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EXCLUSIVE-Zambian government has no plans to seize First Quantum -sources

Tue 11th June, 2019 9:13am
* Miner is in Zambia for the long term -source
    * But will freeze investment and cut jobs if necessary
    * First Quantum major tax payer in Zambia
    * In dispute over tax claim, new fees

    By Chris Mfula, Barbara Lewis and Nichola Saminather
    LUSAKA/LONDON/TORONTO, June 11 (Reuters) - Zambia has no
plans to seize the assets of Quantum Minerals Ltd  FM.TO  and
the copper producer intends to stay in the country despite the
government's move to wrest control of a rival miner, government
and industry sources told Reuters. 
    Canadian-listed First Quantum has looked on nervously as the
Zambian government appointed a provisional liquidator to run
Vedanta's Konkola Copper Mines (KCM), claiming KCM has breached
the terms of its licence.
    The move has unnerved international miners concerned about
rising resource nationalism in Zambia and neighbouring
countries. 
    First Quantum, scarred by having its operations in
Democratic Republic of Congo seized in 2010, is embroiled in a
dispute with the Zambian government after being handed a $5.8
billion bill last year for unpaid import duties.  urn:newsml:reuters.com:*:nL8N1SE4QJ
 urn:newsml:reuters.com:*:nL5N2301RK
    "The government will not touch First Quantum," one source
close to the government said. "Vedanta is very different from
First Quantum."    
    Among the international miners, First Quantum has the most
to lose in Zambia, which accounts for 83% of production from the
company's operating assets this year, excluding a new project in
Panama.
    But the company also has bargaining power as the most
profitable miner in Zambia and the biggest tax payer.
    In 2018, it said it paid more than $533 million in taxes to
the Zambian government, including royalties, income and
corporate tax.
    Two sources close to the company, who requested anonymity
because of the sensitivity of negotiations, said First Quantum
would stay, but would freeze investment and might put operations
on hold.
    "They'll not go. They are here for the long term," one of
the sources said. 
    Still, the company cannot mine at a loss, and, if necessary,
would suspend production and cut jobs, shrinking the tax
revenues Zambia desperately needs as its debts mount, one source
said.
    A First Quantum spokesman declined requests for comment.
    No one from the Zambian government was immediately available
for fresh comment.
    The Zambian government has increased taxes and said it will
switch to a non-refundable sales tax, from a refundable
value-added tax.  urn:newsml:reuters.com:*:nL8N1WE5RK urn:newsml:reuters.com:*:nL8N21Q52C 
    First Quantum has said the tax changes will add about 10
cents per pound of copper in 2019 to its costs and between 15
cents to 18 cents per pound in following years. 
    At the time of its first quarter results in April, First
Quantum CEO Philip Pascall said the company would be "very
cautious" about capital expenditure in Zambia.
    Pascall, who attended boarding school in Zimbabwe, has
weathered previous changes in the Zambian tax regime and the
sources say he will do so again.
    "That's the smart thing to do to wait for relations to be
less toxic," another of the sources said.    
    So far First Quantum has retreated from threats to shut in
production in favour of negotiations.
    First Quantum's open-pit Zambian operations, Kansanshi and
Sentinel, are projected to produce 235,000 tonnes and 250,000
tonnes of copper annually, respectively. The company expects an
all-in sustaining cost of $1.70-$1.85 per pound, excluding the
planned Zambian sales tax.
    This is profitable even with copper prices currently around
$2.65 per pound or roughly $5,900 per tonne  CMCU3 .
 urn:newsml:reuters.com:*:nL4N23H1UJ
        
    'CASH COW'
    Analysts say First Quantum is undervalued. Its shares have
fallen 35% from a peak in April, nearly double the loss on the
benchmark Solative Global Copper Mines index  .SOLGLOCO .
    "The shares have fallen because of a total misunderstanding
of the situation," said Charl Malan, an analyst at VanEck Global
Investors, one of the company's top 10 shareholders.    
    "First Quantum is not going to lose its assets. It is
profitable, it is paying salaries and paying taxes... First
Quantum won't sell the Zambia assets. Zambia is their cash cow."
    The sources and the industry as a whole, however,
acknowledge Zambia is high-risk as it grapples with mounting
debts and as politicians are already positioning ahead of
elections scheduled for 2021.
    Vedanta has said its KCM unit is "largely unprofitable",
although it has paid taxes through its payroll and says it has
invested in the business. 
    Vedanta Resources, part-owner of the Mumbai-listed Vedanta
group of companies  VDAN.NS , has also said it will vigorously
defend itself and has threatened international arbitration in
response to the Zambian government's intervention in KCM.
 urn:newsml:reuters.com:*:nL8N23715G
    Mining Minister Richard Musukwa has said the Vedanta case is
"a signal to other mining companies not complying with the law
to put their houses in order." He has not explicitly said any
miners are safe from government intervention.
($1 = 13.2250 Zambian kwachas)

 (Additional reporting by Julia Love in Panama
Editing by Ernest Scheyder and Susan Fenton)
 ((Barbara.hm.Lewis@thomsonreuters.com; +44 207 542 2932;
Reuters Messaging:
barbara.hm.lewis.thomsonreuters.com@reuters.net))
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