Trend Assessment: Tanzania’s toughening stance against miners

One of Africa’s fastest-growing economies, Tanzania, is intent on refining its mineral resources domestically. But an uncertain policy environment and the erratic behaviour of the president is likely to reduce investor confidence, which risks dampening a decade of strong growth.

INDICATORS

2 March: Tanzania bans copper and gold exports and starts an inquiry into the contents in mining firms’ containers

21 March: Canada’s Endeavour Mining firm suspends merger talks with Tanzania’s Acacia Mining due to policy uncertainty

12 June: A public audit of the contents in mineral exports accuses mining firms of under-reporting and avoiding taxes

ANALYSIS

In the past few months, Tanzania has taken several steps to increase the added value of its mining revenues. On 2 March, the Ministry of Energy and Minerals announced a ban on exporting mineral concentrates and ore for metallic minerals, such as copper, gold, nickel, and silver. The ministry said the move was to ensure that mineral value-enhancing activities are carried out within Tanzania in accordance with mining laws from 2009 and 2010. In the meantime, President John Magufuli ordered two public inquiries into the contents in copper concentrates being exported. In sum, the inquiries were aimed at identifying areas where there was a risk that Tanzania experienced revenue losses, as he looks to increase revenue in key sectors. The audits found that the mineral concentrates in containers at the port of Dar es Salaam, the commercial capital, were as much as ten times above their stated amount. In particular, Acacia Mining Ltd. – a subsidiary of Canadian mining group Barrick Gold Corporation, and the largest foreign investor in the country – was accused in the audits of declaring 1.1 metric tons of gold in their shipments, well under the 15.5 metric tons of gold that was actually in them.

In addition, one of the reports concluded that there was an average of 1,400 grams of gold per metric ton of mineral sand in the containers at Dar, which contrasts with the official number allowed by the Tanzania Minerals Audit Agency (TMAA), which is 200 grams per metric ton. As a result, Magufuli, who has a reputation for not allowing any ‘nonsense’ or mismanagement in the civil service, sacked the energy and minerals minister, Sospeter Muhongo, as well as the board and director of TMAA.

The chairman of the investigation team, Nehemiah Osoro, also said that Acacia was not properly registered with the relevant agency, and he accused the firm of having cost Tanzania TZS108 trillion (USD48.26 billion) in lost revenue from gold exports and TZS188 trillion from copper exports since 1997, without detailing an exact amount of what Acacia owes. A report in the British newspaper the Financial Times on 12 June also said that the government had indicated it wanted to take part-ownership of the firm, although the conditions for this were not disclosed. While waiting to see the full report, Acacia strongly rejected the accusations, stating that it declares anything it produces of commercial value and that it pays all appropriate royalties and taxes on its production in Tanzania. It also said that the allegations would imply that Acacia ‘is the world’s third largest gold miner’ and produces more gold from just three mines than South Africa’s AngloGold Ashanti from 19 mines, Canadian miners Goldcorp from 11 mines, or Kinross from nine mines. These rebuttals have also been echoed by industry specialists.

While the incidents in March and May appeared dramatic, they follow a wider trend across sub-Saharan Africa’s mineral-rich countries to increase the added value from their extractive industries, as A2 warned last year. It also highlights the Magufuli administration’s intention to tighten controls of its strategic sectors, such as mining and telecoms. Magufuli said last November that there had been a lot of ‘funny deals’ in the country and that the government needed to carefully study the country’s laws moving forward. He also said that he wanted to increase the number of smelters in the country to add more value to the country’s labour force and stop exporting commodities in their raw state.

Other measures in Magufuli’s push for greater beneficiation include a requirement on mining firms with a ‘special mining licence’ to list at least 30 per cent of their shares through an initial public offering on the Dar es Salaam Stock Exchange (DSE) by the end of August; the government has requested that telecoms firms list at least 25 per cent of their shares on the stock market. Finally, on 29 June, the govenrment tabled three bills in parliament that could allow the government to force mining companies to renegotiate the terms of their contracts, or force a partial take over of the firms. Given that the bill could be fast-tracked through the Bunge, it is possible that it will be adopted by the end of August.

Plunging shares; ticking clock

The effects of the export ban were immediate for Acacia, which saw the value of its shares drop by 18 per cent on the news of the ban in March and again by 30 per cent on 24 May; while the share price has recovered slightly, Acacia’s shares remained down by 45 per cent on 26 June. Furthermore, the news of the export ban prompted Cayman-islands-headquartered Endeavour Mining, which operates several gold mines in west Africa and is a key competitor of Acacia’s, to suspend negotiations with the Tanzanian miner regarding a GBP3 billion merger on 21 March.

Acacia Mining, which contributed 37 per cent of Tanzania’s mineral revenues in 2013/14 according to a report by the Extractive Industries Transparency Initiative (EITI) – a global standard for the good governance of oil, gas and mineral resources – said that the ban risked forcing it to close operations at its Buzwagi (BZGM) and Bulyanhulu (BGM) gold mines, two of its only three producing mines on the continent, located in the northern Shinyanga Region. Acacia’s third gold-producing mine, North Mara, is located in Tanzania’s northern Mara Region, but the company also has exploration licences in Tanzania, Burkina Faso and Kenya.

Acacia, which accounts for about 10 per cent of Barrick Gold’s 2017 gold production forecast, said that the ban was costing the company USD1 million per day, meaning that projections for this year are likely to be revised downwards. A protracted export ban could force the company to halt operations at BGM and BZGM as mined copper concentrate stocks would pile up, creating a logistical bottleneck. That in turn, could lead to short-term job losses, as facilities to stock the commodity are limited.

ASSESSMENT

It is clear that Tanzania’s current export ban has shaken the mining sector, which contributes less than 3.5 per cent of national GDP. On 14 June, the executive chairman of Barrick Gold, which owns over 63 per cent of Acacia, flew to Tanzania to speak with Magufuli in an attempt to calm the situation and reach a negotiated settlement with the government. Neither side had given a timeframe for the negotiations at the time of writing, but have confirmed that they will take place soon. Whether or not the allegations are true, some industry experts have questioned the validity of the claims of under-reporting made in the audits and have warned that the government’s push for greater beneficiation could have done long-lasting damage to the sector. While there are arguments in favour of increased mid- and downstream capability in Tanzania, the risk appear to offset the benefits in the short term.

On the positive side, processing raw materials for export in Tanzania rather than abroad could increase the skills transfer to Tanzanian workers, which adds value to the wider economy. This could have spill-over effects for related industries and services, which ultimately could improve the already strong economic outlook; Tanzania has seen steady growth rates of about 7 per cent over the past decade.

Although the government is adamant that its policy will work, there are several risks that need to be borne in mind. The first consequence of the ban is an immediate fall in revenue. This has consequences not only for the affected mining firms, but also for Tanzania’s foreign currency reserves. Given that 45 per cent of the country’s imports are refined petroleum, a decline in foreign currency reserves could reduce the country’s energy security. Furthermore, restructuring the sector would take several years to complete and require significant government investment in the sector. However, without an ambitious subsidy programme to promote beneficiation in the mining mid-stream and downstream sectors, Tanzania is unlikely to be able to compete with the likes of China or Japan.

An assessment by the TMAA from 2011 said that developing a smelting or copper concentrates processing capability was not financially viable at the time. The report, for example, emphasised…

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