VZCZCXRO3896
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0549/01 1781403
ZNR UUUUU ZZH
P 261403Z JUN 08
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC PRIORITY 3087
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHUJA/AMEMBASSY ABUJA 1996
RUEHAR/AMEMBASSY ACCRA 2089
RUEHDS/AMEMBASSY ADDIS ABABA 2209
RUEHBY/AMEMBASSY CANBERRA 1486
RUEHDK/AMEMBASSY DAKAR 1844
RUEHKM/AMEMBASSY KAMPALA 2265
RUEHNR/AMEMBASSY NAIROBI 4696
RUEAIIA/CIA WASHDC
RUEHGV/USMISSION GENEVA 1355
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 04 HARARE 000549
SENSITIVE
SIPDIS
AF/S FOR S. HILL
NSC FOR SENIOR AFRICA DIRECTOR B. PITTMAN
STATE PASS TO USAID FOR L.DOBBINS AND E.LOKEN
TREASURY FOR J. RALYEA AND T.RAND
COMMERCE FOR BECKY ERKUL
ADDIS ABABA FOR USAU
ADDIS ABABA FOR ACSS
E.O. 12958: N/A
TAGS: EMIN EINV PGOV ASEC ZI
SUBJECT: CHAMBER OF MINES CALLS FOR FAVORABLE, CONSISTENT
POLICIES
REF: A. HARARE 459
B. HARARE 416
C. 07 HARARE 998
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SUMMARY
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1. (SBU) The Chamber of Mines of Zimbabwe presented an
overview of the state of the sector at its Annual General
Meeting (AGM) on May 30, 2008. The mining sector is
Zimbabwe's largest foreign exchange generator. It earned the
country US$1 billion in 2007 and contributed about 6 percent
to GDP. Production of most minerals, however, is in steady
decline due to an unfriendly investment environment
characterized by distorted pricing, retention of foreign
exchange earnings by the Government of Zimbabwe (GOZ),
shortages of foreign exchange, electric power and skilled
labor, plus lack of policy clarity on foreign investment in
the sector. While the latest shifts in monetary policy
provided some reprieve, before foreign currency flows back
into the sector investors need confidence that favorable
policies are here to stay and that more reforms will be
forthcoming. Under the present political and economic
environment we are pessimistic that this will be the case,
and concerned that the GOZ could target foreign-owned mineral
assets for seizure in line with the election rhetoric of "100
percent empowerment, 100 percent control." END SUMMARY.
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Mining ) Zimbabwe's Largest Forex Generator
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2. (U) At the May 30 Annual General Meeting of the Chamber of
Mines of Zimbabwe in Victoria Falls, attended by econoff,
outgoing Chamber president Jack Murewa outlined the state of
Zimbabwe's largest foreign exchange generator * the mining
sector. Mines and Mining Development Minister Amos Midzi
noted in his address that mining earned the country US$860
million in 2007, in addition to US$153 million from gold that
was sold directly to the Reserve Bank of Zimbabwe. Mining
contributes about 6 percent to GDP, up from about 4.5 percent
in the 1990s, and it directly employees 32,000 people, down
from 46,000 in the mid-1990s. The GOZ's Export Directory of
Zimbabwe 2008 states that minerals and metals contribute 20
percent of Zimbabwe's exports while the mining sector is the
source of more than 30 percent of all foreign currency
inflow.
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But Unfriendly Operating Environment
------------------------------------
3. (SBU) Very few mining investments are underway in
Zimbabwe, aside from the development of a new nickel mine and
investments in the platinum industry, which enjoys unique and
favorable operating conditions (Ref A). Murewa recited a
litany of constraints that explained the lack of investment
in the past year:
-- An overvalued Zimbabwe dollar that prevented companies
from realizing the full value of high prevailing
international commodity prices and that discouraged
investment;
HARARE 00000549 002 OF 004
4. (U) Murewa acknowledged several favorable developments for
the sector announced by RBZ Governor Gono in his April 30,
2008 Monetary Policy Statement (Ref B):
-- the replacement of the gold support price with a price
closer to the real value of the precious metal;
-- allowing the 35 percent of foreign exchange earnings
surrendered to the RBZ to be exchanged at the new inter-bank
exchange rate;
-- moving Foreign Currency Accounts back to commercial banks
from the RBZ, which should make the funds more accessible.
He also commended Zimbabwe's stable and investor-friendly
fiscal policies. On the downside, however, Gono had reduced
the retention period for earned foreign exchange from
indefinite to 21 days; Murewa maintained the industry needed
a 120 day hold on its forex earnings. Gono also had failed
to clarify how or when the RBZ would pay the foreign exchange
component of gold deliveries.
--------------------------------------------- -
Production at Lowest Levels Since Independence
--------------------------------------------- -
5. (SBU) Against these constraints, production of most
minerals was at its lowest level last year since
independence. From 2001 to 2007, among the six largest
mineral foreign exchange earners for Zimbabwe in order of
value:
-- Gold production fell from 18,049 kg to 7,017 kg;
-- Chrome fell from 780,150 tons to 614,558 tons and high
carbon ferrochrome fell from 243,534 tons to 187,327 tons,
both due to their high dependence on the country,s
deteriorating electric power supplies, skills flight, and
high requirements for imported inputs;
-- Nickel production held steady (8,144 tons in 2001 and
8,581 tons in 2007) but Chamber of Mines economist David
Matyanga explained to us that production by the country's
leading nickel company--Bindura Nickel Corporation
(BNC)--had, in fact, steadily declined, only to be offset by
"the platinum factor," i.e. nickel production as a by-product
of platinum mining;
-- Platinum production climbed from a start-up of 519 kg in
2001 to 5,085 kg; and
HARARE 00000549 003 OF 004
-- Coal production halved from 4,064,497 tons to 2,080,221
tons.
A Chamber of Mines spreadsheet of Zimbabwe's mineral
production from 2001 through March 2008 is available on the
Mission Harare SIPRNet under "Special Reports."
------------------------
The Special Case of Gold
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6. (SBU) Murewa defended gold mining companies against
persistent government allegations of "leakage" (i.e. theft by
the producers), noting that although four government agencies
and one private company were now policing the sector,
production still had not increased. Privately, he said it
was impossible to conceal the additional amount of earth that
would have to be moved to produce the quantity of gold
allegedly being smuggled. Price distortions were the root
cause of decline, not theft.
7. (SBU) Until the reforms contained in the last Monetary
Policy Statement, gold output, based on Jan-March production
figures, appeared likely to fall to about 4 tons in 2008 (the
country's installed annual gold production capacity is 30
tons). Minister Midzi maintained at the AGM that production
had already responded positively to the new policies, but
Peter Dell, Finance Director of Canadian-owned Caledonia
Mining, which operates the Blanket gold mine, countered to
econoff that it would take six months for his large mine to
reverse the downward production trend. Murewa cautioned
against expecting immediate growth in the industry, as
investment decisions needed 1-3 years to yield results. In
addition, the industry needed confidence that the reforms
were here to stay after years of frequently shifting monetary
policy.
8. (U) Murewa commended companies for staying in business in
the face of up to six months payment arrears from the RBZ,
and he lauded the deal brokered by the industry with the
Zimbabwe Electricity Supply Authority (ZESA) to pay for power
in forex (Ref C). He emphasized the industry's strong record
of stepping up to the plate, in the face of a vacuum on
government's part, in infrastructure development plus health
and education services, over and above all taxes and
royalties paid. In closing, and in passing the Chamber
presidency over to David Murangari, MD of Bindura Nickel
Corporation, he underlined that the mining industry stood
ready to marshal its own resources without burdening the
fiscus, if given a favorable operating environment.
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COMMENT
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9. (SBU) We are pessimistic in the present political
environment and under escalating hyperinflation that the GOZ
will introduce further monetary policy reforms, or even stick
with the recent partial liberalization of the foreign
exchange market, which, if continued, would be a much needed
shot in the arm for the mining sector. Nor are the prospects
good for investor-friendly implementation of the
Indigenization and Economic Empowerment Act. Alarmingly,
election campaign rhetoric has centered around "100 percent
HARARE 00000549 004 OF 004
empowerment, 100 percent control," which bodes ill for the
development of Zimbabwe's crown asset--its mines and mineral
resources, a significant amount of which is still
foreign-owned. END COMMENT.
McGee