GOLD'S POTENTIAL TO CONTRIBUTE TO ZIMBABWE'S

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E.O. 12958: N/A
TAGS: EMIN ETRD ECON PGOV ZI
SUBJECT: GOLD'S POTENTIAL TO CONTRIBUTE TO ZIMBABWE'S
ECONOMIC RECOVERY

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SUMMARY
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1. (SBU) Zimbabwe is in dire need of substantial foreign
currency inflows. Looking ahead, the country's once
significant gold mining industry is a potential source of
foreign exchange earnings, provided the problems of access to
capital, power shortages, and protection of property rights
are addressed. The recent liberalization of gold policy has
helped revive the industry, but producers still face serious
constraints. Moreover, they are calling for consistent
implementation of more market-friendly policies that will
attract the foreign investment needed to increase exploration
and production. Foremost, the Indigenization and Economic
Empowerment Act and the proposed amendment to the Mines and
Minerals Acts require substantive review to make them more
investor-friendly. END SUMMARY.

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Gold Offers Hope
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2. (SBU) Zimbabwe's dire lack of foreign exchange is
threatening the survival of the inclusive government. The
collapse in value of the local currency after the explosive
growth in money supply in 2008 forced the GOZ to abandon the
Zimbabwe dollar as a medium of exchange. No longer able to
print local currency with abandon to buy hard currency,
Zimbabwe must now quickly develop alternative sources of
foreign exchange. As the international donor community
remains on the side line with economic assistance until the
inclusive government introduces bolder political and economic
reforms, the resuscitation of Zimbabwe's gold mining industry
offers hope as a potential source of foreign exchange in the
near term.

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Output Crashed under Bad Policies
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3. (SBU) According to David Matyanga, chief economist of the
Chamber of Mines of Zimbabwe, Zimbabwe's gold production fell
by 49 percent from 7.018 MT in 2007 to 3.58 MT in 2008.
Matyanga attributed the decline from the most recent
production peak of 27 MT in 1996 to the overvalued Zimbabwe
dollar and a government policy of paying producers far less
than the world gold price. Gold producers whom we
interviewed identified further constraints on output from
both large- and small-scale miners.

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Arrears to Producers
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4. (SBU) Paul Markham, Technical Director and board member of
one of Zimbabwe's major gold producers, Rio Tinto Zimbabwe
Limited, told economic specialist that an acute lack of
working capital had adversely affected production in 2008.
He attributed the shortfall to the Reserve Bank of
Zimbabwe,s (RBZ) US$30 million in arrears to producers for
gold delivered to Fidelity Printers and Refiners (Private)
Limited as of end-2008. Caxton Mangezi, General Manager of
QLimited as of end-2008. Caxton Mangezi, General Manager of


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developed countries, such as Australia, as a result of the
global financial crisis. Mangezi added that his large
company had not lost a significant number of managerial
staff, and agreed with Markham that Zimbabwean geologists and
surveyors had begun to return from abroad.

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New Gold Marketing Rules Roundly Praised
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8. (SBU) The industry roundly applauded as progressive the
liberalization of gold marketing introduced by the RBZ in its
January 2009 Monetary Policy Statement. Markam told us that
the policy shift and the subsequent removal of the 7.5
percent foreign currency surrender requirements per Budget
Review Statement of March 2009 made gold production
profitable once again. (NOTE: Previously gold producers had
to sell 7.5 percent of their foreign exchange receipts to the
RBZ at a highly overvalued exchange rate. END NOTE.)
Matyanga told us that most large-scale gold producers now
send their gold to the RBZ's Fidelity Printers and Refiners
through the Chamber of Mines. Fidelity does the assaying,
consolidates the output, ships it to the Rand Refinery in
South Africa, and credits each producer's account with the
sales revenue. Mangezi felt that the new marketing and
payment arrangements would stimulate gold output, especially
given the current high gold price. Gura of Metallon, on the
other hand, saw the liberalization of gold marketing as a
temporary measure brought about by Zimbabwe having failed to
produce 10 MT/year which caused Fidelity to lose its gold
license at the London Bullion Marketing Association. He
believed that once the industry reached the 10 MT threshold
again, Fidelity would seize back the independent marketing of
gold.


9. (SBU) Chimbodza told us that the changes to gold marketing
were equally positive for small-scale gold producers who
could now get the world price on delivery of their product.
He added that the policy shift would encourage small
producers to sell gold through official channels. (NOTE: The
small-scale sector produced as much as 50 percent of
Zimbabwe's gold output as recently as in 1999. END NOTE.)
Matyanga was less optimistic about the resurgence of
small-scale gold producers in the short term. The sector
needed significant capital investment to enable blasting,
setting up rock supports, and ventilation since the
easily-mined gold was nearly depleted. In his view,
small-scale producers were unlikely to contribute more than
30 percent in the short term.

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Suspension of Royalty Payments a Boost to the Sector
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Q

10. (SBU) The RBZ suspended payment of 3 percent royalty
fee in 2004 in a bid to boost gold production. Gura
anticipates re-introduction of the royalty following the
removal of the 7.5 percent foreign exchange surrender
requirement to the RBZ. Minister of Finance Tendai Biti has
told producers that they will have to pay royalties now that
they may retain 100 percent of their sales proceeds, although
he has not indicated when this would occur. Victor Gapare,
President of the Chamber of Mines and himself a gold miner,

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pointed out that royalties should be less than in Tanzania,
South Africa, Mali or Ghana, as Zimbabwe's yield of gold per
ton of rock is less than half the rate in those countries.
For now, at least, the absence of royalties is another
incentive to producers to increase output.

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More Needs to be Done
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11. (SBU) Markham made the point that gold producers did not
want aid or subsidies, rather an economic environment
characterized by consistently implemented market-friendly
policies. He said that while the Short Term Economic
Recovery Program (STERP) launched by Minister Biti contained
the right policies, they may prove to be unpopular and
consequently not consistently implemented by government.
Gura and other gold producers told us they would like to see
the positive changes to gold policy set forth in the January
2009 Monetary Policy Statement reflected in an amendment to
the Gold Trade Act and no longer subject to the whim of the
Reserve Bank. In addition, Gura questioned the onerous
requirement for taxes to be paid on a quarterly basis, as the
currency--the U.S. dollar--was no longer losing value
overnight. The requirement was a further drain on working
capital at a time when it was needed most.

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Current Output
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12. (SBU) Matyanga expects gold production to roughly double
to 6-7 MT in 2009. Markham told us in April 2009 that
monthly production was 140 kg, with Rio Zim's Renco Mine
accounting for almost half of it. In his view, the
prevailing high gold price underpinned by tight supply could
lift output substantially if the sector were able to
recapitalize and if workers' wage demands were realistic.
The outgoing President of the Chamber of Mines, David
Murangari, went further to state that the sector would
welcome flexibility in the labor market. He called for wages
to be linked to productivity and for greater freedom for
employers to retrench workers during lean times. Labor
unions are asking for wages of US$454/month, which the
economy cannot sustain. Most mines pay workers about
US$100/month plus free housing, school fees for workers'
children, medical insurance, etc.

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COMMENT
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13. (SBU) Zimbabwe is desperate for foreign exchange. Given
the country's considerable gold resources, its gold mining
tradition, and gold's firm and stable price, establishing
policies that attract capital and that promote gold mining
could generate considerable foreign exchange inflows in the
next year. The restoration of the rule of law and respect
for property rights would be a catalyst for investment and
renewed exploration in this important sector. In this
Qrenewed exploration in this important sector. In this
regard, the Indigenization and Economic Empowerment Act
requires substantive review, along with the proposed
amendment to the Mines and Minerals Act. They need to be

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more foreign-investor friendly as indigenous Zimbabweans
clearly are not in a position to raise sufficient funds on
the local market to revive and expand this important and
capital-intensive subsector of the mining industry. END
COMMENT.

MCGEE