On December 11 of last year, the central bank in Africa’s red metal producer Zambia signed a gold purchase agreements (GPA) with Zambia Gold Company Limited (GPL) a subsidiary of ZCCM-IH Plc and Kansanshi Mining Ltd (KML) a subsidiary of First Quantum Minerals (FQM) respectively. This was a move to shore up falling foreign exchange reserves that have plummeted to decade lows. This will be one of the interventions that the Zambian authorities put in place in addition to accepting all mining taxes in dollars directly to the central bank.
The gold buying solution was suggested over a year and half ago by various think-tanks but was only formalized with key stakeholders with the Bank of Zambia (BOZ) to date buying 1,688 ounces (47kg’s) of gold from ZCCM-IH Plc the mining investment vehicle for the Zambian authorities. Foreign exchange reserves have plummeted to under one and half yards in dollar terms translating to less than 2.5months of import cover leaving the copper producers economy vulnerable to external shocks.
Gold buying from the mines is a doubled edged sword as it helps shore up reserves on one leg yet deprives support for the Kwacha mid-month in the period that the mines require local currency to meet remuneration and other obligations for staff on another leg. This is on the back that the Bank of Zambia (BOZ) purchases gold in Kwacha from both the mines and the mining investment vehicles which takes away the motivation to converting dollar proceeds to Kwacha to fund obligations. The Kwacha sold off over 43% in value ending the year trading north of 21 for a unit of dollar. Lack of support for the local unit such as from conversions, in the absence of adequate reserves, could cause breed further sell-off pressures.
Mining investment expert from the Copperbelt University Professor Raphael Chileshe advised that the mushrooming of gold hot spots in Zambia’s North Western province was a sign that there exists a main ore body within the vicinity which the mining authorities should invest in exploration to locate and maximize benefits.
Think tank, Economics Association of Zambia (EAZ) at an indaba on economic recovery post default held in November last year, advised the mining and fiscal authorities to set precise mining production targets for this bullion idea to make it measurable whose results could also help with reserve building forecasts. The Association bemoaned the lack of data as to exact quantities that are being mined for the purpose of transparency and accountability in the reserve build up process.
First Quantum Minerals annual estimates of gold production is 145,000oz. (circa $261mln) assuming the central bank purchases the entire production lot. Forty seven Kilograms of gold translates to slightly over 1,688oz. of gold which is valued at $3mln. This provides an opportunity for the Southern African nation to boost its reserves more meaningful if the artisanal inputs are well managed in volumes but the cost of buying bullion from big players will in the interim deprive the Kwacha of support in the period.
The Kwacha Arbitrageur
