Zimbabwe’s indigenization policies could halt future mining
investment in its tracks.

Robert Mugabe’s crushing victory in Zimbabwe’s presidential elections renews the possibility of enforcing his desire for the “indigenization” of the mining sector. For the embattled resource sector though, the news is not all bad.

In August, Mugabe steamrolled his opponent, Morgan Tsvangirai, and secured his seventh term as the country’s leader in a poll grudgingly accepted by the international community as fair. For the mining industry, this brings with it the fear that the 89-year-old Mugabe is now free to pursue a long-cherished vision—the effective transfer of assets held by foreign companies to black Zimbabweans. A swath of industries, banks and mines, in particular, have been told to cede 51% control of their operations to locals or risk losing their licenses.

“Mugabe has not let up on his rhetoric post-election,” said John Meyer, partner and head of resources at SP Angel, a corporate investment firm in London that specializes in commodities. “ZANU PF appears determined to push ahead with applying new indigenization legislation since the election. Companies that have yet to work out their indigenization deals can expect to have empowerment deals forced on them or risk losing their assets.”

He said the power sharing agreement Tsvangirai’s party had with Mugabe’s Zanu PF over the past five years brought a measure of stability to the country. With the uneasy partnership now ended, Mugabe’s ambitions are unfettered. “We do not expect any leniency from the ruling party now that the power sharing agreement is gone and they feel mandated to push ahead with planned reform,” Meyer added.

There is, however, a view that indigenization may lose its drive now that Mugabe is once again secure of his position, and that the focus will now turn to luring investors instead.

Talk of taking control of foreign business and the mines, in particular, has been part of Zanu PF’s political platform since the late 1990s, when landless blacks were encouraged to seize whiteowned farms. Yet, a decade and a half later, this still has not happened. This suggests the government itself is not certain that this is the best way to proceed.

“Indigenization is not cast in stone,” said Vimbai Chakanetsa, CEO at Goldsearch Holdings in Bulawayo. “There is a need for investment—a need for stable policy.”

He noted that mining can be divided into two parts: extraction and exploration. It’s the second element that will be critical to Zimbabwe’s development. Although the country has endured political and economic turmoil under Mugabe’s rule, existing mining operations have continued. They have weathered power cuts, the wholesale looting of foreign currency reserves and the constant threat of nationalization.

At its peak in 1986, the Zimbabwe mining sector contributed about 7% to GDP, according to the country’s chamber of mines. Zimbabwe was a major contributor of chrysotile asbestos, ferrochromium and lithium minerals. Gold production was the leading sector in 1996 with output exceeding 24,000 metric tons (mt).

At the height of the country’s financial crisis, when inflation soared above a trillion percent, mineral exports dropped to less than 4% of GDP. But by 2010, after the country had abandoned the Zimbabwe dollar and began using Uncle Sam’s paper instead, mining had soared to providing 20% of GDP, said the chamber.

Gold is a good indicator of the country’s mining fortunes. In 1996, Zimbabwe produced 24,000 mt, according to Imara Capital in Harare. By 2009, it had fallen to less than 5,000 mt; this past year, production rose by a third, to 7,200 mt.

The real picture is the overall decline in volume from the 1990s to today. This is largely the result of underinvestment, particularly in new exploration.

“The country is under explored,” said Chakanetsa. “Existing mines won’t shut down but the big danger is that policy will kill exploration. That is the real problem we face today.”

The country has bountiful platinum reserves, gold, diamonds, base metals and coal.

Another risk the lack of investment has caused is that while formal mining has done little to expand, informal diggers are scouring the countryside for gold and diamonds. Thousands of “Makorokoza,” as illegal panners are known, are working surface deposits. Many can be seen quite openly working along the main road leading from Bulawayo to the capital Harare.

“Digging big orebodies in small patches can destroy the resource,” said Chakanetsa. “The same thing was happening at the Marange diamond fields before the government stepped in and pushed out the Makorokoza.”

However, the big issue remains—how to attract the investment that the government desperately needs. A hard-driving program to attract mining capital, from China as well as traditional players, has delivered little. In April this year, Zimbabwe Investment Authority (ZIA) Chief Executive Richard Mbaiwa said in a speech, that in 2011, Zimbabwe had more than $6 billion worth of mining project approvals but only $387 million in actual investment, according to the Financial Times.

Figures posted on the ZIA’s website indicate that broader approved foreign direct investment has tumbled in 2012, even from its main trade partners. So far, 2013 statistics aren’t much better.

Much of this can be attributed to the uncertainty around indigenization. More than 1,000 foreign-owned firms have submitted plans to comply with the policy, but less than half have been approved, according to a recent speech by Saviour Kasukuwere, the minister overseeing the issue.

In January, South Africa’s Impala Platinum, the world’s second largest producer of the metal, agreed to sell a 51% share of its Zimbabwe holdings, Zimplats, to local blacks for $971 million. The carefully crafted deal would have seen Zimplats lend the money to the buyers, who would have paid back their loan with dividends and earnings from their share.

Kasukuwere endorsed the deal but then backtracked a short while later when his boss, Mugabe, objected to the loan component that he called a “mistake.” Zimbabweans, Mugabe said, should not have to pay for a resource that already belonged to the country.

This was a theme that was expounded on in the run-up to the August elections. “When it comes to natural resources, Zimbabwe will not pay for her resources,” Kasukuwere said, quoted in the state-run Herald newspaper.

Now that the election has taken place, populist rhetoric may ease. Already the government has indicated that it may back off on the banks; “Where an investor brings in his or her capital, technology, expertise and raw materials, we will not insist on the principle,” Mugabe said in his inauguration speech. He did go on to add that mineral resources were still in line for takeover. “However, where finite natural resources such as minerals were concerned, the country could not be bystanders in their exploitation.”

Still, the fact that he is now suggesting that local ownership is secondary to investment is a sign that the government is taking a more pragmatic view on the issue. Zimbabwe’s rulers will also be mindful that even though miners like Zimplats have not disinvested, there are limits to how much they will put up with.

“If the indigenization trigger is pulled, there will be consequences,” said STANLIB Asset Management resource analyst Kobus Nell in Johannesburg. “Platinum still has to be sent over the border to South Africa to be smelted, by Impala Platinum. This gives the mines some leverage.”

If the mines do pull out, they will take with them skills, experience and capital, which would be catastrophic for the country. Minerals now account for more than half of the country’s exports. Nell suspects that both the mines and government would like to move on to a post-election relationship that is mutually beneficial.

“There’s been a lot of stuff flying around in the pre-election period, but it now comes down to the fact that both sides need each other. They will have to work together,” Nell adds.

This may not exactly be an ideal situation for resource operators. The certainty that drives business decisions is still absent from Zimbabwe, but at least the threat of indigenization is perhaps not as great as it was. For most, they will take what they can get for now.