Zimbabwe's new gold rush
Amid COVID restrictions, families, youths and women are flooding into the sector. Policy interventions are needed to support them.
The quiet town of Chegutu, located 109 km South West of the capital Harare, is home to a plethora of small business activities – in stark contrast to other sullen towns and cities of Zimbabwe. After all, the country’s economy is in a wild tailspin, hard hit by chronic fuel and cash shortages, as well as rising inflation hovering in the region of 700% per annum. However, scarce United States dollars circulate among locals in this town with free abandon. The only problem is a shortage of lower dollar denominations for change in transactions.
Several small towns in the country are bearing witness to a new gold rush. Not only is the government aware of this but foreign corporates are readily buying Zimbabwean gold mines, as the rally on gold is proving a suitable hedge against COVID-19-induced global financial risk. This renewed wave of mining activity is driving the country towards an extractive industry dependency mode, as gold is now the single largest foreign currency earner, closely followed by tobacco. With Zimbabwe’s tumultuous economic and political trajectory playing out, issues of sustainability and resource governance remain imperatives that need policy consideration, in order for people on the bottom rung of the economy to fully benefit from this resource.
All that glitters…
Tales abound of gold miners across the country who have stumbled into fortuitous finds. Some have fallen upon ore-laden wagons, abandoned since the Second World War on small underground mining railway tracks. Although there is no documentary evidence backing the belief, most miners say that German explorers hurriedly left for Europe as the war intensified. Frustrated by this loss in gold finds, they either buried the shafts in various layers of mortar or used explosives to blow up the mines altogether, with African workers trapped inside. In the field of small-scale mining, it is not rare to find a human skeleton hundreds of meters underground.
The prospect of immediate cash payment in United States dollars has lured thousands of families into the business of artisanal and small-scale gold mining (ASGM.) This type of mining is tolerated and lately encouraged in Zimbabwe, in contrast to other countries, more so as the bulk of gold deliveries trickling into national coffers come from this type of mining.
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Mining law in Zimbabwe is governed by the 1961 Mines and Minerals Act, which permits any individual, provided they are a “permanent resident of Zimbabwe,” to apply for a mining licence.
Research conducted by geologist Forbes Mugumbate shows that Portuguese explorers colonised parts of Zimbabwe in the 17th century and traded in gold with locals. The early Europeans relied on gathering information from local villagers about the existence of old workings, upon which mining shafts were sunk. This rudimentary mining method has continued to date among ASGMs.
Geologists posit that gold exploration in the country has been mainly directed towards the rediscovery of quartz veins at old work sites, at the expense of virgin lands. This has led to inaccurate conclusions that Zimbabwe has been over prospected.
Approximately 60% of Zimbabwe’s land surface is composed of granitic rocks deposited in an Archaean-age basement commonly referred to as the Zimbabwe Craton. The granitic rocks enclose sedimentary layers known as greenstone belts, hosts to gold deposits, industrial minerals and base metals. Alluvial gold is present along all the major rivers draining the greenstone belts. The Great Dyke, which marks the upper frontier of the Archaean basement in the country, is host to massive reserves of platinum group metals and chrome.
Off at a tangent
Despite this abundant gold wealth, over the past 2 years, gold deliveries have been on a downward trajectory. Cumulative gold deliveries fell to 27.6 tonnes last year, a 16% decrease from tonnage delivered in 2018. Of the 27 tonnes delivered, small scale miners contributed 17.478 tonnes while large scale producers contributed 10.181 tonnes. The central bank attributed this decline to power shortages, gold leakages and inadequate equipment for miners.
The first quarter of this year did not look too good either. Gold output from ASGMs fell by 15.22% in the first quarter of 2020 while large-scale miners’ output fell by 6.96% in comparison to output during the same period last year. Despite this negative trend, government projects gold deliveries to reach 27 958 kg this year. On the flip side, gold export earnings went up by 2.7% to USD 409.7 million from January to May 2020. A total of USD 398.6 million was earned in exports during the same period last year.
This begs the question, what is the real problem? Fidelity Printers and Refiners (FPR), a subsidiary of the Reserve Bank of Zimbabwe (RBZ), currently has a monopoly on buying and refining all the country’s bullion. FPR then sells the delivered gold to the Rand Refinery based in South Africa, which then sells it to the London Bullion Market Association (LBMA). FPR has not been a choice delivery destination for most miners.
Economist John Robertson told me in an interview that the payment which Fidelity offers and distressing delays have done a lot of damage to expected gold output targets.
He said that mobility problems emanating from COVID-19 restrictions meant that there was less movement of people from one region to another, thereby disrupting the whole mining supply chain. This translates to a huge reduction in mining activities.
“We were also selling gold some two to three years ago on the basis of forward contracts to various investors, among them some from the United Arab Emirates (UAE). So government is now delivering the gold,” said Robertson.
He said the RBZ has not been open about the details of the forward contracts but on that basis, these are commitments that have to be met.
“What happened to the money that was paid [through the forward contracts]? It’s difficult to identify who got the money, but those people [investors] must be paid back now,” he said.
Large-scale miners have not been spared the agony of delayed payments either. In June this year, the country’s largest gold miner RioZim Ltd announced that it had halted production due to delays in payments for bullion deliveries to FPR, leaving the company in dire operational expenditure problems. The next month, RioZim issued a statement advising shareholders to exercise caution when trading the company’s securities until an announcement is made to the contrary.
The gold producer said that the delayed payment was placing ‘enormous financial stress on the company.’ RioZim said it was owed USD2 million by FPR for gold deliveries.
Under a new framework aimed at shoring up more gold deliveries, large-scale gold producers are paid 70% of their earnings in United States dollars while the balance is paid in local currency at the ‘interbank’ rate. Miners say this framework disadvantages them as the interbank rate is always outpaced by higher trading rates for the US dollar on the black market.
In an interview, Zimbabwe Miners Federation representative Victor Rupende said the problems that miners are facing relate to lack of production capacity and realistic payments for gold output. “We have gold buyers who were granted permits and some of them are agents of Fidelity who are paying a higher price for gold than that offered by Fidelity. They are enriching themselves,” he said.
FPR last month adopted a new approach to attract more ASGM deliveries by pledging to pay gold prices in sync with global market prices. As of the 31st of July, FPR was paying USD56.33 per gram, while international prices hovered in the region of USD65.72 per gram. Parallel market gold buyers pay immediate cash to ASGMs taking advantage of payment delays by FPR.
“There are some investors from the UAE and Russia who made forward payments for gold deliveries some time ago, and these funds attracted a 4% interest rate. The gold is then sold to them at a 10% discount. This could also be a reason why Fidelity’s hands are tied down in terms of making timely and realistic payments,” Rupende said.
Economic injustice or corruption?
Endemic corruption, policy contradictions and an unstable economic environment remain the major albatross to the gold sector’s growth prospects. In a desperate bid to curb leakages, the government, in May this year, announced a 100% foreign currency retention threshold incentive for ASGMs.
This move caught the ire of the IMF, in light of government’s earlier promise that it would halt the ASGM gold incentive. This subsidy was being funded by printing money, hence fueling inflation.
Zimbabwe is in desperate need of retained foreign currency earnings from gold in order to pay for ever-demanding needs. These range from fuel and electricity to repaying collateralized foreign debts to the tune of just above USD 1 billion. These debts were contracted from multilateral financier Afreximbank.
This arrangement means Zimbabwe can forget debt relief discussion with the Paris Club of creditors and Bretton Woods institutions, due to the fact that the IMF had previously prohibited further Afreximbank loans on the basis of a Staff Monitored Programme (SMP).
An SMP is basically an informal and non-financial agreement between the IMF and country authorities to implement a coherent set of policies aimed at stabilizing the economy. In this regard, any language of subsidies will not be countenanced by the IMF in the interests of further technical co-operation.
Despite the hullabaloo, some investors are actively buying gold mines in the country. Mauritius-based Sotic International Ltd, backed by Cayman Islands registered Almas Global Opportunity Fund, is targeting to become the biggest player in Zimbabwe’s gold sector.
Landela Mining Ventures Ltd, which is run by Sotic, already purchased two mines this year and is aiming for six more. The company concluded a transaction to purchase Shamva gold mine from Metallon Corp, once the country’s biggest gold mining company.
Despite delivery problems bedeviling government, the current set-up where ASGMs are permitted to continue mining is highly desirable for the latter group. With high unemployment levels and ever-tightening COVID-19 restrictions, thousands of youths are flocking from the cities to gold mining towns in search of a living. Children, whose access to education has been disturbed by the coronavirus outbreak, are becoming small-scale miners too. Women, who have always been shut out of mining, are venturing into the sector in huge numbers. Only well considered policy interventions that stimulate gold deliveries through official channels, that also protect vulnerable populations, the environment and sustainable mining practices, can pull the country out of potential extractive industry dependence.
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