Global mining sector continues to tread cautiously

Investors remained unimpressed with the mining sector in 2018 with market valuations for the world’s 40 largest mining companies falling 18%, according to PwC’s recently released Mine 2019 report, and this despite the sector exhibiting steady growth.

On the other hand, Government take increased in 2018; in particular, the share of value distributed by the world’s 40 largest mining companies to governments in the form of direct taxes and royalties increased from 19% to 21%. This share was not dissimilar to the share distributed to shareholders (25%), employees (22%) or spent on capital expenditure (23%). The question of what is a “fair share” is a vexed one, but for 2018 at least and based on these numbers it appears the global average was a 56%:44% split respectively between the shareholders’ share of value and Government’s.

Pertinent to Tanzania given its significant gold sector is reference in the report to the renewed round of consolidation in the gold sector.  It explains that this consolidation is driven by a shrinking pipeline of projects, fewer new high-grade discoveries and a lack of funding for junior developments. Gold deals increased from 8% of total Top 40 deal value in 2017 to 25% in 2018, and this year are tracking at close to 95% of deals as at the end of April. 

Gold, together with copper, were the dominant sectors for capital expenditure, and approximately half (48%) of capital expenditure was for ongoing projects. Although capital expenditure showed a rise (up 13%), this was from historically low levels.  The overall picture on capital expenditure is that miners continue to proceed cautiously.

Tanzania’s Vision 2025 sets out an ambition for mining to contribute 10% of GDP – but if this ambition is to be achieved, there is a need for a number of significant new projects.  Interestingly June 2019 marks the twenty year anniversary of the signature date of development agreements and issue of special mining licences (“SMLs”) for Bulyanhulu, North Mara and Geita.  Later years saw SMLs issued for Tulawaka and Buzwagi – and then May 2017 saw the opening of Shanta Gold’s medium scale New Luika mine.  Major production for 2018 based on public financial statements was Geita 564,000 oz, Acacia 521,980 oz (of which North Mara contributed 336,055 oz) and New Luika 81,872 oz.

Given that no new large scale mine has been developed for over a decade, it was great to read a recent interview with the Minister for Minerals where he mentioned the expected issue of three SMLs.  Of course, once these licences are issued, funding will have to be sought to develop these mines and it is to be hoped that Government will be receptive to any genuine regulatory or tax concerns that might prove a stumbling block when seeking money on the capital markets.

One major current concern for the sector is the status of VAT refunds – and some insight on this front can be gained from a perusal of the publicly available accounts of listed entities. For example, the 2018 accounts on Shanta Gold’s website reveal a USD 21.8m VAT receivable at the end of December 2018 (up from USD 14.7m at December 2017) – and the significance of this becomes clear when set against the company’s annual turnover (USD 103.8m), profit before tax (USD 7.9m) and net assets (USD 105.1m).  It is to be hoped that this year’s budget will see some clear commitment given to clear the backlog of VAT refunds – and also to institute processes to ensure expedited refunds going forward.

By David Tarimo Country Senior Partner - PwC Tanzania

The views expressed do not necessarily represent those of PwC. For PwC updates on Tax and other matters do follow@pwc_tz or visit our website www.pwc.co.tz 

Article first published in The Citizen pg.6 (10.06.2019).