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Zimbabwe’s currency crisis hits gold production

Zimbabwe’s currency crisis hits gold production

Inflation, currency shortages and energy shortages are taking their toll on gold production in Zimbabwe, causing hardship for miners and reducing export receipts. Tendai Marima reports on the problems and how they can be addressed.

In the 1800s, British colonists in South Africa trekked up to Zimbabwe, attracted by rumours of a land rich in gold. While many were disappointed and quickly turned their attention to agriculture, their initial instinct proved partially correct, with small deposits supporting a modest industry for the precious metal to the present day. 

Today, gold mining in Zimbabwe is struggling to maintain its historic role, as the country faces its worst economic crisis in a decade. Rampant inflation, currency shortages and a severe energy crisis have hit artisanal miners and larger producers of the yellow metal, threatening export earnings. Analysts are calling on the government to urgently address multiple issues plaguing the industry.

In June, as part of a raft of austerity measures aimed at reviving the economy, the minister of finance, Mthuli Ncube, announced the end of the country’s decade-long multiple currency regime – which had permitted the use of the US dollar and South African rand in daily trading – in a bid to revive Zimbabwe’s own long dormant currency. However, the partial introduction of a quasi-currency known as the RTGS dollar has resulted in inflation soaring as high as 176% in June, the highest since the Zimbabwe dollar collapsed in 2008.

Earnings drop

In Inyathi, a gold-rich area in south­western Zimbabwe, artisanal miners say that the reversion to a single currency system has hit earnings and dampened hopes of economic recovery. By law, gold miners are required to sell their production to the Reserve Bank-owned Fidelity Printers and Refineries, the sole official gold buyer, refiner and exporter. Fidelity has tried to incentivise small-scale miners to use the official channel by offering a gold support price. The incentive, which starts at $1,368 per ounce, is on average 7% more than the daily gold trading price set by the London Bullion Market Association, but there is a catch.

Fidelity pays at least 55% in US dollars, but 45% in the unpopular RTGS dollars at the prevailing exchange rate. The rapid devaluation of the RTGS has made miners like Cosmos Dube weary of selling gold to Fidelity. Dube says that the support price has dipped below the true value of his gold due to the constant weakening of the RTGS against other currencies.

“Selling to Fidelity is like giving away my gold for free,” he explains. “I work hard just to get a few grams of gold, but what I’m getting from Fidelity is not equal to the work I put in. The bond note [RTGS] is worthless. If you get it today, by tomorrow prices in the shop would have gone up so there’s not much you can buy. It would be better if we were just paid in US dollars only – it has a steady value.”

The low prices offered by Fidelity have seen Zimbabwe’s gold export receipts dip by 17% from $330m in the first quarter of 2017 to $273.5m in the first quarter of 2018. Some turn to illegal mining; Zimbabwe loses up to $180m annually to gold smuggling. Illegal artisanal miners frequently toil in dangerous conditions. In February, at least 23 were feared dead after a gold mining shaft was flooded. 

As well as struggling to attract and retain supply from artisanal miners, Fidelity is embroiled in legal disputes with larger mining houses relating to its past dealings. In November, it was reported that Zimbabwean miner RioZim had launched a $92m lawsuit intended to force the Central Bank to pay for more of its gold purchases from the company in US dollars. According to Reuters, RioZim says it failed to receive $48m due in payments from the Central Bank for its sales in dollars and suffered losses of $44m due to lost production.

In May it was reported that Metallon Gold, a South African company, had launched legal action to recover an alleged $132m it claims it is owed for gold deliveries dating back to 2016.

Eddie Cross, an economic analyst and member of parliament, believes that the Reserve Bank has bought up the gold in order to settle debts. “They are buying gold to settle the bank’s external liabilities,” he says.

Infrastructure deficit

Those external liabilities are likely to mount unless President Emmerson Mnangagwa can inject momentum into a much-needed economic recovery. The IMF predicts the economy will shrink by 2.1% this year. The president has promised to woo investors by amending controversial indigenisation policies, and in March, Ncube pledged to amend a rule requiring investors to cede 51% stakes in diamond and platinum mining operations to local investors. Yet even if the country takes decisive action to attract miners, a vast infrastructure deficit built up by years of underinvestment means that many struggle to see the upside. Patrick Imam, the IMF’s representative in Zimbabwe, says power and fuel shortages stifle efforts to grow the economy.

Large energy-consuming gold miners remain underserved by a sole hydro-electric power plant and outdated coal stations, which offer a costly and erratic supply defined by lengthy blackouts. The Kariba Dam in the northwest is only producing a third of its capacity due to low water levels as a result of the El Niño drought.

In March, officials said gold miners may again face higher costs and may need to fall back on expensive diesel generators. Mines have been given the costly option of paying for power in foreign currency to secure supply.

At Blanket Mine, a gold excavation site in southwestern Zimbabwe run by London-listed Caledonia Mining, power shortages have dogged operations. In the first quarter of 2019, the gold producer recorded an output of 11,900 tonnes, below the quarterly target of 13,250 tonnes. While the mine has generator facilities, it has struggled to access a steady supply of diesel due to acute fuel shortages arising from national currency constraints.  

“Our technical team has worked tirelessly to mitigate the effects of electricity supply interruptions and we continue to work closely with the Zimbabwe Electricity Supply Authority to address these challenges as well as investing internally to improve our resilience,” says CEO Steve Curtis.   

Cross says Zimbabwe is likely to be faced with severe power challenges for a number of years and urges the government to take swift action in order to support the gold sector and other miners.

“The state must urgently address the need for imports and must allow duty free importation of all solar power components so that consumers can make alternative sources of electricity.”   

Faced with multiple challenges, Zimbabwe’s legal gold producers require further legislative certainty and national infrastructure improvements if their historic role in the economy is to be maintained. 

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