Mining is a major contributor to Zambia's economy. Copper is responsible for around 80% of the foreign earnings, and despite the metal's low prices, BMI Research forecast a real GDP growth of 6.0% in Zambia over 2015. BMI's report, published in July, concludes that private and government consumption are likely to remain key drivers of that growth, and a resilient domestic demand, coupled with a stable inflationary environment, will help offset any export weakness.
Challenges to come
However, the report also makes clear that Zambia will face some challenges along the way. The country's "current account" will end 2015 significantly further in the red, having almost doubled to $711m, as the deficit as a proportion of GDP grows to 3.3%, up from 1.5% the previous year. Though this will drop to 2.4% in 2016, it will not be in the black for another two years. The sharp decrease in global prices for copper, which has seen it trading close to its support level, has been a significant factor in this, and so too has falling production. But of late, the Zambian mining sector has had two quite different concerns altogether - politics and power.
The country's president, Edward Lungu, won a narrow victory in January 2015, having stood on a populist manifesto which supported earlier moves to scrap corporate income taxes but force royalties of 8% on underground mines and 20% on open-cast operations. The threatened hike in royalties brought widespread warnings of closures and huge job losses before the standoff was eventually broken by the reinstatement of income tax and a major reduction in royalty rates - though both at slightly higher rates than before.
Some have speculated that the next presidential election, due in 2016, might see taxation and mineral policy again feature strongly in the campaign as it has elsewhere across the continent, with governments attempting to get a greater share in their natural resources. However, Zambia perhaps more than most is unlikely to want to bite the hand that feeds it. Mining accounts for 12% of GDP and 10% of employment, and according to industry figures, from 1997 to 2013 it drew $12.6bn of foreign investment, helping to turn the country into one of Africa's top performing economies.
Common sense prevails
"Zambia is keen to encourage more mining, and with the sector key to the economy the government can ill afford to discourage mining," says John Meyer, analyst and partner at SP Angel.
Meyer says that the royalty rate hike was specifically aimed at stopping Vedanta, and possibly Glencore, from taking advantage of transfer pricing, but the unintended consequence was for an unsustainable rise in taxes for all miners, even though the government claimed some miners might be better off. With the issue now resolved, he says that they do not expect to see any further radical changes over the next few years. "Zambia is a sensible economy," he says.
It is a sentiment broadly echoed by Jeremy Wrathall, head of Global Natural Resources London, and mining team leader at Investec Bank.
"The Zambian Government have always shown themselves to be pragmatic - that's always been their way - and certainly since privatisation in 2001 they have tried to impose ridiculous taxes. They haven't worked, and they've responded to the industry." Wrathall does not think that there is anything to suggest that they will stop listening in future.
Unfortunately, no amount of political pragmatism is a match for the vagaries of nature, and with water levels at the country's hydro electric plants perilously low after drought, the country's miners have been forced to confront the prospect of restrictions of supply. It has already seen the power allocations to First Quantum Minerals' Kansanshi and Sentinel operations cut by almost a quarter, leaving both operating at reduced capacities and facing significant potential cuts to production.
The immediacy of the situation should, of course, be remedied once the rains come, but it highlights a more persistent legacy of decades of underinvestment by the state-run Zambia Electricity Supply Corporation that has left capacity insufficient, transmission losses high and reliability low.
Now, however, there are major moves afoot to combat the shortages and improve and extend the network infrastructure, with a number of new power stations being developed and a range of projects planned, including a 2,300km interconnector to bring energy from Kenya to Zambia. While there is clearly still some way to go - transmission and distribution losses currently amount to over 16% and are not predicted to fall below 13% until 2024 - BMI take the view that "the outlook for Zambia's power sector is generally positive" which, by extension, is good for mining too.
There will, nevertheless, be some changes for the industry. Wrathall feels that the copper prices we are seeing now will be here to stay for at least the next three years, and that this will put pressure on grade, rendering some of the particularly low-grade ore bodies effectively uneconomic.
He thinks that with many of the existing operators curtailing exploration, and the financial climate unfavourable for another Sentinel or Konkola deep to be developed, the focus will be on smaller deposits. This will, he suggests, be the pattern the world over, and it will have major implications for copper mining in general and for Zambia in particular, since he believes that it will be the making of the next cycle.
"The copper market is probably over-supplied for the next couple of years, but not massively, and nothing like the same as iron ore or coking coal or aluminium or nickel. Copper's fundamentals are pretty attractive still and if you get companies pulling in their horns, not pre-stripping, and cutting cap-ex, and not building these mega-projects, then the copper market will become under-supplied quite quickly [by] 2019/20. So it starts to look very attractive and the market will start to think about that in 2016/17," Wrathall predicts.
So what does that mean for future investment? Jackson Sikamo, country manager at Chibuluma Mines, is upbeat on that question.
"Foreign direct investments will continue to play a major role in the mining industry," Sikamo says. Looking beyond today's commodity price and power supply problems, he believes that the medium to long-term prospects are bright.
Wrathall agrees. He says that when people start looking to invest in new copper mines, they will look to Zambia.
"In my view, it still remains one of the most attractive places to do business, because the government is sensible; they're accommodating. It's a very, very safe country to work in. It's still geologically prospective. So yes, I think it's still a great destination, probably one of the best destinations in Africa, if not the best for base metals."