The Republic of Zimbabwe is a mineral rich country with vast unexplored resources.
Over the years, the country’s economy has been shifting from an agrarian based economy to an economy based on mixture of agriculture and mining. Currently the mining sector contributes 13% towards the national GDP, 70% of the country’s foreign exchange earnings and 4.5% in terms of employment. The sector is expected to continue growing and by 2023 the sector is forecast to be contributing $US12 billion annually to the economy, primarily from gold, platinum and diamonds.
The country’s mineral base is highly diversified and huge. Most of the minerals are found in the Great Dyke and the ancient Greenstone Belts also known as Gold Belts. In addition to its abundant precious metals resource, Zimbabwe has one of the largest deposits of Diamonds and it also has the second largest platinum deposits world over.
Sixty percent of the land is said to consist of deposits rich with a wide variety of minerals including Gold, Platinum, Copper, Cobalt, Lead, Zinc, Iron Ore, Lithium, Vanadium, Rare Earth Metals, and Industrial minerals like Phosphates, Limestone, Dolomites and Clays.
Zimbabwe’s mining sector provides a unique investment opportunity as the country emerges from three decades of under investment in both exploration and mining development.
The mining industry remains a sector with great potential to anchor the economy, contributing between 12-15% to annual GDP. During the 1H19, the sector generated US$1.3bn, 68% of the US$1.9bn export receipts earned.
• The re-introduction of the ZWL$ is likely to impact gold production, as historical trends indicate that gold is highly currency elastic and any currency weakening tendencies are met by a production decline. Gold production for the first nine months of 2019 declined 26.6% to 20.63 tonnes from 28.09 tonnes in 2018. The government predicts that gold production will decline to 28.0k kgs in 2019 from the 35.1k kgs achieved in 2018.
• Globally, platinum demand is expected to increase by 8% in 2019, owing to a strong increase in investment demand while supply is expected to rise by 4% this year. However, Zimplats, Zimbabwe’s largest platinum producer, recorded a 36.1% slump in production volumes for the first 8 months, due to rising inflation, electricity outages and foreign currency shortages. Government estimates that platinum production will increase to 15k kgs from 14.7k kgs achieved in 2018.
• Diamond production is estimated to increase to 4.1k carats from 3.3k carats reported in the prior year. However, the US government recently banned imports of rough diamonds from Zimbabwe over concerns that forced labour was being used in the mines. It is our view that if the resource is explored and mined extensively, legally and under globally accepted conditions, Zimbabwe has the potential to be a major player in global diamond production.
• Growth in the medium to long term hinges on the ability to attract investment into current and new projects, as well as infrastructure. Investment of $5-7bn is required to grow the sector as follows: platinum 40%, gold 33%, diamonds 11%, coal 8%, chrome 4% and nickel 4%.
• Russian diamond miner Alrosa has entered into a joint venture (JV) agreement with the Zimbabwe Consolidated Diamond Company (ZCDC) to develop diamond deposits in Zimbabwe. Alrosa will hold a 70% controlling stake for the development of greenfield projects, while ZCDC will own the balance. Additionally, London-listed Vast Resources is expected to sign a JV agreement with ZCDC to prospect and mine diamonds. These companies join the Chinese firm Anjin Investments, who was relicensed to extract gems. Additionally, the government has signed a Memorandum of Understand with Rwanda, that will see the two countries cooperating and exchanging experiences from the extractive industries to develop their respective mining sectors.
• Production in 2019 is anticipated to be hindered by the erratic power supply and consequently fuel shortages. Blanket Mine failed to meet its 1Q19 intended production target due to unstable power supply, whilst small-scale miners’ operations have been reduced to margins between 70-80%, evidenced by the reduction in gold output.
• Low retention ratios, are also a cause for concern in this challenging economic environment, as miners may either suspend operations or seek ways to sell their minerals outside Zimbabwe and without government involvement.
Source: IH Securities Research