Zim mineral wealth no match for debt

By The Standard | Jul. 2, 2010

ZIMBABWE’S mining wealth will not provide sufficient resources to settle the country’s external debt even if the government mortgaged its future fiscal revenues from the sector, the International Monetary Fund (IMF) has said.

The IMF, in a comprehensive commissioned report titled Zimbabwe: Challenges and Policy Options after Hyper Inflation, said the country should focus on sound policies and debt relief if it were to achieve growth sustainability.

The government has maintained that the sale of diamonds would change the fortunes of the country but the latest report commissioned by the IMF and based on various models discounts this claim and encourages better policies instead.

Zimbabwe has stockpiled over four million carats of diamonds worth about US$1,7 billion.Zimbabwe’s external debt is US$4,6 billion which is 104% of the country’s gross domestic product (GDP), a level which is considered unsustainable.

“More importantly, the government would not be able to generate significant primary non-mineral surpluses to ensure its inter-temporal solvency in the foreseeable future,” said the international financial institution in the report released last week. “Going forward, a strategy focusing on sound policies and debt relief would help achieve external and growth sustainability in at least three ways.”Zimbabwe needs sound policies to support macroeconomic sustainability and economic growth and assist the country “establish the track record needed for debt relief from official creditors”. The IMF said debt relief would immediately increase Zimbabwe’s net wealth by reducing its debt obligations and increasing the value of mining wealth through a reduction in country risk.Should this happen, then government would have access to fresh financing at lower costs, a development that would create room for much-needed public investment. The move would also facilitate growth in both mining and non-mining sectors.Even the much hyped diamonds would not do much as the extraction of the mineral is still subject to certification and international price movements.Diamond mining, like any other business venture in Zimbabwe at the moment, is also very expensive as operational costs are still very high, driven largely by the price of utilities.It is estimated that Zimbabwe would produce as much as 1,1 million carats of diamonds this year and would fetch an average US$100 per carat.Diamond production would more than double in two years’ time to around 2,4 million carats, the IMF added.Diamond extraction costs vary widely depending on the type of mining and the Zimbabwe Chamber of Mines estimates that for a rich alluvial deposit, the cost per carat varies between US$3 and US$10 while for a kimberlitic deposit the costs could be as high as US$50 to US$70 per carat. “Because a large share of Zimbabwe’s diamond deposits is of the alluvial type, we assume extraction costs of US$10 per carat under the optimistic scenario,” said the IMF. “Under a 17% discount rate, we estimate the gross present value (GPV) of mineral resource export receipts, including diamond proceeds, at US$9, 2 billion under an optimistic scenario and US$3 billion under the more conservative staff scenario.”Apart from diamonds, gold and platinum are the other minerals with a potential to earn the country significant revenue streams, but they are also weighed down by high extraction costs. The Zimbabwe Chamber of Mines estimates that the extraction costs for the two metals would be around US$502 per ounce if economies of scale were realised.

Per ounce costs would decline after significant increases in production but at the current low production levels, the costs of production in both gold and platinum are significantly higher: US$800 per ounce for gold and US$1 000 per ounce for platinum.