Mining: Sunrise, sunset?

Not only the Namibian economy as whole, but the mining sector are facing trying times in which government as a true partner must show its colours.

15 May 2019 | Business

The chamber has pointed out to government on many occasions that the total effective taxation rate for the mining industry … is at the tipping point of no longer being attractive for foreign direct investment into Namibia. – Chamber of Mines

Jo-Maré Duddy - Namibia’s mining sector needs policies which will transform the sector from a perceived “sunset” industry to a “sunrise” industry.

This will allow investment into exploration to pave the way for new deposits to be discovered and new mines to be developed, enabling a new dawn in the era of the country’s mining industry, the chief executive officer of the Chamber of Mines of Namibia, Veston Malango, says.

Continued policy uncertainty does not support sustainable growth in the mining industry, “which is desperately needed in lieu of Namibia’s depressed economic environment”, Malango says in his CEO’s forward in the 2018 Annual Review of the chamber, released at the recent Mining Expo.

Policy uncertainty includes new tax proposals, as well as the New Equitable Economic Empowerment Framework (NEEEF) and the Namibia Investment Promotion Act.

Reliable pillar

Key statistics contained in the latest Annual Review show to which extend the mining sector supported the local economy in its recession last year: Chamber members directly employed 9 045 permanent workers, 498 temporary employees and 6 681 contractors. In total, nearly N$6.1 billion was paid in wages in salaries, about 8.6% more than 2017.

In total, the mining sector paid nearly N$3.98 billion in taxes, about 4.4% more than in 2017. This comprised of nearly N$1.71 billion in corporate tax (2017: N$2.13 billion), around N$2.06 billion in royalties (2017: N$1.56 billion) and N$214.6 million in export levies (2017: N$115.3 million).

On average, 20% of the revenue and well over 50% of the profits generated by the mining sector is paid over to government’s coffers, the chamber said in a statement last week.

This comprises of corporate tax, royalties and levies on gross sales, dividends to government and personal income tax (PAYE) paid by individuals employed by the mining industry. PAYE would not be paid to government if the mining company did not exist, the chamber emphasised.

“In addition, there is the massive local procurement spend by the industry, which is on average 40% of revenue (sales) each year.

Dampening the recession

A further contribution by industry is its enormous voluntary Corporate Social Investment (CSI) spend, far higher than any other sector of the economy. According to the Annual Review, CSI of about N$73 million flowed from mining operations, as well as development and exploration companies in 2018.

“Most of our members have fully-fledged CSI departments contributing many millions each year to the support and development of health, education, livelihoods and the environment,” the chamber said in its statement.

“Net wages and salaries paid to Namibians employed by the sector accounts for an average of 13% of mining revenue annually. Expenditure on national utilities accounted for another 6% in 2017, while the industry also makes significant investments into exploration as well as skills development and training,” the chamber continued.

The mining industry also spent N$147.7 million on skills development last year.

“It can thus be factually concluded that over 79% of all mining revenue stays within Namibia’s borders and is not distributed back to the mining companies. Clearly, the mining industry makes a disproportionate contribution towards the economic growth of our nation,” according to the chamber.

“It is without a doubt that our national economy is in dire straits, and officially in a recession. At the onset, and for the last two years, mining has been one of the few sectors to record positive growth rates, dampening the contractions in GDP in 2017 and 2018,” the president of the Chamber of Mines, Zebra Kasete, says in the Annual Review.

Tax challenges

However, “the longer-term outlook for mining in Namibia appears less optimistic as a number of prominent mines will be reaching the end of their life of mines in the next two to ten years,” Kasete continues.

Boosting exploration activity and enabling the discovery of new mineral deposits which may lead to the opening of new mines are therefore pivotal.

Investor sentiment was “rattled” with the new tax proposals in the Income Tax Amendment Bill 2018 that proposes to change certain sections of the Income Tax Act, Malango says.

“The unintended consequences of the amendments would impede expansion and reinvestments by existing mines and most certainly thwart development of any new projects,” he says.

Certain amendments will make most mines unprofitable, meaning they will most likely scale down production and may end up in care and maintenance with inevitable job losses, while stalling any new investment into the mining sector, the chamber warns in the Annual Review.

This is particularly concerning given that many major mining operations are due to reach their end of life of mine in the near to medium-future. Certain clauses in the bill will unquestionably reduce the value of new projects and eliminate any planned reinvestment by existing mines, the chamber maintains.

“Ultimately, this would undermine broad–based growth in Namibia, bringing the mining sector to a standstill.

“As mining is one of the biggest sectors in Namibia’s economy, other sectors of the economy would shrink, particularly in the local mining supply chain resulting in a second round of job losses and economic contractions,” the Annual Review states.

In his 2019/20 budget speech, finance minister Calle Schlettwein disallowed the deductibility of royalties for non-diamond mining companies, which also includes other sectors paying royalties on intellectual property.

“While the diamond industry is excluded from this clause, the negative long-term impacts on non-diamond mining operations, as highlighted above, will far outweigh the immediate revenue gains for government,” the chamber says

Schlettwein also increased the export levy for dimension stone from 2% to 15%, which aims to induce local value addition to this mineral. “This will result in a hefty revenue-based tax for dimension stone operations of 20%, with the inclusion of the current applicable royalty of 5%,” the chamber says.

Diamonds

The effective taxation rates - including royalties, levies and corporate taxes - of the diamond industry are completely unsustainable in the long term and are likely to bring about the premature closure of Namdeb’s land-based operations with the loss of many thousands of jobs, the chamber said in its statement.

A 55% statutory corporate tax rate is charged to diamond mining operations, in addition to a 10% royalty on gross sales payable by diamond miners. This compares to the 37.5% corporate tax rate and 3% royalties plus 1% export levy on gross sales paid by the non-diamond mining companies.

According to the Annual Review, taxes from diamond mining is estimated to have constituted nearly 5% of government’s total revenue in 2018/19. Non-mining companies, on the other hand, contributed an estimated 1%.

“Should government reduce the taxation levels for the diamond industry to more sustainable levels of total effective taxation, the continued employment of thousands of Namibians would be secured and the country would make better use of its mineral endowment for the longer term future of Namibians,” the chamber said.

“The chamber has pointed out to government on many occasions that the total effective taxation rate for the mining industry (at well over 80% for diamonds and over 50% for the non-diamond industry) is at the tipping point of no longer being attractive for FDI [foreign direct investment] into Namibia.”

Empowerment, investment

The chamber says while government has provided assurance to produce legislation that reflects submissions and inputs by industry, there is still uncertainty regarding when NEEEF will be finalised and implemented.

“Following government’s intention and announcement to finalise the bill in 2018, the outcome of this policy/legislation is still pending.

“Despite this uncertainty, the Chamber of Mines wishes to allay industry concerns that the contents of this legislation will be aligned to industry charters, which will include targets that are achievable for each sector.

“Government has also reiterated its commitment and intention to continuously engage and work with industry associations to produce a policy and legislation that is amicable and workable, one that will induce growth rather than stifle economic productivity,” the Annual Review states.

Much like NEEEF, the Namibia Investment Promotion Act (NIPA) is pending finalisation and implementation, the chamber says.

“However, the chamber is pleased that government has accepted amendment proposals by the private sector players, including the Chamber of Mines. The revised legislation, once promulgated by parliament, is one that will encourage investment into Namibia rather than creating a barrier for investment,” the Annual Review states.

“The chamber continues to work closely with its line ministry, the ministry of mines and energy, to enable investments into exploration and to foster new growth,” Malango says.

“This partnership with government, and the trust built therein over the years, continues to underpin the cornerstone of our successes, and we are hopeful it will carry us through in trying times,” he concluded.

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