Barrick Gold, First Quantum Expected to Take Hit from Zambia's New Royalty Increase

The Zambian government has outlined a 2015 budget with increases to copper mining royalties that will negatively impact Barrick Gold (ASX:ABX) and First Quantum Minerals (TSX:FM).

The two companies, both of which operate copper mines in Zambia, will be subject to an increase from six percent to 12 for open pit operations and eight percent for underground mines.

The changes will “achieve a more equitable distribution of the mineral wealth between government and the mining companies,” said Finance Minister Alexander Chikwanda. He added the increased royalties will replace the 30 percent corporate income tax miners currently pay.The new tax system aims to generate revenue from different stages of production.

“The proposed changes to mining tax policies will likely further erode the relationship between miners and the government,” said Clare Allenson, a London-based analyst with Eurasia Group. The higher royalties “will likely delay the development of new projects.”

Canadian mining company First Quantum Minerals has already delayed more than $1 billion in investment projects in Zambia because of uncertainty over the fiscal regime.

"On the face of it, the new system doesn't incentivize investment in new capital projects," said John Gladston, First Quantum Minerals Zambia government affairs manager.

"The budget address served to confirm the sagacity earlier this year of First Quantum's postponement of additional major capital projects in Zambia.”

Barrick Gold, which operates the Lumwana copper project in Zambia, will also take a significant blow. The company is expected to take a negative hit of 3.7 percent to its NAV, reducing its 2015 EPS by 4.6 percent and cash flow per share by 2.2 percent.

Companies like Vedanta Resources (LSE:VED) and Glencore (LSE:GLEN), both of which run underground operations in Zambia, are expected to be impacted. The new royalty rate for mining operations will go into effect January 2015.