Mining investment in Tanzania

The 6th Mining and Investment Conference began yesterday with the theme: Mineral Value Addition for Socio-Economic Development, and is said to have brought about 1,500 delegates to Dar es Salaam from across the globe. The mining sector has been instrumental not only in generating foreign currency but has also increasingly become a significant contributor to the country’s GDP. The sector’s contribution to GDP is currently at  9.4% which is a mere 0.6% short of the 10% target that it should reach by 2025 as set by the Government. 

The conference will discuss among other matters, the investment opportunities and the regulatory framework around mineral value addition, financing and investing in mining and critical minerals exploration and beneficiation. There are a number of projects underway in graphite, nickel, mineral sands, gold and rare earths in which the Government signed framework agreements with investors a couple of years ago but unfortunately most of them have not yet progressed to development. In addition, these projects are a result of exploration work carried out many years ago as there has been little exploration activity in recent years. As we reflect on the theme for this year’s conference, it is important for the country to address the inhibitors to exploration and development as they precede beneficiation/ value addition.

According to the Bank of Tanzania, in the year to September 2024, gold accounted for 47.8% of the total non-traditional exports, with a 7% increase in the export value year on year. In the quarter ending September 2024, the three major mines - North Mara, Bulyanhulu and Geita  produced a total of 276 thousand ounces (koz) (106koz, 52koz and 118koz respectively), being slightly less compared to September 2023 when they produced a total of 278koz. This attests the fact that the increase in the export value is mainly driven by the record increase in the gold price rather than increased production. Therefore, even though there is strong pull towards critical minerals, investment in gold is equally critical, at least in the short to medium term.

Needless to say, mining is a gamble, yet with significant capital requirements, at all stages of the project - exploration, development and production. Similar to any game of chance, the level of exploration activity is directly linked to chances of viable mines. However, the tax legislation contemplates that no relief is available for costs incurred in exploration between different mining licences. To illustrate, where an investor has 10 exploration licences and only one licence area proves to be viable, the investor will not be allowed to claim relief for costs incurred in the other 9 areas against the income from the one viable area even if geographically they are next to each other and forms one economic activity. A comparison can be drawn with the pharmaceutical industry, where to introduce a new drug, R&D has to be conducted for various drugs to assess the commercial viability. However, there are no restrictions on claiming relief for costs incurred in exploring the non-viable drugs against income from the commercial drug. These restrictions act as a disincentive to exploration as an investor would rather restrict exploration to a few licence areas and take the lesser hit (e.g. exploring in 3 areas rather than 10 in the case of my example above).

For projects in exploration and development, the funding options include: inviting another investor to share the risk (farming in), a disposal to a bigger investor with the cash required to take the project further and issuance of shares listed in large stock markets (for projects that are advanced and close to development). Unfortunately as currently worded, the legislation contemplates that tax has to be paid on the capital at the time of raising such capital, to the extent the shares issued result in a more than 50% change in the underlying ownership of the Tanzanian entity holding the asset, and in case of a farm-in/ disposal, no relief is obtained for costs incurred in the asset at the time of transfer. An additional complication for the farm-in is that where the agreement requires the incoming investor to commit to cover the existing investor’s share of future costs, the present value of such sums should also be brought to tax as part of the sale consideration. Given the nature of the industry and uncertainties surrounding mining projects to progress to development, it may not be practical to establish such value, which can also be highly subjective. This also begs the question whether the tax accounted for at the time of the transaction would be refunded, in the event the project does not progress to require the future costs envisaged at the time of the transaction. It is therefore evident that there is a need to relook at the fiscal policy to improve the investment climate in the sector for the country to realise economic development through mineral value addition. With the massive potential in mining investment opportunities in Tanzania that remains unrealised, a fair exchange is no robbery!