Zambia

Overview

The Republic of Zambia, a landlocked country in south-central Africa, covers over 752,614 square kilometres and shares its borders with Angola, the DRC, Malawi, Mozambique, Namibia, Tanzania and Zimbabwe.

The country's population of approximately 11 million consists of more than 70 ethnic groups. Zambia is one of Sub-Saharan Africa's most highly urbanized countries with 44% of the population concentrated in a few urban zones strung along the major transportation corridors, while rural areas are underpopulated. More than 1 million people live in and around the capital city, Lusaka. Expatriates, mostly British or South African, live mainly in Lusaka and in the Copperbelt Province, approximately 350 kilometres north of Lusaka. Zambia also has a small but economically important Asian population, most of whom are Indians. English is the country's official language, but more than 70 local languages and dialects are spoken.

Politics and Government

Zambia is a republic governed by a parliamentary democracy. Currently, it is ruled by the Movement for Multi-Party Democracy under President Levy Mwanawasa. The most recent Constitution, enacted in August 1991, enlarged the National Assembly from 136 members to a maximum of 158 members, established an electoral commission, and allowed for more than one presidential candidate. An amendment to the Constitution in 1996 set new limits on the presidency, including a retroactive two-term limit. The President exercises executive powers and is responsible for appointing cabinet ministers. The President is also the appointing authority for heads of parastatal organizations and boards and is the Commander-in-Chief of the Zambian armed forces. The President is elected by popular vote at the same time as elections for the National Assembly are held. Election rules and regulations are drawn by an electoral commission, which is empowered to limit and review constituency boundaries. The National Assembly is comprised of 150 directly-elected members, up to eight presidentially-appointed members, and a speaker. Zambia is divided into nine provinces, each administered by an appointed deputy minister who essentially performs the duties of a governor.

The legal system in Zambia is dichotomous being based on English common law and, with respect to certain succession and matrimonial causes, customary law. The Supreme Court is the highest court and below it are the high court, magistrate's court, and local courts. The President appoints Justices of the Supreme Court subject to ratification by the National Assembly.

The Bill of Rights contained in the Constitution sets out fundamental rights and freedoms of the individual and provides protection from discrimination on grounds of race, place of origin, colour, creed, sex or marital status. It further provides for the freedoms of expression, assembly and association. The Bill of Rights also guarantees investors protection from deprivation of property, as provided in the Land Acquisition Act, Chapter 189 of the Laws of Zambia (the "Land Acquisition Act"). No land can be compulsorily acquired other than in accordance with the Land Acquisition Act and market value compensation must be paid. Under the Land Acquisition Act, all land is vested with the President who holds it as trustee on behalf of the people of Zambia.

Economy

Zambia's economy relies heavily on international trade with imports and exports totalling approximately $2.2 billion and $1.8 billion, respectively, in 2004. Major exports include copper, cobalt, lead, and zinc, cut flowers, and cotton. In 2004, the GDP was an estimated $9.4 billion and the real GDP growth reached 5%, marking the fifth consecutive year of expansion. Inflation held to 17.5%.

The mining sector has traditionally dominated the economy of Zambia, and has historically been based on the copper-mining industry. Following privatization of the industry, copper production reached 398,000 tonnes in 2004. Improvements in the world copper market have magnified the effect of this volume increase on revenues and foreign exchange earnings.

Exchange Controls

All exchange controls in Zambia have been suspended since January 1994.

Mineral Licence Regime

Land in Zambia is categorized as state land and customary (or trust) land. The procedure for procurement of title or use of such land varies with each category.

In Zambia, all rights of ownership in searching for and mining minerals are vested in the state on behalf of the people of Zambia. No person may prospect for minerals or carry on mining operations except under the authority of a mining right granted under the Mines and Minerals Act, (1995) (the "1995 Act"). However, the Zambian government's policy is not to participate in mineral exploration or other mineral activities or to hold any shares in mining companies other than in a regulatory and promotional role. The right to explore for, or extract, minerals is authorized by licences granted under the 1995 Act. There are several categories of mining licences that may be acquired in the country, including Prospecting Licences, Retention Licences, Large Scale Mining Licences and Specific Mining Licences.

The 1995 Act seeks to encourage foreign investment in mineral exploration and new large scale developments, and to encourage private investment in smaller scale mining. The legislation provides for such rights as secure title to mining rights, rights to renewal upon satisfaction of licence conditions, rights to remedy licence defaults, deferment of royalty in certain circumstances, rights to assign licence interests, confidentiality of mining information, and international arbitration of disputes. Under the 1995 Act, mining rights must be registered with the Ministry of Mines. Once a licence is registered over an area, no other mining right can be granted over the same area without the consent of the current tenement holders. The consent, not to be unreasonably withheld, of the Minister of Mines is required for the transfer of a large scale mining licence and for any change in control of a company holding such a licence.

A framework for responsible development has also been created through publication of the Environmental Protection and Pollution Control (Environmental Impact Assessment) Regulations, 1997 which apply to mining operations and, among other things, govern emissions and require applicants for mining rights to submit environmental impact studies for approval.

The Environmental Council of Zambia issues permits for the discharge of effluents and waste water, air pollution control, and the transportation of wastes and waste disposal sites. Rights to use water are issued by the Water Board and require renewal every five years.

For the purposes of protecting and encouraging large scale investments in the mining sector in Zambia, and in relation to the grant of a large scale mining licence, mining companies generally enter into development agreements with the Minister of Mines acting on behalf of the Republic of Zambia. These agreements contain provisions binding on the Republic and deal with large scale mining operations, the financing thereof, fiscal stability, human resource and other matters, and the circumstances or manner in which the minister or director may exercise any power of or discretion under applicable legislation.

Tax Regime

Zambia's tax administration system is operated by the Zambia Revenue Authority. Generally, the fiscal regime set out below will apply to the Company's mineral projects in Zambia:

• A corporate tax rate of 25% for copper and cobalt production.
• A royalty of 0.6% of net back value (although it has recently been reported that Zambia is considering an increase that would apply to new mining operations).

VAT is charged at 17.5%, which is fully claimable on most items upon presentation of the appropriate documentation.

No withholding tax on dividends, royalties, management fees to shareholders or their affiliates and interest payments to shareholders, affiliates or any lender of money to one of the Company's active Zambian projects.

The holder of a mining right is entitled to exemption from customs and excise duties in respect of all machinery and equipment required for the purposes of investment in mining or prospecting. To benefit from this incentive, TEAL would be required to make an application to the Zambian authorities.

Tax losses can be carried forward for mining companies involved in the production of copper and cobalt for a period of ten years.

Capital allowances are allowed up-front, or once incurred, for a period of up to 20 years. This includes money expended upon buildings, equipment and interest payable on any loan for mining or prospecting purposes.

In Zambia, withholding tax is applicable on payments due to resident and nonresident contractors at the rate of 15%. For these purposes, a contract is defined under the Zambian Income Tax Act as "a contract for the supply of goods or services in terms of which the state, a statutory body, a quasi-government institution or registered taxpayer is obliged to pay one or more persons an amount or amounts totalling or aggregating one hundred and fifty thousand dollars or more". Effective January 1, 2005, all persons who enter into contracts with quasi-government institutions and taxpayers who are registered with the Zambian Revenue Authority are required to submit evidence that they have furnished a return under the Zambian Income Tax Act. A person who fails to produce evidence that such a return has been furnished will have 10% withholding tax deducted from any amount otherwise owed to that person.

Miga Insurance

Zambia is a party to an agreement with the World Bank's Multilateral Investment Guarantee Agency.