Tanzania good as gold, despite tax panic

[miningmx.com] — WHATEVER South America can do, can Africa do better? When it comes to political risk, then yes. Investors, still fresh from muttering about the prospect of a nationalist president in Peru, are now having to contemplate a so-called super profit tax in Tanzania.

At the same time, the central committee of South Africa’s National Union of Mineworkers (Num) has backed the Freedom Charter’s clause on nationalisation. This states the country’s mineral wealth ought to be transferred to the people “as a whole’ (while also saying workers stood to lose if talk of nationalisation deterred investors).

It’s not terribly difficult to figure part of the Num’s motives so close to wage negotiations, but the situation in Tanzania is more puzzling. Certainly, the reaction to the proposed imposition of a super tax in Tanzania has verged on excessive. Shares in African Barrick, demerged from Barrick Gold in 2010, declined nearly 9% on Wednesday. Shares in AngloGold Ashanti – which operates the Geita mine in Tanzania (equal to 8% of total production) – were also lower, although most gold shares were under pressure amid general sector weakness.

African Barrick has generated positive cash flow every quarter since it listed and ended the year with some $434m in cash reserves, according to a report by RBC Capital Markets dated June 8. To say this cash flow is a function of super profit performance on a par with the 80% operating margins enjoyed by some iron ore and coal producers – and which have subsequently attracted a 30% profit-based tax from the Australian government – is pushing credence, however.

Quite frankly, gold companies haven’t been producing super profits for a while, which was why Australia specifically excluded the sector from its tax amendments.

Yet if you’re a Tanzanian official interested in participating more in the commodity boom, your eye can’t but be drawn to the type of statistic Bloomberg News identified which was that gold exports from Tanzania increased threefold to $1.5bn in the past five years, or 7% of gross domestic product (GDP), while annual government revenue from gold sales remained at $100m, or 0.5% of GDP.

The problem is, however, that gold sales are a revenue figure while government revenue is actually a share of gold company profits. So while the gold price received by gold mining companies has improved in line with the advance in the gold price – $1140per ounce end-2010 from $420/oz at the beginning of 2005 – profits have not kept the same trailblazing pace, largely due to cost pressures.

In any event, the imminence of a super profit or windfall tax in Tanzania seems premature. The notion of such a tax was identified as part of a five-year plan by the country’s development commission on June 7, but it was conspicuously absent in the national budget speech a day later. The proposal faces opposition party criticism in Tanzania, but it also runs the risk of unhinging regulatory confidence as both African Barrick and AngloGold Ashanti have stabilisation agreements attached to their operations which lock in tax rates.

Stabilisation agreements have been challenged before. One thinks back to Zambia’s attempt to participate more in the copper price improvement in 2007. It overturned First Quantum Mineral’s stabilisation agreement at its Kansanshi copper mine, which had locked in a 0.6% royalty for 15 years in favour of a new 3% royalty.

Michael Sata, a presidential candidate from the Patriotic Front, commented in September that lower royalties should be applied because the higher royalty had only alienated investors. The proposed changes had First Quantum considering legal action and proved messy. For a country which like Tanzania is keen to attract more investment, it seems an unwise move, one assumes.

Peru is an unknown prospect, South Africa continues to bewilder with its fascination with nationalisation, but Tanzania represents a more reliable district, analysts think. “Whilst we would not rule out higher taxes in the future, we do not see the risk to ABG [African Barrick] in this respect being materially higher than in other jurisdictions,’ said UK stockbroker Numis in a note on Thursday morning. “We continue to believe that Tanzania is towards the lower risk end of the spectrum.’