Tanzanian Government Increases Mining Royalties, Takes 16% Stake in Projects and Reviews Mining Agreements

By Owen Murphy, Head of Africa Desk, BDO South Africa

Tanzanian President John Magufuli has dramatically overhauled the country’s existing mining legislation, affecting existing and future investors in the country’s mining sector. The changes in the laws were passed by parliament in the week ending 7 July 2017 and is in most cases has immediate effect.

The new royalty rates announced are for two broad categories of minerals, for gemstones and diamonds has increased from 5% to 6% and the rate for metallic minerals such as copper, gold, silver, and platinum group minerals has increased from 4% to 6%.

An “inspection fee” of 1% of the value of all mineral exports has also been imposed, which means that the effective royalty rate for gold, for example, has increased from 4% to 7%.

The laws also give the government the right to renegotiate existing stability agreements and to disregard clauses to submit disputes emanating from these agreements to international arbitration. The laws also provide that the income tax act overrides all other laws, such as the Mining Act which provides for fiscal stability clauses.

The laws also enable the government to convert future “tax expenditures” derived from stability agreements into equity holdings of a mining operation. It also provides for stringent new measures relating to training of local staff, local content, insurance cover, strict liability for environmental damage and provision for social responsibility expenditure.

The legislation is couched in broad language and makes provision for the exercise of wide discretionary powers in many cases and it also empowers the Minister of Mines to issue regulations for certain laws to be implemented.

The introduction of a free carried interest for the government is not unusual in African mining jurisdictions and as an example both the Guinea and Mali governments have obtained a free carried interest of between 15% and 20% in new mining projects, whilst the DRC currently provides for a 5% interest and Ghana a 10% interest in their mining codes. The difference here is the speed at which the changes have been introduced in Tanzania and the element of retrospectivity that has accompanied these changes. Investor confidence in the sector has certainly been shaken by the dramatic change in the mining law landscape of Tanzania and the changes have resulted in increasing the costs of conducting mining operations. The wide ministerial discretion granted as well as the general nature of the language which has been used in the legislation will lead to uncertainty as to how the legislation will be interpreted and implemented going forward. Companies with substantial Tanzanian mining interests have seen their share prices fall in light of the expected increase in royalties and the moves to increase government’s revenues from the industry. In addition, the shares of some of the listed companies with significant exposure to the mining sector in Tanzania have been suspended in light of the uncertainty created. The full effects of these changes have yet to be determined and many planned projects are no doubt being re-evaluated.

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