Can Zimbabwe fix its broken gold mining sector?

Henrietta Rushwaya was arrested by police as she was boarding a flight to Dubai from Robert Mugabe International Airport in Harare last October. Authorities stopped her at the airport after the 56-year-old head of the Zimbabwe Miners Federation was allegedly caught trying to smuggle six gold bars worth around $366,000 in her handbag.

Rushawaya denies the charges and the case has yet to come to trial, but the alleged incident was no anomaly. Gold smuggling is estimated to cost Zimbabwe $100m each month, the country’s home affairs minister, Kazembe Kazembe, said at the end of last year. Much of the gold smuggled out of the country ends up in Dubai.

Gold is Zimbabwe’s largest means of foreign income, vital for a country in the throes of an economic crisis where there is a desperate shortage of hard currency. Amid the Covid-19 pandemic, foreign investors have turned to gold as a safe hedge during the crisis. Unlike other export commodities, such as diamonds, nickel and platinum, which have continued to drop, gold’s price has soared – historically it has been a safe haven investment in difficult times.

But, in a country sorely affected by misgovernance, extreme weather, hyperinflation, and economic sanctions, prosperity from the country’s lucrative gold trade doesn’t trickle down to the masses. Kleptocracy and a broken gold pricing system are among the two main reasons.

Since he first took power in November 2017 from Robert Mugabe, President Emmerson Mnangagwa has repeatedly pledged to increase the value of the gold industry. The Zimbabwean government wants the mining sector to be worth $12bn by 2023, with gold expected to make up $4bn of that.

Although the price of gold has rallied during the pandemic, Zimbabwe’s revenues from the precious metal have slumped. Gold production fell 30% year-on-year to 3.98 tonnes in the first quarter of 2021, with earnings declining $26m to $200m.

Overall, the country’s gold output fell by nearly a third in 2020 to 19 tonnes after some smaller producers diverted the metal to illegal private dealers, who pay more than Fidelity Printers and Refiners (FPR), the Zimbabwe Reserve Bank’s gold refining and printing unit. Since January 2014, FPR has been the sole legal buyer, refiner and exporter of Zimbabwean gold but the government is coming under increasing pressure to allow private players to refine bullion.

Incentives for black market

This pressure has come from the fact that FPR underpays producers for gold and sometimes pays late. The body pays partially in US dollars and partially in Zimbabwe dollars determined by the official exchange rate. 

This method is designed to save the central bank foreign exchange, something it has been perennially short of. But in the open market, the Zimbabwe dollar is worth less than half of its official value, causing huge losses.

The discrepancy means FPR pays substantially less for gold than international buyers, who tend to pay all in US dollars. The black market, where sellers can get straight US dollar payments immediately, therefore becomes an attractive option.

Before May 2020, Zimbabwe’s industrial miners only received 55% of their payments in US dollars, later increased to 70%. As of January, it is now back to 60% in US dollars. The Chamber of Mines of Zimbabwe (COMZ), which is made up of mining companies and other industry bodies, has decried delays in payments from FPR that have eroded producers’ profits.

Caledonia Mining is one of the largest industrial miners in the country. It owns the Blanket Mine, located in southwest Zimbabwe, 15km west of Gwanda. CEO Steve Curtis says that policy changes are needed in Zimbabwe to make the country’s gold sector more inviting for foreign investors.

“How do you as an investor, who could be spending hundreds of millions of dollars, model what this business proposition looks like? It is complicated and becomes too much for people to understand,” Curtis says.  

Other mining executives feel they have little certainty over their US dollar income. “Fidelity and the Chamber of Mines are weak players in the greater scheme of things. The president, Reserve Bank of Zimbabwe and the minister of finance are the main players,” an executive at another gold mining company, who requested to remain anonymous, says.

Conflicting interests

The US dollar shortfall hits the earnings of industrial miners, leading to some mine closures. Inactive industrial mines then become fertile ground for intrusion by small-scale artisanal miners. Violence can flare up over land disputes, and the police, army and private security firms have been known to demand bribes from miners to give them access to mines they are meant to protect.

A report released in June by Southern Africa Resource Watch (SARW) said the entire justice system can be involved – from the investigation officer and public prosecutor, to the lawyer and magistrate – each demanding bribes from artisanal miners.

The government have blamed the violence on artisanal miners, who despite often digging without licences, are responsible for mining more than half of the country’s gold.

But the problems run deeper than that. Actors linked to mining conflicts have alleged links to the Zimbabwe African National Union-Patriotic Front (ZANU-PF), which has ruled the country since its independence in 1980.

A report released last November by Crisis Group revealed that hundreds of people had been killed in violence associated with Zimbabwe’s gold mining sector. In January 2020, Zimbabwe’s parliament began an investigation into the violence, but that was halted during the pandemic.

On its own, a beefed-up police presence isn’t the solution. At the beginning of last year, the government responded with a mass police operation, arresting thousands of gang members. The Crisis report noted that police often make no distinction between gang members and non-violent artisanal miners when they make arrests, likely robbing thousands of miners of their livelihoods without making the sector much safer.

Furthermore, police often don’t act on mining-related violence, when gangs or artisanal miners are politically-connected.

Reforms needed

Although violence has fallen during the pandemic, Mukasiri Sibanda, industry analyst and co-ordinator of the Stop the Bleeding Consortium, a group of civil society organisations fighting to curb illicit financial flows from Africa, believes it could easily return if the root causes are not addressed.

“Multi-claim ownership disputes must be curbed through greater transparency and accountability in the application, acquisition, maintenance, and forfeiture of a mining title. An online mining cadastre is required,” he says.

A cadastre – an official record of the owners of land and of the amount and value of the land they own – would help make the sector more transparent, meaning that disputes would become less common.

“ZANU-PF must take an active interest in controlling and disciplining its rogue members at all levels especially the top brass wreaking havoc in the sector,” Sibanda adds.

Both Curtis of Caledonia and the other mining executive believe reforms are needed to make the sector more investment friendly, and there has been some progress.

In February the government changed its policy to allow producers to get paid directly from the refinery, rather than the funds being processed by the Reserve Bank, meaning payments are made to the producers more quickly and efficiently.

In May, the government said that under a new incremental export incentive scheme, all exporters currently retaining 60% of their foreign currency receipts will have their retention threshold increased to 80%. Gold producers who deliver gold quantities above their average monthly deliveries will benefit from the higher threshold.

But the government’s statement on incentives is “incredibly ambiguous”, says the anonymous mining executive. “If they’re saying they want to pay better attention on incremental gold that’s great – if incremental means anything more than last year. But what if incremental means anything more than the month before? No one understands it so how do we act?”

Curtis is among the many gold producers in Zimbabwe that wants the government to let them export 100% of their own bullion.

“Given the mere fact that we are going to be allowed to export our incremental gold, it’s obvious that we should then argue, if our incremental gold is good enough to export and control, why is the base load not good enough to export and control? If you trust us to export the incremental, why not do the whole lot and just simplify the process?” 

Call for incentives

He says that artisanal miners getting underpaid for their gold also stokes tensions.

“At the moment, there’s a tier system where the artisanal guys get paid a below-market price. They get paid a fixed price, per gram of gold. And the last time I looked at it, I think it was about a 13% discount. Now if you continually do that, there’s an incentive for people to go and look for the balance of the money,” Curtis says.

“I think some effort needs to be put into the small mining sector to make it an attractive, transparent business process. There’s no disgrace in being a small gold miner at all but you should be protected, you should have your title protected, you should have your ability to access raw materials and banking facilities,” he says, adding artisanal miners should be equally compensated.

The other mining executive is relatively optimistic that domestic gold prices will eventually move back up towards the international average. Mnangagwa has hired a mix of career politicians and technocrats in the ministry for mining, he says, “with less destructive policies [than under Mugabe] and they claim they are trying to improve the retention on gold”.

As Zimbabwe’s economic malaise continues, a reformed gold sector that works for everyone would go a long way to helping the economy recover.

“Most of the mining sector has said if you want to instil confidence, then you have to relax the route to market regulations, you’ve got to allow people to produce their product, export their product, and then repatriate the funds back to run the business and pay your taxes. And that is the only thing in my opinion that is going to raise the level of confidence and encourage people to make investments into the country, hard dollar investments,” says Curtis.