Exploring the mining landscape

B7: What is the prevailing business landscape in your field of expertise?

AB: The mining industry is one of the four pillars of Namibia’s economy, the other pillars being fishing, agriculture and tourism.

In Namibia there are currently 174 active and pending renewal mining licenses and the industry’s contribution is mostly from a limited few mining companies relating to diamonds, uranium, gold, zinc and copper.

None of the local mining companies are listed on the Namibian Stock Exchange (NSX) and therefore information is not publicly available. However, important contributions the mining industry made to the Namibian economy for the 2018 financial year, as obtained from the 2018 Annual Report of the Chamber of Mines, are as follows:

* 22% growth from the previous year;

* 14% direct contribution to GDP of Namibia;

* 50% on average of Namibia’s export revenue is accounted for from mining;

* 9 500 temporary and permanent employees with a total wage bill of N$6 billion; and

* N$6.25 billion contributed in terms of taxes, royalties and levies to the government of Namibia.

These figures relate to the 2018 calendar year and we have in all likelihood progressed further en route to achieving goals set out as part of the Fifth National Development Plan (NDP5), i.e. reaching 15.2% of Namibia’s GDP by 2022.

Exploration is an important part of the future of mining operations and to ensure sustainable growth. As at 9 July 2019 there were more than 1 400 exploration and prospecting licenses active and in the 2018 financial year N$573 million were spent on exploration activities.

Given the above statistics, it is clear how important the mining industry is to the economy of Namibia without even considering the multiplier effect of all the mining peripheral services and purchases from the local communities and contractors.

B7: What are the most significant tax developments and how do they impact on mining?

AB: The Chamber of Mines stated that currently mining companies are paying in excess of 20% of revenue and 50% of profits generated to the government through taxes, royalties and levies.

In the 2019 budget speech the minister of finance proposed 12 amendments to the current Tax Act of Namibia. Of these the following will have a direct effect on the mining industry:

* Repealing the Export Processing Zone and introducing the Special Economic Zones, with a sunset clause for current operators with the EPZ status;

* Abolishing the current practice of a conduit (flow through) principle in the taxation of trusts;

* Introducing a 10% dividend tax for dividends paid to residents;

* Disallowing deductibility of fees and interest paid to non-residents for calculating taxable income until payment of withholding tax paid is proven; and

* Disallowing deductibility of royalties for non-diamond mining entities.

Disallowing the deductibility of royalties will have the most significant impact as it is expected to have a detrimental effect on the viability of existing and proposed operations of the mining industry in Namibia.

The industry is already under pressure as a result of low commodity prices and the financial models are cost-sensitive. Imposing additional taxes in the form of disallowing the deductibility of the royalty payments could result in unwanted consequences for the economy in the form of job losses and the withdrawal of investment from the country as payments to government will then even more exceed 50% of profits generated.

In addition to the effect on the above proposals, PwC performed a paying taxes study in conjunction with the World Bank Group. It indicates that it takes an annual average of 302 hours and 27 tax payments to be tax compliant in Namibia.

That placed Namibia 81st out of 190 economies surveyed on the ease of paying taxes. Not only does this place a significant administrative burden on the companies, but also makes Namibia a less attractive option to invest in.

B7: What are the biggest challenges facing mining currently?

AB: Significant challenges facing the mining industry will be the commodity prices and exchange rates.

Due to the consistent low uranium price various mines are in care and maintenance as the cost price exceeds the spot price. Low commodity prices with a low exchange rate as was the case for the majority part of the 2018 financial year results in revenue being substantially lower and companies less profitable.

Namibia has a small population and there is a significant skills shortage in the market. As a result expats with the required knowledge and experience are obtained on work visas, which also has its challenges. Due to this skills shortage there are capacity constraints impacting the production of the mining industry.

The labour costs in the mining industry in Namibia are regarded as high if compared to other developing countries around the world. This coupled with extensive labour relations and negotiations make Namibia a less attractive investment for foreign investors.

Lastly government regulation with the proposed changes affecting the mining industry has a significant influence on foreign investors in determining whether to invest in Namibia.

B7: How can these challenges be overcome/mitigated?

AB: Commodity prices, in particular uranium, are forecasted to increase in the medium to long term which will make mining more viable in future. As such mining companies must implement cost-cutting measures to withstand this period and ensure they benefit from the better commodity prices in future.

The mining industry collectively spent N$148.7 million in 2018 on skills development in various forms from on- and off-site training to bursaries for students to study both locally and abroad. Furthermore there are institutions like NIMT that does extraordinary work in developing artisans and equipping the youth to develop the specialised skills needed to work in the mining industry. This will decrease the reliance of obtaining the expertise required from expats and reduce capacity constraints.

The Chamber of Mines, representing the mining industry in Namibia, has a very good relationship with government and regularly consults with government on new proposals - for example the proposed tax changes, ownership of mining licenses and EPLs and the New Equitable Economic Empowerment Framework (NEEEF) - to find solutions which are beneficial to both the industry and government.

B7: What growth opportunities are in your sector?

AB: The growth of this industry is in the exploration activities performed.

Due to technological developments and better methods of mining various resources it becomes more viable to mine resources with lower grades which was not the case in the past. It is therefore important to be an attractive option for foreign investors in order for exploration activities to be performed which could result in future mining operations.

Due to the amount of EPL currently active and amount spent by the industry it is testament that a lot of effort is going into identifying viable resources to mine and expand the industry.

B7: Any closing thoughts?

In the face of all the change and challenges experienced and the current economic climate of Namibia, the mining industry is not only of paramount importance to Namibia’s economic growth and sustainability, but also to Namibia’s social political wellbeing.

The mining industry spent N$73.1 million as per the annual report on social corporate responsibility and now also recently announced that the industry will contribute N$5.15 million towards drought relief, thus testament of the important role the industry has within Namibia.

We as citizens of Namibia therefore need to work together to make the country attractive to foreign investors to maintain the mining industry.