No Longer a Sleeping Giant

Tanzania: No Longer a Sleeping Giant

Stark, Anna

Touted as one of the most amenable investment environments for mining on the African continent, the “sleeping giant” has recently benefited hugely from the boom in commodity prices, and consequent gold exploration discoveries on Tanzanian soil. Thus, despite its status as a predominantly agricultural nation, the performance of the Tanzanian mineral sector has continued to improve, with exports totaling just under $700 million in 2005 (3.5% of GDP). The government aims, as enshrined in the 1997 mineral sector policy, for a contribution of 10% by 2025. A socialist nation from 1967 through untill 1995, mining in Tanzania remained largely underdeveloped until 1997, when President Mcapa introduced a new initiative to encourage mining. Consequently, the Tanzanian mining industry is relatively young in terms of investment, causing investors to remark on the immaturity of the industry in terms of understanding and support. The upside of this, however, is that there remains huge untapped resource potential. Combined with a revised mining act, this renders Tanzania an attractive mining investment destination.

1998 marked the introduction of a revised mining act, closely modeled on Australian and North American mining legislation, creating an environment open and conducive to foreign investors. Salient features of the act include: the right to trade in mineral rights; improved security of tenure; clarity and tranparency; a non-discriminatory licensing procedure and environmental management legislation.

Stanley Robinson, president of Lakota Resources, a Canadian junior exploration company holding an interest in more than 1,300 km^sup 2^ of gold licenses, points out the generally progressive nature of the legislation. “The new mining act was developed in consultation with international mining companies and government bodies. It is very competitive and similar to some North American acts. It is clear cut from the perspective of a person applying for mineral rights and the steps required to retain those rights. On the government side, perhaps it is not so clear. The granting of exploration licenses, for example, can take longer than is stipulated in the act.” John Deane, president of Tanzanian Royalty Exploration Corp., another Canadian junior exploration company whose business model is revenue from royalties believes, however, that it is still a lot easier to obtain prospecting permits in Tanzania than a lot of other African countries. He claims that companies in Tanzania can usually acquire prospecting licenses within two to three months, in comparison with South Africa which can take six months or longer.

Don McLeod, managing director of Resolute Tanzania, the first company to establish itself in modern Tanzania with their Golden Pride project in 1997, and now one of Tanzania’s larger gold mining companies, notes the extent to which the government facilitated their entry to the market. However, he also draws attention to the changing face of the industry as it develops. “The industry is now entering a more mature phase meaning there are a larger number of companies present. Consequently, the development of legislation and the business environment has become more complex.” In particular, some members of the government and the general public hold the view that the government is not getting a fair deal. This relates predominantly to certain tax incentives which were offered to new investors by the previous government to boost the industry. As a result, the industry is currently engaged with the government in revising existing agreements for the benefits of both parties.

Communication with the government takes place through a special government negotiating committee and the Tanzanian Chamber of Mines. Giving the industry a common voice, the Chamber plays an important role as an intermediary in discussions between the government and the private sector. As vice-chairman of the Chamber, Gareth Taylor (also executive general manager of Barrick Gold Tanzania), highlights the challenges that the Chamber often faces in trying to overcome the misunderstandings and misconceptions that are held by the government and the general public, who don’t always appreciate the extent to which private mining companies have invested into Tanzanian health, infrastructure and education. With regards to the latter, the Chamber has been especially active in working with the private sector to develop better formal education for mining. This will in turn lead to the employment of Tanzanian people, benefiting the local economy and providing cost benefits for the companies concerned.

Speaking in February at the Mining Indaba in Capetown, President Kikwete highlighted the importance of mutual benefits: “Much of the dialogue with the mining companies has been to make sure that the exploitation of Tanzania’s mineral resources would benefit the investor, the government and the local communities.” Under the revised tax payment incentives cited at the Indaba, specific mining companies operating in Tanzania will pay the existing corporate tax of 30%. The determination of the time frame for payments will be a result of negotiation with these companies, and will relate to the assessed life span of a mine.

His speech brought to the public’s attention the agreements that had already been reached between the new government and Barrick Gold Tanzania and Resolute Tanzania in late August 2006 and late November 2006, respectively. Barrick was the first to agree with the government to remove the clause in its earlier contract that required the company to pay 15% additional capital allowance on unredeemed capital expenditure. In return, Barrick will be required to pay US$7 million per year until it starts making profits. Deo Mwanyika, executive general manager for Corporate and Legal Affairs for Barrick Tanzania, recounts that, “Barrick’s decision to revise its contractual regime with the government was made freely as a gesture of good corporate citizenship.” Resolute Tanzania agreed to revise certain tax concessions in recognition that its operations had now moved on to a more mature phase of operation. The company estimates the cost impact of this package to be about $10-$15 per ounce of production. Not-withstanding, McLeod is optimistic, con-cluding that, “The overall attitude of the government is very positive. They are seeking a sustainable and long-term beneficial environment. Tanzania is overcoming decades of socialism, you can’t change people’s perspectives overnight. President Kikwete has only been in power for just over a year.”

In terms of overall political stability, Tanzania is perceived as being a stable environment. In the words of William Kagaruki, country manager of IAMGold, “Tanzania is a very peaceful and friendly country and we are very proud of the fact that we are one of the few African countries that has not had a crisis.” Fritz Neeling, executive officer of Anglo-Gold Ashanti’s Geita mine is a little more cautious, drawing comparisons with other countries the company operates in, including Namibia and Ghana, emphasizing the higher level of risk in Tanzania. He links this to the economic immaturity of the country and some frustration and impatience amongst the people, but balances this risk against the expectation for higher economic returns.

On an infrastructural level, Tanzania remains largely underdeveloped. The country’s main port at Dar es Salaam is severely congested, a result of poor road and rail infrastructure which makes it difficult to move cargo out of the port. Insufficient infrastructure for the passage of large earthmoving equipment and machinery has led some mining investors to use the port at Mombasa in Kenya instead. Robinson believes that the country has a long way to go in terms of developing power supply and road infrastructure, but does not see the problems as being insurmountable. Speaking from the north of the country, Deane has seen recent improvements in roads in the region, and expects to see a tar road from Mwanza to Dar es Salaam within the next six months, creating new business opportunities.

Extending the discussion from transport to infrastructural support in general, Taylor uses a comparison with South Africa to reiterate the immaturity of the industry in Tanzania. “Investors have to import at huge cost but also huge opportunity. There is an impatience to develop the kind of support industry that can be found in South Africa within 10 years, however this can only be achieved by the government. If you compare Tanzania with Botswana which has a very small population and a very mature and well established and profitable mining industry, the proceeds from the government are much better felt by the people in that country. It takes a huge amount of time to invest in a mine, add to that the immaturity of the support industry, and just about everything you bring in comes at a premium meaning your payback period is longer.”

General sentiment appears to be that increased commitment from the government is required to overcome infrastructural obstacles and push development forward.

Dominating the industry, 48.2 metric tons of gold was produced in Tanzania in 2004 (more recently this figure has been boosted by several large gold mining projects which have come on stream), and the country continues to rank number three in gold production in Africa after South Africa and Ghana. The majority of gold mining takes place on the greenstone belts around Lake Victoria and in the Proterozoic rocks in the Southwest of the country. Consistent with the mining reform policy, between 1998 and 2003 five modern large scale gold mines were put into production and the number of prospecting licenses issued reached 2,360, compared to a total of 10 licenses in 1990. By 2006, this figure was at 3,570. As a comparison, 30 years prior to 1995 no viable mine was opened.

In February 1999, the Golden Pride mine, owned and operated by Resolute Tanzania, became the first modern, large scale gold mine in Tanzania. It has been producing approximately 200,000 oz of gold annually and the company plans to extend the project another six to eight years. Resolute Tanzania has a number of joint venture exploration projects underway and are gradually increasing their reserves, notably in the Nyakafuru region.

Representing the largest gold producer in Tanzania, Taylor emphasizes the diversity of opportunity for minerals in Tanzania. “The minerals are here in reasonable quantities, there are some very promising prospective areas and pretty good ore bodies. We probably spend between $6-$8 million per year in exploration. From a Barrick perspective we are focusing here, and if we grow, we’ll grow here.” In addition to a number of greenfield projects, Barrick currently has three gold mines in production.

Their Bulyanhulu mine began production in 2001, on one of the largest gold reserves in East Africa. At the end of 2005, the mine had 10.7 million oz of proven and probable gold reserves. In 2005, the mine produced 311,000 oz of gold at a total cash cost of $358 per oz. Barrick’s North Mara property, consisting of three open-pit deposits, produced 250,000 oz in 2005. More recently, the company’s small but highly profitable Tulawaka mine began production in the first quarter of 2005. A 70:30 joint venture between Rangea Goldfields Inc., a wholly-owned subsidiary of Barrick and Northern Mining Explorations, Barrick’s share of production was 87,000 ounces of gold at a total cash cost of $253 per oz in 2005. While the mine life is limited (it has only two years remaining), it is hoped that it can be extended with a small underground operation. Construction of a new gold project, Buzwagi Gold mine, has just been approved, and the mine is expected to start production within the next two years. It will add another 200,000 oz to the current 1.8 million oz that the sector is currently producing.

Production from these properties together with anticipated production from the company’s Kabanga nickel project (currently spending $95 million on pre-feasibility) will give Barrick 70% of Tanzania’s total current mineral production.

In production under an AngloGold Ashanti joint venture agreement since 2000, and wholly owned by the merged AngloGold Ashanti since 2004, Tanzania’s Geita mine was once the largest gold producer in East Africa and constitutes one of the most extensive gold mine developments in the world.

With a total of 2,256 employees, the mine had an annual production in 2004 of 692,000 oz at a total cost of $250 per ounce. Gold production is set to decline, however, to between 562,000 and 585,000 oz in 2006, at an expected total cash cost of between $297 and $309 per oz. A change from contract to owner mining was implemented by the company in July 2005 to address spiraling contractor mining costs. The legacy of decades of shelter provided by insular government policies, Tanzania offers a wealth of opportunity as the country crawls out of its socialist shell. This entails drawbacks in the underdeveloped infrastructure and administrative functions that facilitate ease of business. However, recognizing this, the government is allocating significant expenditure to addressing these shortcomings.

The 1997 mineral sector policy and 1998 Mining Act have greatly facilitated foreign mining investment and there are promising signs that the negative sentiment surrounding tax incentives is being overcome following positive negotiated outcomes between the government and Barrick Gold Tanzania and Resolute Tanzania.

Education and skills development are seen as the most important contribution that foreign mining companies can make to advancing the Tanzanian minerals sector and the economy as a whole.

However, for the staggering pace of mining development to continue, investment into road, rail and energy infrastructure is imperative.

Copyright Mining Media, Inc. May 2007

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