Zimbabwe Tax Focus Could Pressure Ailing South African Producers

Miners in Zimbabwe may want to prepare to tango with the nation’s tax authorities. It appears that the ever-struggling nation has intensified its focus on extracting financial benefits from the mineral resource sector at an inconvenient time for South African platinum producers.

Zimbabwe’s mining sector is contributing a paltry 4 percent of gross domestic product despite the fact that mining firms in the country are realizing huge profits, according to Finance Minister Tendai Biti. If Zimbabwe is to benefit from its natural resources, Biti believes there is an urgent need to revise its mining and tax laws.

The finance minister has reportedly gazetted amendments to the country’s Revenue Authority Act, giving ZIMRA — Zimbabwe’s revenue authority — the power to scrutinize miners.

Tax authorities will be able to enter any mining location and examine prospecting or mining operations and mineral treatments. They will be allowed to examine books, records and security systems. They will also be allowed to take samples of items such as ore, concentrate and tailings.

In addition, tax authorities will be able to collect information, such as deeds, records, trade lists or other materials deemed necessary to assess an individual’s tax liability. And individuals who make a false statement to ZIMRA could be fined and imprisoned for up to two years.

Unwanted pressure costs

For South African platinum miners operating in Zimbabwe this development could prove to be another headwind in the quagmire — and the industry certainly does not need any more cost pressures. Already on its list of problems are demands for wage increases, expanding labor unrest, weak metal prices, weak platinum demand and rising production costs.

If ZIMRA’s approach with Zimplats is any indication of the sensitivity it will show these miners, the picture isn’t pretty. The tax authority recently flexed some muscle and slapped Zimplats, a unit of Impala Platinum Holdings (OTC Pink:IMPUY,LSE:IPLA), with a hefty tax bill.

Zimplats told shareholders that following a tax reassessment of the tax years 2007 to 2012, it owes $33.8 million. The company said it lodged an objection to the payment of penalties and interest on that bill, but is engaged in discussions for payment terms for the principal amount.

Zimplats explained that the bill arose mainly because the reassessments do not allow the company to claim full capital expenditure in the year incurred. ZIMRA deems written undertakings issued by the government in 2001, which apparently allow the practice, baseless since the required legislation was never promulgated. Zimplats has conceded.

However, CEO Alexander Mhembere told Bloomberg that the tax demand puts pressure on the company’s cash flows and will delay a planned $469 million expansion program to boost output by 50 percent.

Meanwhile, Impala, which has determined it is best to pay a series of wage increases this year, has also found it necessary to reduce capital spending for the 2013 fiscal year. An illegal six-week strike at Rustenburg took a toll on production and drove up costs. As a result of that and the pricing environment for platinum group metals, the company’s cash generation decreased by 40 percent in fiscal year 2012.

Impact to industry

If Zimbabwe is pondering an effective “resource-based debt reduction strategy,” one might assume that strategic thinking would prompt the government to look at the ailing South African platinum industry as a gleaming opportunity to lure investors in.

Zimbabwe has the second-largest known platinum reserves, but the nation is overshadowed by a crisis of confidence, due in part to the implementation of aggressive measures by the strong-armed authorities described above.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.