Mining Profits...Investing In Industrial Metals

The Zambian government proposed Friday to raise a tax on mining companies, aimed at helping the copper-rich but impoverished nation cash in on high global copper prices.

Finance Minister Ng'andu Magande said the government planned to negotiate with the mining companies on tax revisions.

But more than 70 percent of the population still lives in poverty, which has led to frustration with policies of recently re-elected President Levy Mwanawasa, evidenced in last year's bitter presidential elections. The distribution of copper benefits has become a key element of that debate.

Magande said the government wants to increase the country's royalty tax on copper earnings from 0.6 percent to 3 percent, increase the company income tax from 25 to 30 percent, and reintroduce a 15 percent withholding tax on dividends, interest, royalties and other mining sector transactions.

The existing 0.6 percent royalty tax, which is particularly low compared with taxes in other copper-producing countries, was put in place during an industry downturn early in the decade, when the Zambian government was desperate to attract foreign investment. Copper accounts for more than 60 percent of the southern African nation's exports.

Copper prices have since risen from less than US$1 per pound to more than US$3 per pound (about €5 per kilogram), driven in large part by growing demand from China. Zambian copper production rose by 7.9 percent in 2006, Magande said, from 459,324 metric tons to 492,016 metric tons. The mining industry now directly employs almost 50,000 people in Zambia, he said.

"At the time when copper prices on the international market were low, mining companies were offered tax concessions in order to make their projects viable," Magande said in prepared remarks. "Now that the prices are high, there is need to review these concessions so that the nation can benefit from increased earnings from the mining companies."

Talk of revising the copper tax has raised fears, however, of a backlash among foreign mining companies many of which entered into long-term contracts with the government.

Magande said the government would now seek negotiations with those companies "so that there is mutual consent by contracting parties to revise the tax regime to the new rates."