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Mining and crisis in Zimbabwe
Richard Saunders, Fatal Transactions Newsletter
August 2007

http://www.fataltransactions.org/cgi-bin/dbp.cgi?db=cmsp&ID=92

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Contents

• Background: Shifting terrains of growth and decline
• Party empowerment
• New indigenisation interventions
• Diamonds chaos
• Conclusions: Parallel slopes
• Annexure: Zimbabwe Minerals Production 18

Background: Shifting terrains of growth and decline

The deepening crisis in Zimbabwe's mining sector has been brewing for several years. Initially based in declining production efficiencies and investor wariness due to the country's rapidly worsening economic climate, the sector's continuing deterioration has since been punctuated by political faction-fights over divested public and private assets, murky deals involving the takeover of mineral producers by quasi-state organisations and more recently, mounting allegations of corruption and smuggling in the diamond and gold sectors. The key factors in mining's decline lie outside the sector, and have their origins in the security-driven restructuring of Zimbabwean politics and business in the late 1990s and early 2000s.

The ensuing economic instability and growing political unpredictability deprived the potentially high-growth sector of the kind of investment needed to sustain and expand existing operations. In this dynamic, working people, rural communities and the poor - including many destitute communities dependent on mining operations - have been among the most profoundly and negatively affected.

In the 1990s Zimbabwe was poised to become a significant force in African mining. With competitive mineral resources, a well-maintained infrastructure, skilled workforce, professionally-managed state regulatory institutions and liberalised, relatively stable fiscal and monetary regime, the country held key ingredients for a resurgence in mining growth. Mining houses responded favourably. Investments in the gold sector saw production rise and lift the country into third place among African gold producers, and into the world top ten. New interest in ferrochrome, and a large greenfield investment in platinum - the second largest foreign direct investment since independence - helped boost capital inflows into mining exploration, mine commissioning and production expansion.

Reflecting the new optimism, plans for other major investments in coal and thermal power generation were also developed, including a US$1.6 billion Sengwa Coal Field project led by mining major Rio Tinto. With further international financial support for larger projects, Zimbabwe appeared to be on the verge of a new breakthrough as an international mining investment destination.

This promise was shattered by the economic and political crisis that emerged in the late 1990s and exploded into a direct challenge to ZANU-PF by a resurgent opposition in the 2000 parliamentary elections. In 1997, besieged both by growing revelations of elite corruption and deepening economic decline under structural adjustment policies, the ZANU-PF leadership embarked on a path of internal political realignment. This included the rapid militarization of the ruling party, State and broader terrain of national politics, a trend reflected in the rising prominence of so-called "war veterans", state security personnel and later, party-affiliated militias, in the senior ranks of ZANU-PF and black business.

The immediate and longer term consequences for political and economic stability were soon evident. Within government, a rapid erosion of bureaucratic professionalism compounded emerging "rule of law" problems as the ruling party subordinated state institutions to the priority of its political survival and the consolidation of its leadership elite. In civil society, government was increasingly hostile to demands for participation and dialogue from a range of labour, business and other community interests with whom government previously had engaged in Zimbabwe's homegrown version of social democracy.

Along the way, renewed nationalist posturing by ZANU-PF, which became especially prominent during the 2000 and 2002 parliamentary and presidential elections, asserted the need for government to reassume sovereign rights over strategic natural and economic resources. The combined impact of these dynamics was sharply negative for not only political participation and governance, but also for the wider economy.

An economic downturn was immediate and pronounced, and worsened in subsequent years. Production and foreign earnings in most industrial and commercial agricultural sectors plummeted after the 2000-2001 farm invasions, which undermined investor confidence, destabilised the supply of agricultural inputs into an array of local processing industries, and were followed by intermittent threats against, and attacks on, urban commerce and industry. Inconsistent fiscal and monetary policy amid declining macroeconomic indicators played havoc with cost management, and increasingly unstable power supply, rising fuel costs and skills flight made production planning precarious.

As foreign currency reserves dwindled amid continuing draw-downs for fuel, electricity, plant and spares, production went into a deep slide. A 7% decline in GDP in 2000 was compounded by drops in following years and by 2005, Zimbabwe's economy was ranked the world's fastest-shrinking.

In the early 2000s, government's fiscal and monetary policy became increasingly ad hoc and unpredictable, designed to suppressed exploding inflation, domestic interest rates and exchange rate collapse. While a parallel market in foreign exchange blossomed, private sector exporters and others within the regulatory reach of government were forced to trade mostly at impossibly low official exchange rates, while local inputs costs inflated rapidly. For exporters, the rising shortage of foreign exchange therefore spelt disaster, not opportunity.

The mining sector, a key consumer and generator of foreign exchange and domestic employment, was a critical casualty in this emerging crisis. Currency fluctuations, policy vacillation and skyrocketing production costs were especially damaging. The pegging of the Zimbabwe dollar exchange rate to the US dollar in a period of high inflation, coupled within increasing restrictions on access to foreign exchange earnings, immediately put many mining houses' production costs under pressure. The gold sector was particularly hard hit, buffeted by complicated and unpredictable foreign exchange regimes managed unpredictably by the Reserve Bank.

Several gold producers were pushed to the brink of collapse in 1998-2000, prompting slowdowns and closure of a number of key operations. These included Delta Gold's new US$24m Eureka gold mine, which was expected to become the country's second largest gold producer but was mothballed after only one year in production. In 2000- 2001, 14 gold mines were closed or placed on care and maintenance. The result was a sharp drop in gold production. After rising steadily after 1990 and peaking in 1999 at 27 tonnes, gold production slumped to 18 tonnes in 2001, 12.5 tonnes in 2003 and to the equivalent of 8 tonnes per annum in early 2007. Short-lived state interventions - providing special subsidies to help rejuvenate production - worked briefly but the overall trend was downward.

The consequences for the broader economy would be critical: after the collapse of commercial agriculture, gold mining accounted for one-third of foreign currency earnings and more than 50% of mineral production. Production of several other key minerals also fell off, affected by the same combination of rising production costs, materials shortages, degraded infrastructure, skills flight and low realised returns due to distorted exchange rates. Copper production collapsed from about 15,000 tonnes in 1990 to barely 2,000 in 2001; and ferrochrome, which peaked in 1995 at nearly 300,000 tonnes, fell to 218,000 tonnes ten years later.

Exploration spending, a critical indicator of future investment intentions, peaked in 1996 and then declined sharply. Since 1999 there has been no new internationally financed exploration even though there has been strong exploration growth in neighbouring mineral-bearing countries. Apart from the booming platinum sector, represented by the Ngezi Selous mine operated by Zimplats (an Australia-listed company with a majority shareholding held by South Africa's Implats) and the smaller Mimosa Mine (jointly owned by Implats and Australian mining house Aquarius), large new investors were warned off by the deteriorating investment climate. At a time of a strong international resurgence in metals prices, the well-placed Zimbabwe sector lost out almost entirely.

New investments in the 2000s primarily involved mergers and acquisitions, including Mwana Africa's acquisition of one nickel and two gold projects, and the transfer of the small Blanket gold mine from Kinross Gold to Caledonia Mining, both of Canada. Wholly new projects like Rio Tinto's US$61million Murowa Diamond Mine, commissioned in 2004, and the Zimplats and Mimosa operations, have been the exception: overall, the Chamber of Mines and others point to the absence of new project implementation as the worrying dominant trend in a sector which under more stable conditions, would likely be booming.

While most mining houses' operations and investment slowed in the 2000s, many mining communities teetered on collapse under the double assault of economic downturn and politically-motivated violence. The targets of attack included not only mining companies but also mine workers, their union (the 10,000-strong Associated Mineworkers of Zimbabwe - AMZ), mining compounds and communities. Mineworkers who were already hard hit in the 1990s by mechanisation and restructuring - which saw mining employment drop from 83,000 in 1995 to less than 50,000 in 1999 - soon suffered more direct and unambiguous forms of injury.

In ZANU-PF's increasing militarization of politics in the 2000s, workers and workers' organisations were identified by government and the ruling party as potential "opponents". The Zimbabwe Congress of Trade Unions (ZCTU), the national labour centre to which AMZ is affiliated, officially endorsed the opposition Movement for Democratic Change (MDC) and indeed provided many of the new leaders of that party from amongst union ranks. The ruling party was determined to prevent its rural political base from being occupied and reorganized by its political critics, and soon violence and intimidation was unleashed to this end.

In 2001, workers on several mines were physically assaulted, harassed and otherwise strong-armed by members of the self-styled Zimbabwe Federation of Trade Unions (ZFTU), a ZANU-PF-inspired "trade union" led by war veteran Joseph Chinotimba, whose members seemed to consist mostly of "war vets", youth militias and unemployed party-linked youths. These attacks, unpunished by the State, led to the extortion of funds from workers and mine owners; displacement of the AMZ's organising capacity and access to its dues-paying members; and the disabling of the MDC's political and organisational support in mining compounds.

Reports of violence, destruction of property and theft were common during these incursions, which thoroughly destabilised industrial relations and community life in several different mining areas in 2001-02, and set the stage for the collapse of a number of small and medium-scale mining operations in subsequent years. Many mining communities were left to limp along without further investment in the context of slowed-down or closed operations, a rapidly declining social economy and under threat of further violence from government-aligned pseudounions.

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