Tanzania's mining audit indicates president encouraging creeping expropriation of large-scale gold miners by creating onerous operating environment

Two audit committees were appointed by the government on 28 March and 10 April to examine mineral concentrates being exported for processing by Acacia Mining, a subsidiary of Canadian-owned Barrick Gold, which is Tanzania's largest gold miner (see Tanzania: 5 April 2017: Audit of Tanzania's mining contracts indicates closure of tax exemptions and pressure for domestic primary commodity processing). These concentrates are pre-sold and the contents sampled by the Tanzania Minerals Audit Agency (TMAA) to determine the royalty payout, while royalties for copper, gold, and silver are paid by the mining operator. The first committee sampled concentrates from 277 containers to determine their mineral composition and scrutinised the TMAA's monitoring procedures, and it has published its report. The second committee examined the fiscal and legal framework governing the mining sector, but has yet to report its findings and recommendations.

Audit uncertainty

The audit committee's report alleged that Acacia understated the value of gold and copper concentrates being exported from gold mines in Bulyanhulu and Buzwagi. IHS Markit assesses that the stated figures are unreliable. According to figures viewed in the report by IHS Markit sources, the committee estimated that, on the basis of 3,600 containers being exported each year, Acacia produced 3.5 million ounces of gold from concentrates in 2016. This is very high compared with Acacia's own figures for the same year, which report total production of just over 800,000 ounces (including exported concentrates and bullion produced in Tanzania). Highlighting this perceived discrepancy in figures, the committee also alleged that at least four containers were overloaded by up to 3.1 megatonnes (MT), and claimed that monitoring systems installed at ports were unable to differentiate the contents of the concentrates. However, the report did not specify how many of the 277 containers held for inspection were sampled, and there are a number of inconsistencies in the use of volumes and averages that lead to a perception of inaccuracies in how the audit committee's figures have been extrapolated.

Magufuli's response

President Magufuli responded to the report by dismissing Minister of Energy and Minerals Sospeter Muhongo, in addition to the ministry's permanent secretary and the CEO of the TMAA. The president also enacted the following recommendations:

• Retain a ban on export of concentrates until corrected royalties due are paid.
• Facilitate construction of smelters in the country to reduce the need for exports.
• TMAA to seal all containers immediately after sampling and invest in upgrades to screening technology.
• Mandate spot checks on exports and creation of a task force within the security service responsible for continuously monitoring mineral exports.

Acacia's response

Acacia has yet to be provided with a copy of the report and details of the audit committee's sampling protocol, and the mining operator stated on 24 May that it fully declares "everything of commercial value" produced and pays all appropriate royalties and taxes. A further statement on 26 May suggested that the actual gold content of its concentrate is one-tenth that specified in the committee's report, and that the export ban amounts to an average daily revenue loss of more than USD1 million. Consequently, on 29 May, Acacia reported that it would close Bulyanhulu gold mine in Shinyanga region in order to minimise losses.

Outlook and implications

Since entering office in November 2015, President Magufuli has focused the country's economic policy on aggressively targeting foreign mining operators perceived to be offering Tanzania an "unfair deal". This has included the strengthening of tax compliance, calls for stricter local content policy, and demands on the private sector to take responsibility for improving domestic primary commodity processing (see Tanzania: 5 April 2017: Audit of Tanzania's mining contracts indicates closure of tax exemptions and pressure for domestic primary commodity processing). The targeting of Acacia is unprecedented, but is likely intended to create an onerous operating environment that results in the transfer of assets to the government. This escalation in Magufuli's strategy has occurred because he is now strongly supported by the ruling Revolution Party's (Chama Cha Mapinduzi: CCM) 'old guard', which comprises former president (1995–2005) and current party chairman Benjamin Mkapa, in addition to the CCM’s secretary-general, Abdulrahman Kinana.

The most likely successors to Muhongo are current Deputy Minister of Energy and Minerals Medard Kalemani and current Deputy Minister for Health Hasmi Kigwangalla. Both appointments would almost certainly result in a case-by-case renegotiation of mineral development agreements (MDAs) signed with large-scale mining operators with an aggregate capital expenditure in excess of USD100 million within designated special mining areas. Terms likely to be introduced include an increase in state participation and more stringent local employment quotas, in addition to the streamlining of royalty, duty, and other tax rates across operators. Kigwangalla's appointment also increases the likelihood that the Acacia audit extends to Australian-owned Golden Pride's gold mine, against which he has led community protests.

This review will extend to production sharing agreements (PSAs) for the Songa Songa and Mnazi Bay gas fields, focusing on increasing Tanzania Petroleum Development Corporation's (TPDC) take-off rights to at least 20%, renegotiating profit-sharing ratios, transferring ownership of moveable assets to the government once operations have finished, and – in the case of Songa Songa – resuming negotiations to set prices in gas supply agreements. Operators at Songa Songa will also face pressure to unbundle upstream and mid-stream operations, with the government seeking to bring infrastructure involved in the latter back into state ownership. Deep-sea concessions are unlikely to be affected, while MDA and PSA reviews will progress slowly due to a lack of legal expertise. For this reason, the project law and terms sheet for financing and construction of a USD30-billion liquefied natural gas (LNG) export terminal proposed on 19 April are unlikely to be finalised until next year.

Finally, the customs agencies are poorly resourced and trained, delaying creation of a new minerals audit agency. The mining export ban is, therefore, unlikely to be reconsidered before 2018. This will result in government revenue shortfalls, and pressure to make cost savings during the 2017/18 budget review session elsewhere, while increasing the government's tendency to under-utilise overly ambitious budget targets. The most likely target for review are power purchasing agreements – especially the renegotiation of capacity charges – held by independent power producers, including United Kingdom- and Norway-owned Songas, Canadian-owned Pan Africa Energy, and UK-owned Aggreko (see Tanzania: 24 November 2016: Tanzanian utility's indebtedness motivates proposed tariff increase and indicates non-payment, contract alteration risks to power purchasing agreements).