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Glimmer of hope for mining operations in Tanzania - 2 November 2017

New Tanzanian mining law

In July this year, the Tanzanian government passed new mining legislation aimed at safeguarding the nation against international exploitation of its mineral resources. These amendments to the Mining Act 2010 have resulted in the government being entitled to own (at the very least) a stake in mining projects operating in the country, as well as expansive powers to renegotiate existing mining contracts. Under the new laws, mining operators have also been denied the right to seek international arbitration of any dispute involving the Tanzanian government. In addition, the royalty taxation on gold, copper, silver and platinum exports has been increased from four percent to six percent.

Announcement of the passing of the new legislation sent Australian Stock Exchange listed explorers into trading halts as the implications for their mining operations were digested. Many commentators have spelt this as the end of mining foreign investment in Tanzania.

Partner, Joshua Hunt and Law Graduate, Emma Scotney take stock of recent legislative developments and their implications for Australian mining companies with projects in Tanzania.

A new deal

Tanzania’s largest gold miner, Acacia Mining plc (Acacia), was hit hard by the news of the new legislation passing, sending its share price tumbling. To add to the company’s woes, the Tanzanian government also slapped Acacia with a US$190 billion fine for allegedly operating illegally, by failing to fully disclose its earnings.

Independently operated Acacia is 64 percent owned by Toronto stock exchange listed gold miner, Barrick Gold Corporation (Barrick). This month, it was announced that Barrick and the Tanzanian government had brokered an agreement on a framework for a new partnership involving Acacia. The arrangement will see a sharing of economic benefits on a 50/50 basis between Acacia and the Tanzanian government, delivered in the form of royalties, taxes and a 16 percent free carried interest in the Tanzanian operations. Both parties have also agreed to form a working group that will focus on the resolution of outstanding tax claims. As a gesture of good faith, Acacia is obliged to make a payment of US$300 million to the government of Tanzania, with the details of these payment arrangements to be determined by the working group.

Numerous small cap Australian companies operating in Tanzania will be watching this deal with interest. Acacia has stated that while Barrick has agreed to the payment, they have not, and indeed, do not have the cash on hand to make such a payment at this stage. In our view, whether or not the deal actually gets signed off is questionable.

The concessions made by Barrick (on Acacia’s behalf) have also been criticised widely across the industry, with both investors and smaller resource companies stating that the deal sets a dangerous precedent, one which most companies could not commercially enter into.

Implications

The President of Tanzania has called the Acacia deal a “modern, 21st century partnership” and that the framework agreement would serve as a model for other mining companies operating in the country. This is obviously concerning for other operators in Tanzania. Most of these operators do not have the resources of Acacia, and would not be able to economically develop their projects if subject to the same or similar agreement.

A major concern in our view is that this action by Tanzania, and the subsequent deal made with Barrick, comes at a time when there are shoots of rising resource nationalism throughout the world.

Governments are seeking greater financial shares of existing resource projects and the Tanzanian/Barrick experience will only embolden other countries to take a similar approach. It may be the case that companies and shareholders should get used to host countries making fresh demands of project operators.

On a positive note, while uncertainty remains for many exploration companies doing business in Tanzania, the recent Barrick dealings demonstrate the possibility of negotiating with the government to reach in principle agreements. While the finer details of the deal involving Acacia is yet to play out, the hope of operating profitable mining operations in Tanzania may remain - in spite of such far- reaching legislative change.

For more information or discussion, please contact HopgoodGanim Lawyers’ Partner, Josh Hunt from our Resources and Energy team.


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