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First Quantum shares drop as ZRA issues USD$10.4 billion bill for unpaid duties

First Quantum Minerals Ltd. has been accused by the Zambia Revenue Authority of underpaying its taxes by more than USD$10 billion over a period of five years.

ZRA said in a statement it had issued a preliminary tax assessment of ZMK76.5 billion (USD$8.04 billion) to a "prominent company" for classifying imported goods as mining machinery, which attract no custom duty.

“We have since notified both the mining (company) and the clearing agent of this unacceptable act of cheating,” ZRA said, without naming the company or the clearing agent.

ZRA’s assessment suggests the total value of goods imported was between USD$30 billion and USD$51 billion if about $8 billion is unpaid levy charged at between 15 and 25 percent.

The announcement comes almost a year after tax chief Kingsley Chanda invited companies and individuals to declare their hidden assets in tax amnesty.

Zambia, which collected ZMK39.1 billion in taxes last year, netted ZMK4.4 billion in hidden assets from the amnesty after smaller companies stepped forward, ZRA said, adding that it has started detailed audits on all companies for compliance.

In a statement released before the close of trading on Tuesday, First Quantum confirmed it is in the cross-hairs of the ZRA.

"The company ... is in possession of a letter from the ZRA, dated March 19, 2018, noting an assessment for import duties, penalties and interest on consumables and spare parts of ZMK76.5 billion," First Quantum said.

First Quantum said it "unequivocally refutes this assessment which does not appear to have any discernible basis of calculation and will continue working with the ZRA...to resolve the issue."

Earlier on Tuesday, shares in the Canada-based mining company sold off heavily as speculation mounted it was the company the ZRA was targeting. The shares lost 12.4% before being halted at mid-afternoon.

In a note to clients, an analyst from a global investment banking firm, Jeffries, Christopher LaFemina wrote that First Quantum's revised tax assessment "does not seem reasonable," but added that "a large portion of the assessment may be penalties."

"This incident poses a significant risk to the company and is likely to be an overhang on the stock for now," he said.

With a market capitalization of more than USD$12 billion, First Quantum operates two mines in Zambia, including the Kansanshi mine, the largest copper mine in Africa. First Quantum produced just under 574,000 tonnes of copper last year.

"While First Quantum has had some operational issues and problems with power supply in Zambia, the country has been a relatively benign geography for the company from a geopolitical perspective," he wrote.

Last year, Tanzania accused Barrick Gold subsidiary Acacia Mining of drastically underpaying its taxes, handing it a USD$190-billion tax bill. Acacia is currently subject to a gold-concentrate export ban as Barrick tries to negotiate a settlement with the Tanzanian government.

Earlier this year, the Democratic Republic of the Congo suddenly announced plans for a punitive new tax system on mining companies that operate in the country. Under the new system, copper royalties will rise to 3.5% from 2% and royalties on battery metal cobalt could go up as much as 10% from 2%.