As the fourth-largest gold producer in Africa and the world’s only source of tanzanite, Tanzania is a major mining destination in the region. It has nine large-scale mines that produce silver, copper, diamonds and coal, as well as major untapped deposits of graphite, uranium and other minerals.
The government has begun to review its legislative framework for mining activity as part of efforts to reassess the value of existing projects, increase local revenues and ensure communities benefit from extractive industries. This is part of a trend across the continent, as other major mining producers, such as Ghana, are also looking at raising oversight, royalties and taxation. Tanzania has been particularly bold in this regard, with the government declaring a moratorium on new licences, a ban on concentrate exports and an examination of existing contracts with foreign investors. As a result of these recent overhauls, one of the country’s largest mining investors is in discussion with the government over a disputed tax bill, with the outcome likely to impact Tanzania’s foreign investment competitiveness.
While many of the reforms have sought to limit new activity until government evaluations have taken place, there is still work under way to reduce bureaucratic inefficiency, with a focus on the government bodies charged with overseeing the sector. These measures should lead to a more stable and predictable operating environment in the long term.
Indicators
Mining and quarrying accounted for 4% of GDP in mainland Tanzania in 2015, and averaged 3.6% from 2006 to 2015. For Zanzibar, which is responsible for its own extractive industry, the figure was 1.6% in 2015 and held steady at around 1.5% over the decade prior. The sector provides more than 7000 jobs, and together with the smaller natural gas sector accounts for 12% of state revenue.
The total value of mineral exports derived from mining reached $1.9bn in 2016, up 13% from $1.7bn in 2015, but in light of the 2017 concentrate export ban this is likely to slow. The value of mined building and industrial materials sold domestically was $103m in 2016, with gold accounting for about 35% of access to foreign exchange. “Gold is the top foreign exchange earner in Tanzania, so it’s very important for the country that the mines are operating,” Gilead Teri, director of policy at the Tanzania Private Sector Foundation, told OBG.
Project Pipeline
There has been steady interest in new mining exploration in Tanzania in recent years. According to the most recent government data there were 21 projects in the advanced stages of exploration at the end of 2014. These contained an estimated 20m oz of gold, 71,400 tonnes of uranium, 645.3m tonnes of coal and a total of 1.2m tonnes of ores, containing nickel, graphite, iron, niobium and rare earth metals. Furthermore, much of Tanzania remains ripe for further exploration. “It is a vastly underexplored country in a proven region for mining,” Toby Bradbury, former CEO of the London-listed Shanta Gold, told OBG. “There’s strong potential here with the right investment climate.”
After several years of subdued metals prices, projects coming on-line in the next few years could be doing so in a bull market. Metals were displaying relative strength in commodity indices in mid-2017, partially due to the depreciating US dollar, a planned cut in Chinese capacity and various cyclical factors, such as increased demand for industrial applications. The Bloomberg Industrial Metals Subindex broke a five-year decline in January 2016 and has been steadily climbing since, reaching levels in August 2017 that were unseen since early 2015.
Organisation
The Ministry of Energy and Minerals – which, it was announced in October 2017, is to be split into two separate ministries – is charged with defining sector policy and issuing licences on a first-come, first-served basis. In May 2017, following concerns over the ability of the Tanzania Minerals Audit Agency (TMAA) to monitor exports, the Cabinet was reshuffled, the minister was removed and the agency was then dissolved.
The government-run State Mining Corporation (STAMICO) undertakes exploration and manages subsidiary mines. It is the rights holder to many older mines and undeveloped properties that foreign investors no longer consider commercially viable, such as Tulawaka Gold Mine and Kiwira Coal Mine, but has struggled to revive these due to limited capital. A 2016 report from the National Audit Office recommended increased funding for the firm to allow it to better develop its ageing and undeveloped assets. It may first need to follow the recommendations of an August 2017 parliamentary committee hearing, which tasked the firm with improving its financial reporting due to its previous issues with revenue management and missing payments.
Licence Structure
There are roughly 10,000 active licences in the country. Prior governments negotiated mining development agreements with major miners, which set stable terms for the life of a project and insulated them from any future legal changes. However, the 2016 national audit found that a number of these agreements included overly generous tax incentives and accounting policies, and were often based on limited surveying data – issues the government has sought to address with its reforms. Royalty rates are currently 6% for gold and uranium, and 3% for all other minerals. An additional 1% clearing fee applies to all exports.
Gold
Production of gold rose 4.4% in 2016 to 1.42m troy oz, up from 2015’s 1.36m. The largest mine is Geita Gold Mine, owned by South Africa’s AngloGold Ashanti, which accounted for 34% of production from the country’s six major gold mines.
The largest producer in total is Acacia Mining, which is 63% owned by Canada-based Barrick Gold, the largest gold miner in the world. Acacia’s three mines in Tanzania – North Mara, Bulyanhulu and Buzwagi – together contributed 58.2% of 2016 production. In 2014 the company accounted for 37% of the state’s mineral revenues. The other two major gold mines are Biharamulo, which is operated by Stamigold, a subsidiary of STAMICO, accounting for 1.4% of 2016 production; and New Luika, operated by Shanta Gold, which contributed 6% of the total.
Extraction costs vary greatly by mine. For instance, in 2016 all-in sustaining costs at New Luika and North Mara were $661 per oz and $733 per oz, respectively, compared to $1058 at Bulyanhulu and $1095 at Buzwagi. Given that the global gold price was around $1300 in the first three quarters of 2017, production at the latter two, which amounted to almost one-third of total output, offered far thinner margins. Even though Acacia has hedged its exposure to the gold price – the sales price for first quarter production in 2017 was locked in at a floor price of $1150 per oz – future increases in costs, including those caused by changes in the legal environment, could leave the company unable to run the two mines at a profit. At Geita Gold Mine the all-in sustaining costs amounted to $844 per oz.
Copper & Silver
The overall production of copper rose to 15.8m pounds in 2016 – with Acacia accounting for 30% of revenues – up from the 14.3m pounds produced in 2015. Silver production reached 558,000 troy oz, up from 492,000 in 2015.
Gemstones
Tanzania’s only major diamond mine, the Williamson Diamond Mine, has the longest uninterrupted diamond-mining operation in the world, dating to 1940. It was first operated by the De Beers Group of South Africa, which shared joint ownership with the government until 1974, when STAMICO took over as its operator. During that period output fell to around 70,000 carats a year, but when De Beers regained operations in 1993 the mine was recapitalised and production recovered. The group then sold the mine to London-listed Petra Diamonds in 2009, though the government retains a 25% stake.
The mine has an indicated reserve of 4.2m carats, with an additional inferred reserve of 36.2m. Petra is planning an expansion that will boost annual production to 350,000 carats by 2018. The mine’s production rose to 226,599 carats in 2016, up from 196,256 in 2015, with its exports reaching 226,899 carats, indicating sales from existing stockpiles. Its 2016 exports were valued at $82.2m, which accrued $3.7m in royalties for the government. Similarly, there is one major tanzanite mine, as this gemstone has so far only been found in a single deposit in the north. The mine is a 50:50 joint venture between STAMICO and TanzaniteOne, whose parent company is Sky Associates, a privately held company based in the British Virgin Islands, which purchased the rights from Richland Resources for $5.1m in 2015.
Coal
The Ngaka Coal Mine, the only major mine to produce coal, is a joint venture between the National Development Corporation (NDC), a state agency charged with investing in projects that catalyse economic development, and Intra Energy Corporation, an Australian-listed company.
Its mine in the south-western region has a proven reserve of 212m tonnes and overall potential of 1bn tonnes. In total, the country is estimated to have 1.9bn tonnes in coal resources, 25% of which has been proven. The coal segment has grown steadily, reaching 279,000 tonnes in 2016, up from 256,000 tonnes in 2015. Around 85% was sold in domestic markets at an average price of $40 per tonne, with the remainder exported. Sales hit $11.3m in value, accruing $338,000 in royalties for the government.
Tanzanian coal is generally perceived to be of a quality too low for most industrial applications. Nigeria’s Dangote Cement, which already has production sites in Tanzania, has been awarded rights to mine coal, in part to fuel a proposed captive power plant. Dangote had previously been using imported coal from South Africa to power the facility, but Tanzania banned coal imports in 2016 in the hope of increasing the use of domestic supply. The government is also seeking to use coal for its own thermal electricity generation and has charged the NDC with developing coal-to-power projects.
Smaller Producers
Beyond the big mines, smaller-scale and artisanal operators also produce copper, silver, diamonds, tanzanite, coal and gold. In 2016 small-scale gold mines – primarily in the Chunya, Geita, Kahama and Mufindi districts – produced and sold TSh4.2bn ($1.9m) of gold, amounting to TSh172.2m ($78,300) in payable royalties. Additionally, smaller operators produce a range of other gemstones, base metals and minerals, including salt, gypsum, bauxite, marble, tin and kaolin. A total of 15.5m tonnes of building materials and industrial minerals were produced and sold in 2016, generating TSh230.8bn ($105m) in revenue and TSh7.1bn ($3.2m) in royalties for the government, a 13.9% increase from 2015. To support the growth of the small-scale mining segment, Tanzania set aside $3m for grants to boost development in 2016.
Concentrate Processing
In March 2017 Tanzania banned the export of raw concentrate in a bid to stimulate domestic investment in smelting infrastructure and capture greater value from mining. The move follows other commodity export bans across the continent, such as Gabon’s ban on raw timber exports in 2009, which was also aimed at forcing producers to process wood domestically.
For Gabon, overall exports fell in the following years, but soon began to climb back up above preban levels, as processing activity jumped. It is not yet clear whether Tanzania’s ban will see the same result, given the higher levels of capital expenditure required, the limited output starting point and the fact that processing will only provide a marginal rise in value. A 2011 study by the TMAA found that copper smelting is unlikely to be profitable, since the sector does not offer economies of scale. Production in Tanzania would need to at least triple in order to deliver the sort of volume normally handled by a smelting operation, and would likely require government subsidies. Smelting is not typically a high-margin activity for minerals other than nickel. The price difference between concentrate and refined copper ranges from 4-6%, and is smaller for gold and silver. Both the government and the private sector are keen to find a solution. With stockpiles of concentrate no longer eligible for export, the cost to the government was estimated at $1m-1.2m in revenue per month. Bulyanhulu is already reducing operations, Buzwagi no longer produces concentrate and North Mara has never done so.
Fiscal Framework
The export ban is indicative of the state’s changing approach to mining. The sector was a prominent part of the economy in the early post-colonial years, but its contribution to GDP fell from 10% to 2% during the period of economic nationalisation in the 1970s. Like many other mining destinations in Africa, the 1980s and 1990s brought privatisation and liberalisation, with investment increasing as a result of generous tax breaks, a lack of windfall taxes and competitive royalty rates of 3%. The commodities supercycle in the 2000s prompted the government to re-examine the legislative framework for mining. A revised Mining Act in 2010 boosted the royalty rate on gold from 3% to 4% and reintroduced local content stipulations.
The administration of President John Magufuli has furthered these efforts, as it looks to increase the value of Tanzania’s domestic economy as well as the royalties received from extraction of the country’s natural resources. One of the key focal points for reform involves revisiting tax incentives. In many jurisdictions the cost of developing a mine is covered by having annual capital expenditures deducted from income tax in fractions spread over the course of several years, but in Tanzania they can be fully deducted from annual revenue, or at a proportion of 80% of the total. A 2016 report from the National Audit Office recommended having a corporate tax of 0.3% on gross revenue as one potential solution.
According to a review by the Tanzania Extractive Industries Transparency Initiative, five major mines were established between 1999 and 2005, and as of 2014 the state had yet to receive any corporate income tax from two of the operators. For the others, income taxes applied only after 7-11 years of operation. The government seems set on addressing this with moves outside tax policy, such as the export ban, along with two new laws in July 2017: the Natural Wealth and Resources (Permanent Sovereignty) Act and the Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act. There have also been amendments made to existing laws. The Finance Act was changed in July 2017 to impose a 1% clearing fee on all exports, while amendments to the Mining Act of 2010 raised the royalty rate for gold from 4% to 6%.
Local Solutions
The Natural Wealth and Resources Act and the Natural Wealth and Resources Contracts Act involve several substantial changes to the previous legislative framework. The new laws mandate that all disputes be resolved in Tanzanian courts, removing international arbitration as an option. They also stipulate that all natural resources are owned by the state and not by a producer. In addition, they allow the Parliament to designate elements of mining development agreements as “unconscionable” – a term currently undefined in existing law – and direct the government to renegotiate these terms. If the government and the miner cannot agree on modifications within 90 days, unconscionable terms can be unilaterally expunged.
The laws also mandate a 16% free carried interest in all mining projects and provide Tanzania with the option to purchase up to 50% ownership stakes in them. For existing projects, in lieu of paying cash for these assets, the value of past tax breaks can be considered as payment. In addition, profits from mining must be held in a local bank and all exports of raw minerals are banned. Instead, the government plans to establish clearing houses for minerals, and miners must ship mined output to these facilities within five days of extraction.
The volume of proposed changes has led to some uncertainty in terms of how the application of the laws will take place. For example, whether the right to a 50% stake comes on top of or includes the 16% free carried interest has yet to be clarified. Furthermore, the laws do not address the existing rule that miners must list 30% of their shares on the Dar es Salaam Stock Exchange. So far only Acacia has a local listing, but should that rule remain, miners may not be able to retain majority ownership of their projects and could be capped at a maximum of either 4% or 20%, according to different interpretations.
Investor Impact
In July 2017, as the industry was assessing the potential impact of these new laws, the Tanzania Revenue Authority announced that it was giving Acacia a tax bill of $190bn due to past underpayment. The bill was based on a report commissioned by President Magufuli that claims Acacia had underreported concentrations of minerals in the ore it was exporting on a large scale. The allegations are partially based on an examination of containers at the Port of Dar es Salaam that the government says held double the volume of copper and silver, and eight times the volume of gold declared. However, assessing concentration can be difficult, and equipment such as handheld scanners frequently overestimates concentrations. Acacia maintained that it had paid its taxes in full, and abided by the law and its mining development agreement.
Executives from Barrick arrived on July 31, 2017 for negotiations with the government, and in October Barrick said that Acacia would pay Tanzania $300m and split “economic benefits” from operations with Tanzania under a deal proposed to resolve the dispute. Tanzania will also get a 16% stake in Acacia’s three gold mines under the framework agreement, according to Barrick and a government minister. Acacia is not the only firm grappling with the legislation, and AngloGold Ashanti initiated arbitration proceedings in July 2017, claiming that the new laws violate its existing mining development agreement.
Outlook
With the mining sector currently in a period of government review, the outlook for the industry is largely contingent on clarification of the new laws. Local press reports stated that some companies at the exploration stages announced they were reviewing their strategy for Tanzania. Despite any disruptions, the government has been consistent in emphasising the value of the country’s mining resources and the importance of exploiting them for the benefit of the domestic economy, signifying that there is still ample potential for future growth if current disputes can be resolved amicably. While there is no doubt that tax revenues and licences will be more constricting moving forward, the benefits are likely to include increased revenues for the country and improved governance over the long term.
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