Mining overhaul fails to dent Tanzania's investment appeal

Tanzania continues to offer foreign mining companies significant opportunities, despite the government completely changing the legal framework around the industry in both 2017 and 2018.

In July 2017, the country made a series of changes to the 2010 Mining Act, which law firm Herbert Smith describes as ‘drastic’. It also enacted two laws asserting the state’s ‘permanent sovereignty’ over its natural resources.

The government now has the power to re-negotiate terms in mining contracts that it considers ‘unconscionable’, including those relating to international dispute resolution mechanisms. It immediately banned the exportation of unprocessed minerals. It gave the state 16% of the equity (non-dilutable free-carried interest shares) of all existing and future mining projects and suggested this could rise to 50% in the future.

Tanzania also hiked royalties on gold, copper, silver and platinum exports from 4% to 6%. It increased the royalty on uranium exports from 5% to 6%. The new regulations allow the government to reject a company’s own valuations if it believes the prices are too low. It also said it planned to impose a 1% clearing fee on the value of exported minerals. The corporate income tax rate is now set at 30%.

Furthermore, in January 2018, the government issued regulations that mean an ‘indigenous Tanzanian company’ must have 5% ownership of any project before a new mining licence is granted. Also, foreign miners must only conduct their business through Tanzanian banks.

Unforeseen consequences

Acacia Mining – Tanzania’s largest gold miner, majority owned by Canadian company Barrick Gold – is locked in a long-running dispute with the government over accusations of tax evasion. The firm denies any wrongdoing.

“The country’s entire mining and oil and gas industries face new rules stemming from the dispute between the government and Acacia,” says David Mestres Ridge, chief executive officer of Swala Oil & Gas, a Tanzanian oil and gas exploration company. “Acacia had in place ‘transfer pricing’, which could have looked provocative to a developing world country.”

Tanzania’s president, John Magufuli, who represents the centre-left Chama Cha Mapinduzi party and took office for a five-year term in November 2015, has refused to hold any negotiations with Acacia, which has three mines in north-west Tanzania. He has accused the company of owing the country of tens of billions of dollars by understating by more than 10 times the gold and copper concentrate levels in its mineral exports.

“The legislative changes were pretty restrictive but the country still offers foreign miners big investment opportunities,” says Patricia Rodrigues, east Africa analyst at consultancy Control Risks. “Many foreign players continue to have a healthy and productive relationship with the government.”

Mineral wealth

Tanzania has a population of 54 million and is endowed with vast natural resources. Key minerals include gold, iron ore, nickel, copper, cobalt, silver, diamond, ruby, garnet, limestone, soda ash, gypsum, salt, phosphate, coal, uranium and graphite. Tanzanite is a mineral exclusive to the country. The country’s gold reserves are estimated at about 45 million ounces and it is the fourth biggest gold producer in Africa after South Africa, Ghana and Mali.

Diamonds are also found in abundance. Since it started operations in 1940, the Williamson diamond mine in the country’s north-east has produced more than 19 million carats (3800 kilograms) of diamonds. Coal reserves in Tanzania are estimated at 1.9 billion tonnes, 25% of which are proven.

The country has huge deposits of uranium in Bahi, Galapo, Minjingu, Mbulu, Simanjiro, Lake Natron and Manyoni. One of the biggest uranium development projects is at Mkuju River in the country’s south, where geological surveys indicate 36,000 tonnes exist.

“The national resources legislation now provides clarity,” says Andrew Moorfield, co-head of investment banking and head of natural resources at Exotix, a London-based investment adviser. “A 16% free-carry rate is not unreasonable and the corporate tax rate is not punitive. The reforms help to ensure that the projects have government participation and support. Firms get a 10-year mining licence, extendable up to a further 10 years. There is always a concern when a state impose major changes but this is a risk everywhere.”

Leaning towards local

It is becoming more common for African countries to require mandatory local ownership. In Mauritania, for example, the state requires 10% free-carried interest in mining projects and in 2018 the Democratic Republic of Congo increased the state’s free-carry from 5% to 10%.

However, Tanzania’s reforms have undermined its international competitiveness. The country is now ranked 144 among 190 economies in the World Bank’s 2019 Doing Business ratings. In the 2018 ranking it was at 137th and in 2017 132nd.

“We are competing for FDI but the question is how aggressive we are to win it,” says Shabbir Zavery, second vice-chairman of the Confederation of Tanzania Industries. “We need to bolster confidence [in] foreign investors that Tanzania continues to have stable policies and a conducive business environment.”

On the up

The IMF expects Tanzania’s economy to surpass $60bn in 2019. GDP is thought to have grown by 5.8% in 2018 and is forecast to grow an additional 6.6% in 2019. During 2017, the country attracted $1.18bn in FDI, a decline of 13% on the previous year and of 24% on 2015, according to Unctad.

The country has witnessed strong economic growth rates – averaging 6% to 7% annually – for the past decade and has seen the slow emergence of a middle class. In central Dar es Salaam – the country’s main city with 4.36 million inhabitants, located on the Indian Ocean – a large number of new residential and commercial skyscrapers have sprung up. The country’s pension funds have largely provided the finance behind the construction boom, with TSh13000bn ($5.6bn) under their collective management.

Tanzania also has a fast-growing tourism sector. It is home to Mount Kilimanjaro, the tallest mountain in Africa, and Zanzibar, the Indian Ocean island that is a semi-autonomous region of the country and attracts 500,000 tourists a year.