The politics of mining

Materials World magazine
,
1 Mar 2018

Michael Schwartz examines the ins and outs of the mining sector in Tanzania, and political efforts to make it a fundamental part of the country’s financial backbone.

To describe Tanzania’s mineral resources as plentiful and diverse would be an understatement. The country has emerged as the third most productive gold producer in Africa, after South Africa and Ghana, mining 44Moz of gold in 2016. Indeed, the sheer variety of minerals extracted in Tanzania is summarised in a list from the government website, TanzaniaInvest, and includes gold, iron ore, nickel, copper, cobalt and silver. Industrial minerals such as diamonds, tanzanite, rubies, garnet, limestone, soda ash, gypsum, salt, phosphate, gravel, sand, dimension stones and, recently, graphite, and fuel minerals, for example coal and uranium, are also on the list.

While Tanzania’s Development Vision 2025 proposed the mining sector contributing 10% to GDP by that year, a more focused five-year development plan launched in July 2016, after a decision in 2015 to integrate the then-current five-year plan with the National Growth and Poverty Reduction Strategy.

A rapid increase in the value of mining and quarrying from US$598m in 2009 to US$1.78bln in 2014 gave warning to Tanzania’s competitors that a significant rival was emerging. Further contributing to Tanzania’s importance has been the decline in output from South African mines, where resources have become harder to extract because operations have had to dig deeper or resources have been exhausted. The recent review of South African mining in Materials World (January 2018) underlines the country’s difficulties. In fact, some of Tanzania’s gold is exported to South Africa.

Imminent changes

However, while Tanzania has attained a key status in African mining, there are challenges. Recent legislation, The Natural Wealth and Resources (Permanent Sovereignty) Act, 2017, has introduced three mining laws that are set to impact the local industry.

The government, headed by President John Magufuli, can now renegotiate or revoke existing mining and energy contracts, own a stake of at least 16% in mining projects and raise royalties from 4% to 6%. The rationale is that the reforms will increase transparency and help Tanzania benefit from its resources.

Analysis of the plans has been undertaken by DaMina Advisors, a firm of consultants that looks at risk factors, due diligence and mergers and acquisitions, particularly in Africa and Asia. The fundamental view of DaMina is what it describes as ‘the world’s last remaining frontier capital markets in Africa, Latin America, the Caribbean and Asia’ are fast becoming synchronised in terms of their rates of growth.

DaMina has recently been discussing whether the changes are a method of gradually nationalising Tanzania’s mines. Sebastian Spio-Garbrah, DaMina’s Chief Frontier Markets Analyst, stated, ‘Tanzania is edging closer and closer to a total nationalisation of the country’s mining sector.’ What is more, reports say that Tanzanian domestic law will now be supreme over any international dispute or arbitration decision.

Writing in the Mining Review Africa, Spio-Garbrah explains, ‘These particular provisions essentially give the government complete autonomy to dictate the current tone of ongoing discussions and re-negotiations they are conducting with mining companies, regardless of any interference by an international body decision. It also allows the government to exercise total discretion as to whether it enforces foreign arbitration judgments locally or not.’

Retroactive laws also allow renegotiation of contracts – on the Tanzanian Government’s terms. As Spio-Garbrah makes clear, complete or partial nationalisation could ultimately ensue.

One aspect that must be factored in, is the role of Chinese and Russian companies. It may well be the case that the Tanzania administration is not willing to change its contracts with such enterprises. Other foreign companies may, therefore, choose to transfer equity to Chinese and Russian enterprises. 

The Acacia case

In addition, another challenge has materialised recently – an export ban imposed on the concentrate mined by London Stock Exchange-listed Acacia Mining, which has three producing mines, all located in northwest Tanzania. The claim is that Acacia was under-reporting output at its three mines.

This ban has had several consequences, notably because of the cash outflows required to keep the mine working. These outflows were costing Acacia roughly US$1m daily. Financial factors have also arisen. First, there has been a collapse in Acacia Mining’s market value to the tune of two-thirds of that value. Secondly, the company has been hit by a backdated demand for unpaid tax running to US$190bln – far more than Acacia Mining’s annual revenue.

An immediate consequence is that Acacia Mining’s CEO Brad Gordon and CFO Andrew Wray have both resigned. Barrick Gold, a 64% shareholder in Acacia, is now talking with the Tanzanian Government to try to come to agreement between all parties.

An initial settlement means that Barrick Gold will provide a higher share of its profits, to the tune of US$300m. The problems are that the export ban remains in place and investors are left trying to establish clarity. Acacia was approached for comment, but did not respond before deadline.

Fuelling the future

As mentioned earlier, coal is a key fuel mineral in Tanzania, with 1.5Bnt in reserve having been identified. In some areas, such as Mbeya in the south west of the country, coal is not intensely mined. This could be set to change as the London AIM-listed Kibo Mining is, at the time of writing, negotiating with the Tanzania Ministry for Energy and the Tanzania Electric Supply Company (TANESCO) on the Mbeya coal project.

This comprises 22 tenements – that is, licences, licence offers, and licence applications – 10 of which are contained within the central block of the project, totalling 2,000km2. The other tenements are spread north-west and south-east of the central block, making an area of 2,600km2. Access is available via variably conditioned roads.

Mbeya is, in essence, a twin-track development – a mine working the existing coal resource and a 250–300MW mouth-of-mine thermal power plant, referred as the Mbeya Coal to Power Project (MCPP). Tanzania’s future power needs will determine the viability of the project.

At present, Tanzania generates less than half the 2,000MW it requires every year. The country is heavily dependent on biomass – wood and charcoal being the key sources for the 85–90% who do not have access to electricity. Regarding electricity, current shortfalls are met from Uganda (8MW/y) and Zambia (5MW/y).

As the International Monetary Fund estimates, Tanzania’s annual growth rate at 7%, it is clear that projects such as MCPP are vital to sustain the country’s development. Kibo has therefore become part of the government’s National Energy Strategy, and also set up its executive management team to steer through MCPP’s feasibility stages.

At the time of writing, an MoU, involving Kibo, TANESCO and the Mining Ministry, is set to be signed. A full production start date of early 2021 has been targeted. Louis Coetzee, CEO of Kibo Mining, has stated, ‘Benefiting from strong regional and local support, the MCPP is of key national importance, aiming to alleviate the acute power deficiency in Tanzania. As such, signing the (related) power purchase agreement will be a pivotal moment for Kibo and the development of the MCPP.’

A sole player

Tanzania hosts just one major diamond operation, the 146ha Mwadui kimberlite pipe operation, which is 75% owned by Petra Diamonds (the government owns the remainder). A mark of its importance and extent lies in the fact that it is the world’s largest economic kimberlite to have seen continuous mining.

Petra Diamonds stresses certain advantages that the Mwadui mine enjoys. Mwadui has been operating since 1940, the average depth for extraction being 55m, while the deepest level to which the mine has to descend is just 95m, due to the sheer size of the deposit. If required, Petra Diamonds can go well below the 95m level, as the resource descends to 580m.

Petra Diamonds has also announced ambitious plans to increase production total of 225,000 carats per year in the financial year 2017 to 337,500 carats per year by 2019. This could alter the life-of-mine, which is currently set for 2033, as the Mwadui kimberlite hosts 39 million carats. Furthermore, the current run-of-mine of 4.6Mt will be ramped up to 5Mt by 2019, accompanied by present grades of 6.75 carats/t becoming 6.5-7 carats/t.

Changes are undoubtedly afoot in Tanzania. It remains to be seen if a still-young mining country can maintain the leading position it has fostered to date.