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Zimbabwe's official gold production to continue to fall: analyst

London — Zimbabwe's official gold production will continue to fall until foreign currency exchange issues and electricity shortages are resolved, Verisk Maplecroft Senior Africa Analyst Nick Branson told S&P Global Platts on Thursday.

The Reserve Bank of Zimbabwe in February cut the foreign currency retention threshold for small-scale miners to 55% from 70%, where 45% of miners' earnings are paid in Zimbabwe dollars. Analysts said at the time that the move may have a detrimental effect on gold deliveries to Fidelity Printers and Refiners, Zimbabwe's state-owned gold buyer, which is wholly owned by the Reserve Bank of Zimbabwe.

It's no surprise that miners are not pleased with a set up that sees them being paid partly in foreign currency and partly in local Zimbabwe dollars.

"The 55:45 forex retention ratio for industrial miners urgently needs scrapping," Branson said.

Governor of the Reserve Bank of Zimbabwe John Mangudya -- who formulated the policy -- was reappointed for another five years in May 2019, in spite of spearheading opaque monetary policy, Branson said.

On top of the 55:45 forex retention ratio woes, last week Zimbabwe Finance Minister Mthuli Ncube said that between 30-34 mt of gold had been smuggled to South Africa, adding that the country's gold production was growing but deliveries to buyer Fidelity Printers and Refiners were falling.

"Regardless of the veracity of the smuggling allegations, the retention of such a large proportion of miners' forex earnings creates incentives to avoid Zimbabwe," Branson said. "Legislating to ensure that gold mined in Zimbabwe is refined locally would constitute a show-stopper for the industry."

Branson said major gold miners depend on being able to market bullion globally, and South Africa is home to the only London Bullion Market Association-certified refinery on the continent.

"Ghana -- now Africa's top gold producer -- has adopted a gradual approach towards increasing the proportion of ore that is refined within the country, aware that miners would balk at the prospect of being forced to use an uncertified refinery," he said.

TIGHTENING LAWS

Last week, in the 2020 national budget, Ncube said Zimbabwe would need to tighten laws to have gold refined in the country.

Zimbabwe Finance Minister said the government should endeavor to come up with policies that would motivate miners to sell gold using formal channels. The precious metals is now Zimbabwe's highest single foreign currency earner, overtaking tobacco.

"In terms of Ncube's pronouncement that Zimbabwe needs to encourage miners to sell gold through formal channels, he was perhaps referring to tweaks to the "No Questions Asked" Policy adopted in 2014," Branson said.

"In a bid to reduce arbitrage opportunities, the government moved to close the gap between royalty rates paid by artisanal and small-scale miners and industrial miners; however, this likely prompted artisanal small-scale miners to avoid Fidelity Printers and Refiners in favor of securing hard currency from foreign buyers."

NO END TO BLACKOUTS

The Zimbabwe Electricity Supply Authority, or ZESA, continues to struggle to fulfill an agreement with the country's miners to provide continuous power supply, while the miners pay for the power supply in advance in US dollars, expecting to receive uninterrupted electricity supply, according to local media reports.

Zimbabwe's mining industry, which contributes about 15% to the country's gross domestic product and more than 60% of the foreign exchange earnings, continues to experience power cuts enforced by ZESA due to low water levels at the the Kariba South Power Station and its ageing thermal power stations.

With continuous blackouts affecting the mining industry, last month Zimbabwe President Emmerson Mnangagwa launched a four-year mining sector strategy aimed at yielding Zimbabwe $12 billion/year in mineral receipts by 2023.

"At present, there is no chance of President Mnangagwa's four-year mining sector strategy delivering the promised $12 billion due to an absence of political will to address fundamental problems," Branson said.

"Miners cannot plausibly commit the necessary sums to capital investment when such a large proportion of the profits are confiscated and converted to an increasingly worthless local currency, and when production levels are so low as a result of intermittent power supplies."

-- Filip Warwick, filip.warwick@spglobal.com

-- Edited by Kshitiz Goliya, newsdesk@spglobal.com