Warning lights are flashing
Tanzania loses status as preferred mining destination
Tanzania has overnight lost its status as miners’ preferred destination in Africa after sudden changes in legislation
Though new laws being enacted in Tanzania to increase the state’s share of mining profits are not draconian enough to cause an exodus of mining companies, they raise the risk of further arbitrary changes and will cap future capital flows into the country.
The higher the risk, the higher the return needed to attract capital, which means some lower-returning projects will no longer go ahead.
The new laws allow the state to renegotiate mining companies’ agreements and take a nondilutable 16% free carried interest in mining companies. Royalties on exports have also been increased.
"While resource nationalism is not a new theme in the country, the nature, scale and manner of the recent changes have spooked the mining community and pose questions around the attractiveness of Tanzania’s business environment," says Ronak Gopaldas, RMB’s head of country risk.
SP Angel analyst John Meyer says government’s motive might be to address corruption among authorities or it could be a populist measure to force mining companies to share more economic benefits with locals.
"We fear the latest developments are likely to lead to completely opposite results involving a revision in estimates for risk premiums of operating in Tanzania, hurting a major forex-earner industry and costing the nation jobs, tax revenues and future investments," Meyer says.
Various listed Australian companies operating in Tanzania have applied for suspension of trade while they consider the implications.
The three SA-listed or operating mining companies with exposure to Tanzania — Kibo Mining, AngloGold Ashanti and Petra Diamonds — have more experience with this kind of government behaviour and reacted more calmly.
Kibo is the most exposed to Tanzania through its Mbeya coal-to-power-plant project and some gold interests. Its shares have dropped 21% in two weeks. AngloGold and Petra are geographically diversified and their recent share-price weakness is attributable to other events.
Kibo CEO Louis Coetzee says that in the 1990s the Tanzanian government wanted to develop mining as a core pillar of the economy, so it promulgated progressive legislation designed to encourage exploration. This was successful in attracting explorers. But it reached a point where the industry had matured while legislation had not. As a result, tensions between government and the industry have been building for several years.
"While I agree with government’s reasons for changing the legislation, I cannot agree with the way [it has] done so," Coetzee says.
But he dismisses the suggestion that Tanzania might follow the example of countries such as SA or the Democratic Republic of Congo, where the goalposts are moved too frequently.
Petra’s Williamson open-pit diamond mine generated US$31m revenue and sold 106,831carats in the six months to December out of the group total of $228.50m revenue and 1.9mcarats sold, mainly from SA.
The company’s shares have dropped from 118.4p to 106.3p since mid-June because investors are focusing on its lower-than-expected production buildup from expansion programmes at Finsch and Cullinan in SA and the breaching of its bank covenants, which it said in a market update "will not present an issue".
AngloGold’s shares have dropped from about R140 in mid-June to about R127, mainly tracking gold’s fall from $1,253/oz to $1,220/oz. AngloGold’s Geita mine in Tanzania produced just under 500,000oz of gold last year, which is about 13.5% of the group total.
Tanzanian President John Magufuli is a forceful leader who has dedicated himself to tackling corruption. His early reforms spawned the social media hash tag #WhatWouldMagufuliDo, comparing him favourably with other African leaders. His moves to tighten up mining legislation are understandable after the fallout between government and Acacia Mining.
Acacia, a subsidiary of global gold giant Barrick, was accused of underreporting its gold sales and has been slapped with an export ban on 50% of the output from its Buzwagi and Bulyanhulu mines. Acacia argues it complies fully with all laws and regulations and that government’s assay results wildly overstated the amount of gold these mines can produce. Acacia has filed a notice of arbitration.
Last year it was reported that some of SA’s big gold miners, including Sibanye Gold, had been invited to buy Barrick’s stake in Acacia, but had not pursued it, partly because the share price was too high. After this they may be either congratulating themselves on a narrow escape, or taking a second look after Acacia’s 34% share-price tumble to 285p.