January 19, 2015 / 2:38 PM / 3 years ago

Problem copper industry poses challenge for Zambia's new leader

* Zambia to choose new president Tuesday after Sata’s death

* Mainstay copper industry hit by price drop, tax row

* Foreign mining firms threaten to shut shafts

* IMF says public spending must be reined in

By Joe Brock

NDOLA, Zambia, Jan 19 (Reuters) - Zambia’s copper industry, the spluttering motor of one of Africa’s fastest-growing economies, has been at the heart of campaigning for Tuesday’s presidential election and poses a big headache for the country’s next leader.

Hit by plummeting metal prices, accusations of corruption and a hike in taxes, mining companies say production and jobs are at risk unless the new president steps in.

The premature election comes after the death of Michael Sata, leader and founder of the ruling Patriotic Front (PF) party, who died in office aged 77 in October. His replacement Edgar Lungu, a 58-year-old lawyer, is seen as the favourite over Hakainde Hichilema, 52, a cattle herder-turned-economist whose United Party for National Development has been wooing the middle-class and investors.

Zambia averaged 6-7 percent growth over the last decade as the mining sector boomed. But that slowed to 5.5 percent last year, the IMF estimates, due partly to lower revenues from copper after prices hit their lowest since 2009.

Last June Zambia had to call on the IMF for help when falling copper prices pushed its kwacha currency to a record low against the dollar and the government was confronted with a budget deficit.

To make up the hole in its finances, the government -- currently led by interim leader Guy Scott -- is now asking Zambian copper mining companies for higher royalties on their revenues, from 6 percent for underground mines and open-pit operations to 8 and 20 percent respectively.

It says its hand has been forced by the fact that many of these companies have avoided paying taxes by manipulating accounts to show they are not making profits.

The government is also withholding $800 million in disputed VAT refunds from mining firms, deterring further investment from companies such as First Quantum and Vedanta Resources subsidiary Konkola Copper Mines until the matter is resolved.

LIFEBLOOD

The companies have denied any manipulation of accounts. The Chamber of Mines, which represents companies operating in Zambia and opposes the royalties increase, said in a pre-election statement that more than half of the sector was losing money.

It has warned that forcing companies to pay the extra royalties could result in a loss of 158,000 tonnes of copper and 12,000 mining jobs in 2015 and commissioned a report, seen by Reuters, that claims the new royalties regime would make Zambia the most uncompetitive copper producer in the world.

Barrick Gold has said the government’s increased royalties demands will force it to suspend operations at its Lumwana copper mine, a major operation which produced around 60,000 tonnes of copper in the first nine months of 2014, according to Barrick.

Mopani Copper Mines, owned by Glencore, and Canadian firm First Quantum Minerals both say they have big copper projects that could now be at risk from increased royalties payments.

Nonetheless, the president of the Chamber of Mines, Jackson Sikamo, told Reuters he was “cautiously optimistic” a resolution on the tax could be reached. “We’ve made progress in building trust,” he said.

With another election due 19 months after Tuesday’s -- the date when Sata’s term would have ended -- some economists fear candidates are making expensive promises, and that a new short-term government could aim to consolidate its popularity with a spending spree. After the 2011 vote the PF party increased the public sector wage bill by 50 percent.

One government source told Reuters the government could issue a bond to cover the cost of refunding the disputed VAT money.

Hichilema, known locally as “HH”, has said in recent days that he would reverse the royalty increase.

Lungu has been more cautious, promising “continuity” as he taps into Sata’s populist support base within the working class, many of whom feel mining firms should pay more.

A Western diplomat in Lusaka told Reuters: “HH is more pro-business but ...if Lungu wins the election he’ll want to heal wounds with the mining companies just as quickly.”

Meanwhile, in tunnels 500 metres underground, miners continued to work and wait.

Elesani Phiri, who works in the Chibuluma mine -- run by Metorex, a subsidiary of China’s Jinchaun Group --clicked on his head torch to reveal a vast cavern of rock laced with copper ore.

“We hope they can sort things out,” he said. “This is the lifeblood of the nation.” (Editing by Sophie Walker)

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