First Quantum Unlikely to Escape $7.9bn ‘Giant Tax Bill’
First Quantum Minerals recovered from what was shaping up to be its worst two-day drop in two years as its chief executive officer said he’s hoping to talk his way out of a $7.9-billion tax bill in Zambia – which includes $5.7-billion in interest.
First Quantum received a letter from the Zambia Revenue Authority dated Monday “noting an assessment for import duties, penalties and interest on consumables and spare parts,” the Vancouver-based company said Tuesday in a statement. The southern African nation accounts for 84% of First Quantum’s revenue.
“While we accept there may be imports with incorrect coded duties, we completely refute the entire amount being claimed and the assessment, penalties and interest,” CEO Philip Pascall said during a conference call Wednesday.
The massive tax bill involves $540-million worth of equipment that Zambian tax authorities say were miss-coded over six years, resulting in the company underpaying the state. First Quantum has been told that about $150-million of the total tax bill is the result of a preliminary reassessment at a 25% duty rate. The bulk of the bill is composed of $5.7-billion in interest and $2.1-billion in penalties, Pascall said.
First Quantum is not the first miner to be hit with a massive tax bill for operations in Africa. Last summer, Tanzania sent Acacia Mining a demand for payment equal to almost two centuries’ worth of the gold miner’s revenue. And the Democratic Republic of Congo is moving ahead with a new mining code that would dramatically raise tax payments.
Shares of First Quantum slumped 12% in Toronto Tuesday when the stock was halted ahead of the company’s statement. They dropped as much 9.2% on Wednesday before recovering and were up 1.4% at 10:40 am.
The Zambian government has struggled with bulging fiscal deficits in recent years and failed to secure a $1.3-billion bailout from the International Monetary Fund. That could be behind the tax assessment, Deutsche Bank analyst Patrick Jones said in an emailed note.
In October 2016, First Quantum was sued for $1.4 billion by Zambia Consolidated Copper Mines Investment Holdings (ZCCM-IH), which is 77 percent state-owned and holds minority stakes in most of the country’s copper mines. The claim includes $228 million in interest on $2.3 billion of loans that it said First Quantum wrongly borrowed from the Kansanshi Copper Mine, as well as 20 percent of the principal amount, or $570 million.
First Quantum described the claims are “inflammatory, vexatious and untrue,” and asked a Zambian court to dismiss the suit, a plea the court dismissed back in January 2018. In his ruling, High Court Judge Winnie Mwenda said that the case would go ahead because “The issues raised by the parties in their respective affidavits are, in my view, so contentious that disallowing them to go to trial would not serve justice well.”
In May 2017, Zambian President Edgar Lungu had instructed that the fraud case the State investment company brought against First Quantum and some of its directors be dropped. ZCCM Investments Holdings, which has a 20% stake in First Quantum’s flagship Kansanshi mine, also started arbitration proceedings against the company in London last year.
Reacting to the latest brush with the Zaambian authorities, Pascall told analysts it will take a team of six people four to six months to examine more than 23 000 separate bills of entry to dispute the tax claim. “In the short time available, we’ve attempted some high-level analysis and within that we’ve found some incorrectly assessed items with both higher and lower duties than required.”