Is Tanzania Still an Attractive Investment Destination for Mining?

The country’s stability and the widespread recognition of its wealth of resources have long made Tanzania an attractive investment destination, but unfavorable market conditions and uncertainty around the new government regime have taken their toll.

By Catherine Howe

IMAGE: Courtesy of Terra Nova

Home to a relatively mature mining industry, Tanzania is the fourth largest producer of gold in Africa, following South Africa, Ghana and Mali, with proven reserves of minerals including diamond, tanzanite, ruby, garnet and graphite, and metals such as iron ore, nickel and copper. The country’s stability and the widespread recognition of its wealth of resources have long made Tanzania an attractive investment destination, but unfavorable market conditions and uncertainty around the new government regime have taken their toll on the industry. In particular, the drive to increase the country’s financial return from the mining sector, alongside the perception of the new government’s seemingly impulsive decision making, has unsettled many investors.

Tanzania continues to view the mining sector as a key area for GDP growth and in-country financial return, planning to grow the sector to account for 10% of GDP by 2025, but general sentiment is that greater attention needs to be paid to attracting investment in the first place and supporting its existing established operations. However, although companies such as Acacia, AngloGold Ashanti and Shanta Gold are well established and experiencing good results, promising exploration programs are scarce, with only a handful of projects underway with adequate funding.

Heralding change: Tanzania’s new government

The long-term goals of Tanzania’s new government are undoubtedly positive and progressive, with primary focus areas including reducing corruption and decreasing wasteful spending and dependence on foreign aid. Looking at the World Bank’s Ease of Doing Business Report, Tanzania has seen great progress, jumping up from a ranking of 144 in 2016 to 132 in 2017 out of 190 economies, with key improvements highlighted as better access to finance, a crackdown on corruption and more developed infrastructure.

The Tanzanian government has also committed to a tighter fiscal policy marked by plans to reduce civil service overheads, postpone several infrastructure projects and crack down on tax evasion. However, the quick substitutions and removal of officials from government positions has slowed certain processes somewhat, and the rapid adjustments to tax policy have caused hesitation among some investors. Nevertheless, the government has shown itself to be open to dialogue and, as such, should be able to work towards a mutually beneficial framework, in keeping with the government’s focus on increasing return from the mining sector as an integral part of the economic growth of the country. 

Infrastructure and planned development

A key area of focus for the new government has been infrastructure development, with TZS 5.47 trillion – 25.4% of the total 2016/17 budget excluding public debt service – allocated for infrastructure projects, as highlighted by Deloitte’s 2016/17 budget analysis. Whilst the road network is generally considered adequate, there are plans underway for additional construction and rehabilitation, with TZS 2.18 trillion allocated.

Tanzania is also seeking to improve regional trade links through the establishment of the Dar es Salaam-Isaka-Kigali/Keza-Musongati (DIKKM) standard gauge railway line, which will link the country to Uganda, Rwanda, Burundi and the Democratic Republic of the Congo (DRC). Following a US$7.6 billion loan from China’s Export-Import (EXIM) Bank, the project is expected to be completed by March 2018.

There is also a further plan to build two more lines to connect Dar es Salaam to the mining regions in the northern and southern parts of the country. “The only challenge today is with the rail-line, which is not standard gauge and has bridges which cannot stand heavy loads,” said Ramadhani Saidi, general manager at EFFCO Solutions, a plant hire and distribution company providing heavy haulage, logistics and civil engineering works in the mining and road construction sectors.  “The government has an initiative to start building a standard gauge railway within the next year, and I expect the rail network to be working well within two or three years.”

Another area of focus is the port at Dar es Salaam. Despite previous development plans, Dar es Salaam’s port facilities have remained relatively basic, and traffic has been about 30% less through the second half of 2016. This can in part be attributed to the increased cost of moving containers out of Dar es Salaam’s port to neighboring countries, resulting in the diversion of international freight to countries such as Kenya, Mozambique and even South Africa. Furthermore, the construction of the port and industrial zone in Bagamoyo has come to a standstill. Improvements are however now being made to Dar es Salaam’s port.

Of even greater importance to mining operations is energy infrastructure, particularly in remote areas, and there is currently a drive to improve the distribution of electricity. Although access to electricity in rural Tanzania currently sits at only about 1% according to the Ministry of Energy and Minerals, this is seen as a key area for improvement, and the 2016-17 budget allocates TZS 1.31 trillion into the electrification of rural areas.

“The energy infrastructure [in Tanzania] is pretty similar in most Sub-Saharan African countries: a poorly managed grid, lacking in supply and reliability, serving only 15% to 30% of the population,” explained Erwin Spolders, CEO of Redavia, a rental solar power company offering containerized solar farms to remote industrial off-grid operations, particularly in mining. “In Tanzania, as in Kenya and Rwanda, there are now new types of energy provider popping up. Off-grid companies are scaling up, starting with solar lanterns and home-systems…”

Biomass-based fuel dominates the energy balance, accounting for more than 90% of primary energy supply, while commercial energy sources such as petroleum and electricity account for about 8% and 1.2%, respectively. Whilst coal, solar and wind currently account for less than 1% of energy used, the interest in renewables is increasing and becoming a more attractive alternative and increasingly cost competitive, also providing the possibility of a more stable long-term cost structure. “It is becoming more and more viable because energy storage is also becoming much more efficient,” said Hossein Sabet, regional director at SMEC. “Now, with technology improving, this area is becoming very promising, and I think changing the formula of energy will be one of Africa’s key new frontiers.”

There is also a plan to interconnect Ethiopia – Kenya – Tanzania and out through Zambia to the SADC market. Furthermore, the Tanzanian government also plans to commission a plant by 2025 to process up to 11.1 trillion cubic feet of gas.

Striking a balance

Since the decision to privatize its economy in the 1990s and the establishment of a more favourable environment with the 1998 mining policy and Mining Act, many Tanzanians have become increasingly dissatisfied with the government’s perceived generosity to foreign investors. In 1998, the focus was very much to encourage foreign investment, and the adoption of the 1998 Mining Act and policy reflected a commitment from the government to create a favourable investment environment for mining companies.

The new mining law of 2009, although retaining some incentives, sought to manage the perceived generosity and maximize in-country benefits. One approach was to increase royalty rates and remove generous allowances of exploration capital and development capital by ring-fencing projects, accelerating the date by which corporate tax would be payable by the companies.  “This was not happily received by mining companies, many of which are still not paying corporation tax,” explained Kibuta Ongwamuhana, managing partner at Ako Law and managing director at Clyde & Co. “So, another step was required – the government wanted to review the mining development agreements of existing operators, simply to see whether an amicable arrangement could be agreed. The ring-fencing, while effective in its own right, was not catching all the companies.”

Further adjustments included removing the 15% forward-carried loss and introducing government free carried interest for all new mining investments. The crackdown on taxes in particular has frustrated many established players, and the lack of predictability and consistency has led to caution among investors. “There had previously been a culture in which not paying taxes was acceptable to the government,” explained Leonard Chacha Kitoka, director at Innovex. “The government then seems to have forgotten that they themselves entertained this – instead of negotiating and discussing, particularly with big businesses, they took a more aggressive route. As a result, many of the big companies have become frustrated and some have even decided to invest in other countries instead of continuing to invest in Tanzania…It is absurd that a tax law is discussed and passed in June and immediately on July 1 it is implemented. This must change.”

The rapid changes seem to be attributable to a shift from a long-term to a short-term view, with a primary focus on immediate inflow, rather than on the long-term benefits that mining operations can bring to the country in line with its long-term economic development. “Quite frankly, Tanzania is going through a political phase where its economic management is somewhat confused,” said Charles Rwechungura, managing partner at CRB Africa Legal, citing uncertainty around the tax regime and regulatory approvals as the key challenges. “It seems the new President is more interested in collecting taxes than promoting and incentivizing industry; the balance is not quite right. We talk about encouraging investors to come, but in the same breath insist they must pay heavy taxes. The market is therefore a little jittery, and some producers are scaling down operations.”

Despite the uncertainty amongst investors, it is the government’s prerogative to capture revenue from the private sector and drive the county’s economic development. Cases such as President Magafuli’s recent call to cancel the prospecting license held by Pangea Minerals (a subsidiary of Acacia), overturning the decision to evict artisanal miners in the Shinyanga region, are unsettling for investors. However, evicting 5,000 local miners for a single license holder can be viewed as equally extreme, and more so when viewed through the lens of a government propagating local empowerment.

Nevertheless, it has been some time since a new large mine has opened in Tanzania, and it looks unlikely that many more will open over the next decade. “The problem at the moment is that there are no projects in the various stages leading up to the mine stage, so there is already a backlog,” explained Reyno Scheepers, director, president and CEO at Handeni Gold, a gold exploration company focused on Proterozoic gold deposits in Handeni, currently raising capital to drill its Njenve target.

It is hugely important for exploration companies to be supported as the necessary first step towards development and production. Equally problematic is that companies’ licenses come under threat once operations have been inactive for a year. If the investment community is not investing, the government needs to be more receptive to making adjustments to help companies survive. However, it is apparent that the government’s goals are progressive, and as such will be making adjustments to ensure the sustainable growth of the sector.

Competing within the continent

Tanzania is in competition with other African countries for investment and it will therefore be important to ensure that the scales do not tip too far towards the country’s immediate financial interest to the detriment of the industry. If investors do not find the country attractive, they will simply go elsewhere, and countries such as Kenya and Uganda are currently somewhat ahead in the incentives they offer.

In reference to taxes incurred by exploration companies potentially acting as a deterrent, Seth Dickinson, managing director at TanzOz Minerals, commented. Whilst we do not make any money, we are still taxed as if making a margin on our turnover. A $500,000 drilling bill can easily become close to $600,000. This increases the costs in Tanzania, because other countries do not apply goods and services taxes to exploration companies to the same extent, instead giving concessions to exploration companies, because they are building and developing for the future.”

Equally, companies are unable to offset money spent on unsuccessful licenses against those that go into production. “The ratio of failure to success for an exploration portfolio is as little as 20:1. The losses from the unsuccessful exploration licenses cannot be written off when the company is finally in production and has a positive cash flow,” added Dickinson.

TanzOz is focused on its mining license in the Geita district, currently completing a drilling program, which will be followed by a resource estimate, pre-feasability study, and IPO around April/May 2017. The expectation is to pour gold 12 months after the IPO.

Because exploration companies are involved in a high-risk business, investment can be sensitive to the companies’ use of funds. Mining companies can create significant wealth and benefits for communities, beyond initial short-term financial return through taxation, but the exploration stage must occur first.

“Mining is full of intrinsic risks which cannot be managed; however, governments globally can help by providing a stable platform for investment,” stated Matthew Yates, CEO at OreCorp. Referencing the importance of maintaining an open dialogue with the industry, Yates continued: “The intention of any government is to work with industry. There is no point in any government, in any country, bringing in legislation which will impede investment. When devising new legislation in any country, what the government begins with is often different from what it ends up with.”

 Whilst there is certainly a lot of work to be done, any change in regime, particularly in light of unfavourable market conditions, will bring a time of transition and a degree of uncertainty. The overall drive has been towards Tanzania’s progress and, while this may create a short period of uncertainty for investors, the end result should be one of mutual benefit.

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