Following the decline in the price of copper, what strategies is First Quantum employing at Kansanshi to ensure profitability?
First Quantum has to remain efficient at Kansanshi. Currently, Kansanshi operates in the lower 40-50 cost percentile. This means that, should the price of copper drop, most of the copper operations worldwide would start feeling severe pressure before Kansanshi does.In the 1990’s, the Government owned the mines in Zambia and in many other countries, so when the price of copper fell these Governments persevered with copper production because the mining industry was the major source of foreign exchange. Now that mines have been privatised, if the price of copper dropped, investors would discontinue their operations rather than losing money. As a result, the demand-supply curve would change hopefully pushing the price of copper back up. In 2015, at Kansanshi, once the smelter is running and producing sulphuric acid, one of our biggest costs items, , will be significantly reduced and First Quantum will move down to the 25-30 cost percentile. Most mines that run at lower costs than Kansanshi do so by having by-products as a credit to their costs, and not necessarily by operationing more efficiency. Operationally, Kansanshi is one of the most efficient mines in the World, and like Sentinel also includes various cost saving methods, such as trolley assist haulage and In-Pit-Crushing to minimise the use of diesel and reduce costs further.
At Kansanshi overall copper production in Q1 2014 was 12% higher compared to Q1 2013. What are Kansanshi’s prospects for further development into 2014?
Despite the increase in production, at Kansanshi, First Quantum is experiencing production constraints that relate to the current smelting capacity in Zambia. The Kansanshi S3 Sulphide expansion is on hold due to a combination of technical and fiscal uncertainties. Transporting concentrates across large distances is not practical and the current 10% levy on the export of concentrate has tied up US$ 350 million worth of concentrate at Kansanshi and delayed tax payments of US$ 80 million to the government. When First Quantum is satisfied that its new smelter is running properly, all fiscal issues are discoursed and the politics are more favourable, there may well be a renewed commitment to building a second new smelter in Zambia. This investment will double thecompany’s smelting capacity to 2.4 million mt/y of concentrate making it the biggest smelting complex in the world and, with S3 will increase production at Kansanshi from 270 000 mt/y to 380-400 000 mt/y.
Would you consider Zambia as an attractive mining investment destination despite the challenges?
To date, First Quantum has invested approximately US$6 billion in Zambia. Sentinel was built in two years, despite the logistic challenges of being 2600 Km from the closest port. To my knowledge, considering the size of the project and the logistics challenges faced, no other mining project in the world has been built in such a tight timeframe. This was possible because Zambia has been an easy country in which to operate. However, overcoming the challenges in the Country takes continuous close engagement with Governmente and of course this requires a lot of energy and time. Current challenges of operating from Zambia include uncertainty in the fiscal regime, with an example being the increase in royalty rates and discussions regarding the re-introduction of windfall tax. Bureaucracy in the Country is also a problem, especially when it comes to land title. Land, in most countries, is the foundation of wealth creation and, through its collateral value, is the main lever for entrepreneurial activity. However, to a greater degree this mechanism is missing in Zambia as there is no place for the average citizen to invest in land with cash and therefore there is no associated means of capital appreciation. Another point, often overlooked, is that the Mining Industry’s contribution to Government revenue, GDP and direct employment in Zambia are all higher than country equivalents elsewhere in the world.
What should the Government do to continue attracting foreign investments in the Zambian mining sector?
Land title issues are undoubtedly discouraging foreign investments in the country in all sectors of the economy.; Moreover, in some ways Zambia’s fiscal regime is more punitive compared to other countries. One would want a situation where the Government acknowledges that they are enforcing high tax rates but then guarantees consistency and stability going forward. Investors need to know that their investment will follow a predictable path which will not be disturbed by future punitive additional taxes. The tax regime must be consistent whether it is good, bad or indifferent, so that for the duration of a mining development project there is certainty to construct that project around, allowing investors to ascertain whether, going forward, a project remains economically viable.