Economic chaos in Zimbabwe drives gold production lower

Gold deliveries for the month of June came in at 1.5 tonnes which was a 32% decline on 1.5 tonnes achieved in May which marginally shy of a record 2 year low of 1.4 tones achieved in November 2018.

Deliveries to Fidelity Printers, which is the sole authorised buyer of gold came off first, in 2018, as miners shunned the 1:1 exchange rate used by government to convert their exports receipt left after retentions.

A rapid erosion in the value of the local currency, largely driven by a  dearth in value of forex in the informal market, resulted in a loss of earnings to exporters particularly in gold whose retention levels were pegged at 55:45.

Gold is Zimbabwe’s anchor export product having accounted for $1.2 billion in annual forex receipts in 2018 translating close to a third of total export earnings.

The sector’s performance is therefore pivotal in stabilisation of the economy especially on the monetary side, given that the economy is a net importer.

In recent months production and consequent deliveries of gold eased, cutting short a strong  emerging trend, as currency related challenges weighed on sector dynamics.

In the fourth quarter of  2018 deliveries plunged to record lows, averaging 1.7 tonnes per month over the period.

Before the 2018 final quarter disruption, gold deliveries reached a record monthly high of 3.9 tonnes in August 2019 and completed a 6 months successive period of deliveries above the 3 tonne mark which consequently helped drive yearly output to a record high of 33.2 tonnes.

Small scale miners have been the engine for recovery although their contribution came in at  2.1 tonnes in April down from 2.6 tonnes and 2.1 tonne in February and January respectively. In June small scale contribution eased further marking the return of side marketing.

The sharp monthly decline in overall deliveries is also attributed to power outages which presently run up to 16 hours a day, thus dampening production.

It is against these developments that Zimbabwe is expected to emerge in a recession in 2019 with a possible spillover into 2020.

Going into full year, government has set a target of 40 tonnes up from 33.2 tonnes in 2018, which by historical measure was a record high.

The re-emergence of the Zimdollar changes the gold production and dynamics in a huge way. Historical performance shows that gold is highly currency elastic  and any currency weakening tendencies are met by a production decline. Given the weak economic fundamentals characterised by a waning production capacity in the face of forex shortages, rising operating costs and steep electricity blackouts, it follows that maintaining the current performance will become more difficult going forward.

If gold production comes off it implies that forex earnings also ease thus further pushing the exchange rate in adverse direction. These vulnerabilities clearly demonstrate that the fundamentals were not yet firm to justify reintroduction of new currency, which demand high caution on the authorities part in dealing with monetary issues.

In 2019 government projects a 40 tonne gold produce which if attained will be a 20% growth on the 2018 outturn of 33.2 tonnes. To achieve the 2019 target average monthly volumes for the remaining 6 months have to scale up to 4.6 tonnes per month which is a growth of 200% from present levels, a clearly unattainable target. Zimbabwe has set a 2023 gold production target of 100 tonnes which is more than twice the present levels.

At 100 tones production, Zimbabwe will emerge among the top 15 gold producing countries in the world. It will also triple its gold export earnings from the current $1.2 billion to almost $4 billion holding constant the international price. Although the country has potential, a lack of investment and capital for recapitalisation, coupled with hard currency challenges and intensifying operational challenges such as power availability stands in the way from achievement of the ambitious target.

In sector developments, listed crocodile skin producer Padenga is set to buy Eureka Gold Mine, Giant Gold mine as well a Pickstone Peerless mine 3 assets controlled by Dallaglio the proceeds of which will be channelled towards the procurement of equipment.

ASA Resources parent to Freda Rebecca is in the process of offloading one of its key mining assets in Zimbabwe in a development which could unlock liquidity.

Respect Gwenzi

Respect is the Lead Analyst and Managing Director at Equity Axis. He has 8 years experience in respective fields of finance and media. Particular areas of expertise include Asset Management, Stockbroking and Financial Media. Respect is on a mission to change the course of Financial Media in Africa through digitalization

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