Analysis of Mining Investments in Zimbabwe

Abstract

The papers in this thesis investigate issues related to investment with particular reference to the mining sector in Zimbabwe. Issues analysed are the levels of risk premia that attract investment in minerals in developing countries, whether firms in the sector manage to reduce operation to optimal levels consistent with theoretical predictions, and the extent to which irreversibility has reduced investment expenditures.

Paper I describes the structure of the Zimbabwean mining industry. It is shown that the importance of the mining sector has been declining over time yet it has remained as the most important foreign currency earner for the economy. Depressed mineral prices, foreign exchange shortages and a hostile domestic political climate have impacted negatively on mineral investments. The government is focused on an indigenisation program whose success could depend on a detailed understanding of effects uncertainty in the investment climate, historical mining returns, and the potential of attracting appropriate investment for small-scale operations.

Paper II analyses risk-risk premia on mining investments in Zimbabwe, using the risk adjusted Hotelling model to examine the level of risk-premia required for investment in mining to take place. Empirical results show that a risk-premium higher than 27% is required. For that reason it is highly unlikely that much mining investment will take place in Zimbabwe.

Paper III examines extraction costs for mining firms in Zimbabwe and tests whether the behaviour of firms satisfy optimality conditions derived from inter-temporal profit maximisation using parameter estimates from a dual cost minimisation problem. Results reject the hypothesis that firms optimise inter-temporal profits and show a positive relationship between cumulative extraction and costs that suggests that ore stock depletion matters. For that reason investment in the sector depend on the possibility of raising sufficient funds to enough to cover setting up costs for frequent new operations due to the small-scale nature of deposits.

Paper IV examines the effects of irreversibility on mining investments in Zimbabwe. The path of reversible investment determined by the equality of the marginal-revenue-product of capital to its user-cost is used to predict irreversible investment based on individual-firm uncertainty. It is assumed that the level of capital-stock deviates from its desired level and that the distribution of the deviations can be derived. The distribution is then used to estimate the implied effects of the uncertainty which underly the observed regular investment-pattern. Results show that the individual-firm uncertainty must have deviation values greater than 0.166 contrasted with values less than 0.04 for the observed investment-ratio. The result implies that the irreversible capital stock was less than 68% of the reversible level when there was positive investment.