Source: Fidelity, Equity Axis

• Record Production Achievement: Zimbabwe surpassed production target, reaching 36.48 tonnes, with approximately 65% contributed by small-scale miners.
• Impact of Rising Gold Prices: The surge in global gold prices, from US2,025toUS2,025 to US2,025toUS2,771 per ounce, provided a financial cushion that incentivized miners to
• Need for Strategic Reforms: Future growth in gold production hinges on government reforms, including improving power supply reliability, reducing the tax burden, and

Harare- In 2024, Zimbabwe not only achieved but exceeded its gold production target, reaching an impressive 36.48 tonnes, surpassing the initial goal of 35 tonnes. This milestone marks a historic high for the nation, prompting the question of whether such an achievement warrants celebration. A thorough analysis is required to assess the implications of this success, including the identification of the largest contributors to this output.

Historically, Zimbabwe's gold production faced significant challenges, particularly during the hyperinflationary crisis of 2008. This period was characterized by a convergence of adverse factors, including severe drought conditions and political instability, which ultimately led to the abandonment of the Zimbabwe dollar. The hyperinflation peaked in mid-November 2008, with staggering monthly rates estimated at 79.6 billion percent, rendering the economic landscape nearly unrecognizable.

Prior to 2024, Zimbabwe's gold production reached its previous record of 35 tonnes in 2022, a feat largely attributed to the contributions of small-scale miners and incentivised exporters. The 2024 production figures were predominantly driven by small-scale mining operations, which accounted for approximately 65% of total output, translating to around 23.69 tonnes.

Conversely, large-scale mining operations contributed the remaining 35% of gold production, equating to about 12.79 tonnes. These large-scale entities typically leverage substantial investments and advanced technological capabilities, resulting in enhanced operational efficiency and output. The expertise and capital influx from large-scale miners are pivotal for advancing the mining sector within Zimbabwe.

Record output despite challenges

Severe blackouts

The year 2024 proved to be particularly challenging for the mining sector. The latter half of the year was marred by severe power disruptions, with outages reaching an alarming average of 18 hours per day in certain regions. This was compounded by a dramatic 43% devaluation of the local currency, occurring within a single day in September.

Despite these adversities, mining companies faced escalating operational costs, particularly related to power supply, which surged to 14.21 cents per kilowatt hour up from 9.86 cents in 2022. Consequently, during periods of electricity shortages, firms were compelled to rely on costly generator backups, while those with access to the grid incurred substantial expenses. This dual pressure on the cost structure heavily impacted production efficiency. According to the Chamber of Commerce, electricity costs now consume approximately 20% of miners’ total revenues.

Currency carnage

Zimbabwe’s  local currency (ZWG) also experienced a rapid decline post-issuance, plummeting by nearly 36% within its inaugural month due to market forces, particularly in the parallel market. This depreciation significantly affected export surrender requirements, where 25% of exporter earnings must be converted into local currency. Given that raw materials are typically sourced in foreign currency, this creates a complex landscape for companies quoting local pricing based on parallel market rates.

Assessing the Ramifications of Currency Depreciation

For instance, consider a mining company which reports significant revenues of US$ 100 million. Under current regulations, exporters are mandated to surrender 25% of their earnings, equating to US$25 million. However, due to the previously mentioned 36% devaluation within the currency's first month, the effective value received post-surrender translates to only 64% of the initial amount. Thus, instead of retaining the full surrender value, the company effectively receives only US$16 million.

This discrepancy results in a substantial loss of US$9 million reflecting the profound implications of currency volatility on financial performance not limited to mining entities alone.

When factoring in the rising electricity costs, as noted by the Zimbabwe National Chamber of Commerce (ZNCC), which account for an additional 20% revenue loss, a mining company experiences a further reduction of US$20 million.

In total, the confluence of these factors culminates in a daunting financial scenario: a US$ 9 million loss from currency surrender combined with a US$20 million depletion due to electricity expenses, leading to an aggregate financial impact of US$29 million. This comprehensive analysis illustrates the significant pressures confronting miners operating in Zimbabwe’s volatile economic landscape.

Rising operating costs have precipitated a notable increase in side-marketing activities. The Gold Mafi documentary, released in 2023, estimated that upwards of $200 million is lost due to these side-marketing practices, with gold deliveries to Fidelity potentially representing a mere 25% of the nation’s total output.

It is because of these aggressive policies that a shift in the gold production landscape has occurred, with small-scale miners surpassing large-scale miners as the leading gold producers since 2017 to date. Due to these high operating costs, there has been a prevalent rise in side-marketing. The Gold Mafi documentary released in 2023 estimated that at least US$200 million and that gold delivered to Fidelity might represent only a quarter of the country’s annual potential.

Given these challenges, what factors have driven output growth despite the adverse operating environment?

Record gold prices

Average gold prices per ounce in US$k

Source: WGC, Equity Axis Research

Despite the significant costs associated with currency depreciation, rising electricity expenses, and high taxes, miners achieved record output in 2024. As global demand for gold surged, prices rose dramatically from a low of US$2,025 per ounce to US$2,771 per ounce by the end of December 2024. Such an increase provided a substantial incentive for miners to boost their production levels.

The rising gold prices allowed miners to offset some of their operational costs, including those incurred from currency depreciation and electricity. With higher prices, even if miners produced less, the revenue generated from each ounce of gold sold was significantly higher.

This financial cushion enabled them to maintain profitability despite the challenges they faced. The allure of increased revenue prompted miners to ramp up production, capitalizing on favourable market conditions to maximise their output.

The combination of high gold prices and the subsequent revenues made it feasible for miners to invest in more efficient mining practices and technologies. These investments not only helped mitigate some operational costs but also enhanced overall productivity.

The late onset of rainfall in 2024 also played a significant role in gold production for both large-scale and small-scale miners. Heavy rains, normally experienced from October through December, led to flooding pits, making mining sites inaccessible and halting operations, mostly for small-scale miners who lack sophisticated machinery to deal with flooding, though even large-scale producers were not spared. Wet conditions create safety hazards, increase the risk of equipment failure, and necessitate costly downtime for maintenance and repairs. Waterlogged sites complicate the processing of ore, reducing operational efficiency and increasing costs.

In the third and last quarters of the year, miners typically prepare for the rainy season, which can disrupt activities. However, in 2024, the late arrival of rains allowed miners to continue operations without the usual interruptions. This extended dry period provided an opportunity for both large-scale and small-scale miners to maximize their output, as they could focus on production without the complications associated with wet weather.

The climatic conditions in 2024 allowed miners to leverage the situation to their advantage. With uninterrupted access to mining sites, they could operate machinery more effectively and maintain consistent production levels. The absence of rainfall meant that miners could implement their production schedules without the typical seasonal disruptions, ultimately increasing their output.

The expansion of gold buying centers from 12 to 17 over the last five years, with 3 only in the fourth quarter, has facilitated easier access to markets, allowing miners to sell their gold more efficiently and receive timely payments. This greater accessibility enhanced their overall profitability and encouraged higher production levels.

The combination of easier access to markets through more buying centers and the financial security provided by USD payments has encouraged small-scale miners to increase their production. Knowing that they can sell their gold quickly and receive stable payment reduces the risks associated with mining operations, motivating them to expand their activities.

A Critical Examination of Gold Production Potential in Zimbabwe

As Zimbabwe reflects on its recent achievements in gold production, particularly the record outputs in 2024, it is essential to consider whether these milestones are genuinely celebratory or indicative of a broader, more sustainable trajectory for the country's mining sector. Ceteris paribus, if conditions remain favorable, Zimbabwe could realistically target the production of 50 tonnes of gold within the next five years. However, this ambition hinges on several critical factors that require proactive government intervention and strategic reforms.

Optimizing Conditions for Large-Scale Production

For large-scale mining operations to flourish, several systemic enhancements are necessary. A reliable and sufficient power supply is paramount; without it, production efficiency is compromised. If not sustainable, reducing the tax burden on mining companies could incentivize reinvestment in operations, especially investing in alternative power projects. Government support is essential for large-scale operations.

In this inflationary environment with currency decay policies, reducing the surrender portions would help. Already, the government is robbing exporters of nearly 12% of their 25% surrender requirements due to the use of the overvalued formal market rate, which is not market-determined. Reducing this will make it easier for miners to expand operations and invest in increasing production capabilities.

Taxes on miners are very high, including IMMT, royalties, and various other charges through the importation of sophisticated machinery. These VATs and customs duties are very expensive. The government needs to enact duty-free policies for sophisticated mining machinery for registered companies.

On the other hand, the small-scale mining sector requires a distinct approach focused on accessibility and sustainability. The continued expansion of gold buying centers is crucial for enhancing market accessibility. Timely payments and fair pricing structures will not only improve miners' livelihoods but also serve to mitigate the pervasive issue of smuggling. When miners can sell their gold easily and receive fair compensation, they are less likely to resort to illicit channels.

Simplifying the licensing process for gold miners is vital. Currently, bureaucratic hurdles can deter miners from entering the market or force existing miners to operate informally. By making gold licenses more accessible, the government can encourage formalization within the sector, thereby increasing transparency and enhancing revenue collection.

Conclusion

In conclusion, while Zimbabwe has made commendable strides in gold production, the potential for future growth rests on the government’s ability to implement strategic reforms that support both large-scale and small-scale mining operations. By ensuring a sufficient power supply, reducing taxes, and facilitating easier access to licenses, Zimbabwe can create an environment conducive to achieving its ambitious gold production targets. Celebrating past achievements is important, but it is equally vital to focus on building a sustainable framework that fosters continued growth and development in the mining sector. Only then can Zimbabwe transform its gold mining industry into a robust pillar of the national economy.

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