector produced as much as 50 percent of 
Zimbabwe's gold output as recently as in 1999.  END NOTE.) 
Matyanga was less optimistic about the resurgence of 
small-scale gold producers in the short term.  The sector 
needed significant capital investment to enable blasting, 
setting up rock supports, and ventilation since the 
easily-mined gold was nearly depleted.  In his view, 
small-scale producers were unlikely to contribute more than 
30 percent in the short term. 
 
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Suspension of Royalty Payments a Boost to the Sector 
--------------------------------------------- ------- 
 
Q 
¶10.  (SBU) The RBZ suspended payment of  3 percent royalty 
fee in 2004 in a bid to boost gold production.  Gura 
anticipates re-introduction of the royalty following the 
removal of the 7.5 percent foreign exchange surrender 
requirement to the RBZ.  Minister of Finance Tendai Biti has 
told producers that they will have to pay royalties now that 
they may retain 100 percent of their sales proceeds, although 
he has not indicated when this would occur.  Victor Gapare, 
President of the Chamber of Mines and himself a gold miner, 
 
HARARE 00000499  004 OF 005 
 
 
pointed out that royalties should be less than in Tanzania, 
South Africa, Mali or Ghana, as Zimbabwe's yield of gold per 
ton of rock is less than half the rate in those countries. 
For now, at least, the absence of royalties is another 
incentive to producers to increase output. 
 
--------------------- 
More Needs to be Done 
--------------------- 
 
¶11. (SBU) Markham made the point that gold producers did not 
want aid or subsidies, rather an economic environment 
characterized by consistently implemented market-friendly 
policies.  He said that while the Short Term Economic 
Recovery Program (STERP) launched by Minister Biti contained 
the right policies, they may prove to be unpopular and 
consequently not consistently implemented by government. 
Gura and other gold producers told us they would like to see 
the positive changes to gold policy set forth in the January 
2009 Monetary Policy Statement reflected in an amendment to 
the Gold Trade Act and no longer subject to the whim of the 
Reserve Bank.  In addition, Gura questioned the onerous 
requirement for taxes to be paid on a quarterly basis, as the 
currency--the U.S. dollar--was no longer losing value 
overnight.  The requirement was a further drain on working 
capital at a time when it was needed most. 
 
-------------- 
Current Output 
-------------- 
 
¶12.  (SBU) Matyanga expects gold production to roughly double 
to 6-7 MT in 2009.  Markham told us in April 2009 that 
monthly production was 140 kg, with Rio Zim's Renco Mine 
accounting for almost half of it.  In his view, the 
prevailing high gold price underpinned by tight supply could 
lift output substantially if the sector were able to 
recapitalize and if workers' wage demands were realistic. 
The outgoing President of the Chamber of Mines, David 
Murangari, went further to state that the sector would 
welcome flexibility in the labor market.  He called for wages 
to be linked to productivity and for greater freedom for 
employers to retrench workers during lean times.  Labor 
unions are asking for wages of US$454/month, which the 
economy cannot sustain.  Most mines pay workers about 
US$100/month plus free housing, school fees for workers' 
children, medical insurance, etc. 
 
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COMMENT 
------- 
 
¶13.  (SBU) Zimbabwe is desperate for foreign exchange.  Given 
the country's considerable gold resources, its gold mining 
tradition, and gold's firm and stable price, establishing 
policies that attract capital and that promote gold mining 
could generate considerable foreign exchange inflows in the 
next year.  The restoration of the rule of law and respect 
for property rights would be a catalyst for investment and 
renewed exploration in this important sector.  In this 
Qrenewed exploration in this important sector.  In this 
regard, the Indigenization and Economic Empowerment Act 
requires substantive review, along with the proposed 
amendment to the Mines and Minerals Act.  They need to be 
 
HARARE 00000499  005 OF 005 
 
 
more foreign-investor friendly as indigenous Zimbabweans 
clearly are not in a position to raise sufficient funds on 
the local market to revive and expand this important and 
capital-intensive subsector of the mining industry.  END 
COMMENT. 
 
MCGEE