Mining Indaba: Tanzania’s positioning in the African landscape
It is that time of the year where all mining stakeholders congregate for the Mining Indaba, being held in the beautiful city of Cape Town. This year’s theme will be ‘Investing in African Mining’. It will be interesting for myself and others this week to see what African governments and mining companies have in store, and what their outlook is for the industry. My outlook for Tanzania follows:
I was recently asked in a pan-African meeting to describe the mining environment in Tanzania. I was so bullish about the country, so much that one participant thought Tanzania sounded too good to be true. I think in a lot of ways Tanzania is that good and has that much potential. Think of the most politically stable country in region, with more natural resources perhaps than the rest of the East African region put together. Think of gold, think of the world’s largest kimberlite pipe at Mwadui where diamonds are being mined economically. Think of coal, uranium and iron potential.
The last few years have seen a mining resurgence in the country and the wider African continent. Nine years ago, an ounce of gold was sold at just over $1,000. That price is close to tripling as it currently stands at over $2,700. Whilst the price of nickel peaked in 2022 and tapered subsequently, the demand for this critical mineral is projected to increase eventually. There has also been significant fluctuations in the copper market. However, its price, at roughly $4.4 per pound is more than double what it used to be nine years ago. The global outlook for cobalt, nickel, graphite and other critical minerals appears to be positive given the rapidly acceleration of the semi-conductor industry.
The global struggle for technological supremacy is inevitably the struggle for critical minerals. According to the minerals minister, Anthony Mavunde, the government is working on a special strategic minerals framework. There are therefore some geostrategic advantages that the country can leverage from.
The only notable exception commodity facing unique challenges, is the diamond, which has to do with the reality of lab-grown diamonds (LGDs). But in a nutshell, the forecasted demand for both traditional mining exports (gold) and the critical minerals such as cobalt, nickel, graphite and neodymium means that the optimism surrounding the mining industry is not unfounded.
All stories have a flip side, and it is however worth noting that many mining projects are somewhere between a successful exploration and a final investment decision. This means that whilst the projects have generated a lot of optimism all around, many of these projects have not fully actualised. You only need to visit a mine to understand that mining projects are extremely capital intensive. Securing such capital often requires grouping a number of financiers to put together both debt and equity in a manner that render such projects viable. The hurdles to such financing are well known. Even none tax technicians now understand what Section 56 - ‘change of control’ mean. Finalizing framework agreements and the necessary details for execution of such projects as well as agreeing financial models has also been a hurdle for some mining projects. Recent changes in the law (particularly in Section 56) means that there is an understanding from the government of some of these hurdles.
The largest hurdle seems to me the VAT refund for mining companies that are in the development stage, let alone those that are operational. The narrow interpretation of the VAT Act to exclude mines in development just throws a spanner in the works for project economics. Simply put, without the certainty of VAT refunds, mining project costs get inflated by 18 percent, which is often the difference between a viable mine and non-viable one. It is also short-termist to insist on tying up valuable capital through unrefunded VAT claims. The permanence of mining projects means that taxes, not just VAT, will inevitably be collected if these mining projects take-off. Policy makers would be wise to address this as a matter of urgency.
What the oil and gas bonanza, that happened over a decade ago, showed us is that it is possible for a country (and industry) to be in a perpetual brink of transformation, and yet never take off. The pace of global technology, energy dynamics and geopolitical developments is so rapid. One would be unwise to assume that this interest in Tanzanian mining will never wane. Tanzania’s plan is to raise the contribution of the mining industry to above 10 percent is not only achievable, but it is achievable in the very short term.
It is not difficult to understand Tanzania’s mining potential. What may be challenging is doing the necessary work to translate that potential into actual economic dynamism that will propel the contribution of the sector to over 15 percent of GDP.
