What does the Tanzania mining framework agreement entail?

Tanzania has a broad range of mineral deposits and adding to the wealth of deposits, the political stability makes Tanzania a prime destination for mining projects.

In the year 2022, the Mining (State Participation) Regulations, GN No. 574 (the Regulations) was enacted which has a template Framework Agreement (FWA) in its first schedule.

The FWA governs the relationship between the Government of Tanzania (represented by the Treasury Registrar (TR)) and the mining investor (collectively ‘the parties’), usually a non-Tanzania company. Whilst most of provisions of the FWA are straight forward, when it comes to active negotiation of these terms, there are critical factors which are considered ‘sticky points’ where parties spend considerable time and efforts in negotiating with the aim of reaching an agreement acceptable to both parties, such as:

1. Structure of the mining project

An investor undertakes prospecting operations before applying for a mining or special mining licence (mining licence). The prospecting licence (PL) is issued to the investor through a locally incorporated prospecting company which is usually 100% privately owned (PL Holder). When the investor is ready to apply for a mining licence, there is an obligation to issue not less than 16% free carried interest (FCI) to the Government of Tanzania through the TR. The PL Holder applies for a mining licence, but the mining licence will not be issued until the FWA (among other agreements) are agreed and signed between the investor and the TR.

Among other obligations, the investor is required to undertake beneficiation in Tanzania, in addition to doing mining activities. This means that, the investor must establish a beneficiation facility in Tanzania because exportation of raw minerals is now prohibited under the Mining Act (MA). During the negotiations of the FWA, the parties must agree the model or structure of undertaking both mining and beneficiation of minerals prior to export.

Standard structure: For most ongoing projects, there is a JV Co which is established between the investor and the TR where ordinarily the TR holds 16% free carry and 84% is held by the investor. Some projects have increased the FCI to 20%. The JV Co is the mining company (MineCo) where the mining licence will be issued to.

The beneficiation operations are separated from the MineCo so there is another entity which is formed between the investor and the TR for beneficiation activities (BenCo). The shareholding structure of the BenCo is as follows; the MineCo owns majority of the issued shares and, minority is held by TR, usually to attain the two-shareholder requirement imposed under the Companies Act.

Then there is one shareholders’ agreement which governs the shareholder relationship for both MineCo and BenCo. The intention is that MineCo will transfer/sale the mined minerals to BenCo for beneficiation before domestic or international disposal. The above structure may pose challenges, some of which are as follows:

• Tax challenges: There can be tax issues in transactions between MineCo and BenCo e.g. double withholding tax, VAT imposition, transfer pricing issues etc.

• Entity holding the PL is stripped of an asset: It is understandable why the TR prefers to hold FCI in a newly formed MineCo as opposed to taking equity in the PL Holder entity. Once the mining licence is issued to MineCo, it leaves the PL Holder without any asset. Usually there are outstanding debts which were incurred by the investor to finance the prospecting activities. Also, there are taxes incurred yet remain unrecovered and the PL Holder entity will not be profitable to offset/recover the costs and taxes initially incurred. Also, this leaves the lenders of the prospecting operations by the PL Holder without security. In the long run, it will lead to further pinch or reduction of lenders’ willing to finance prospecting operations unless a clear structure assuring protection of lenders to prospecting operations is developed. It is undisputed that without prospecting, there can be no mining potentials.

• One shareholders’ agreement governing two entities: It is possible that another investor who mines same mineral may want to co-share the BenCo as opposed to setting up its own beneficiation facility. A separate shareholders’ agreement is necessary otherwise the investor will be attending to matters relating to MineCo which is not relevant to it. Also, material factors for mining operations are different from those of beneficiation so separate shareholders’ agreement is necessary. On the same note, it is best if the MineCo is not a parent of the BenCo, rather BenCo should be held separately from MineCo and its terms separately negotiated. Currently, the legislation entitles the TR to hold FCI in the MineCo.

2. Foreign bank accounts

This is a sensitive point because the Natural Wealth and Resources (Permanent Sovereignty), Act, 2017 (the Permanent Sovereignty Act) clearly states that all earnings from disposal or dealings in natural wealth and resources (including minerals) be retained in banks and financial institutions in Tanzania. Also, it provides that, it is unlawful to keep such earnings in banks outside of Tanzania except in repatriation of profits as per the laws of Tanzania. The forex regulations (including the guidelines of the Bank of Tanzania of 1998) restrict a resident (including local entities) from opening bank accounts outside of Tanzania except with the prior approval from the Bank of Tanzania (BOT), unless it’s part of allowed foreign investments by Tanzania residents.

On the other end, most international financiers require that the borrower entity, in this case the MineCo should establish a bank account outside of Tanzania where the loan will be disbursed to, servicing of debt and all proceeds mineral sales shall be deposited in this non-resident bank account. It can be understood why the international financiers impose this requirement because they want to make sure that the debt can be serviced, and they can control the bank account outside of Tanzania, which may not be the case for bank accounts maintained by local banks in Tanzania.

During the negotiations, the critical issues which ought to be considered are:

1. Can the BOT issue a consent allowing the MineCo and/or BenCo to have a bank account outside of Tanzania, yet there is a law which expressly declares such activity as unlawful?
2. Also, can the Mining Commission (MC) allow the proceeds of sell of minerals to be deposited into this foreign bank account?
3. Where does the tax authority (TRA) sit in all this?

It is understood that the MC and TRA want to ascertain the minerals sold, pricing etc for the purpose of determining payments of taxes, royalties etc. in Tanzania. If sell of minerals and payment from buyers to MineCo is done and deposited in bank accounts outside of Tanzania, which cannot be easily accessed, there will always be uncertainty on whether all taxes and royalties are properly paid without being able to verify independently. On the other hand, the TR has representation in the board of the MineCo and BenCo, and some senior employees of the MineCo and BenCo are appointed by the TR. One can argue that this should remove doubt that there could be illegal activities, false disclosures and/or activities which are not visible to the regulatory bodies in Tanzania.

How to balance the interests of the foreign financiers and those of the regulatory bodies for the sake of ensuring that the MineCo and BenCo can effectively implement their mandates and operations leads to the need for parties to reach a common ground.

3. Verification of foreign loans

It is a standard requirement that foreign debts which meet conditions imposed by foreign exchange laws require prior registration by the BOT.

As highlighted above, the PL Holder is left without an asset yet has outstanding debts from financiers who financed the prospecting operations. The only option appears to involve ‘assignment’ or ‘novating’ the debt from the PL Holder to the MineCo but there is a requirement that the TRA must verify the said debt and if approved, that is when the BOT can register the debt. Primarily the law requires the debt to be registered with the BOT within 14 days meaning the PL Holder may have registered this debt long before the MineCo came into the picture i.e. during the prospecting operations. However, now that the debt must be moved/adopted by the MineCo, verification by the TRA is necessary and another registration by the BOT is applicable since MineCo is now considered to be in ‘debt’.

In an instance where following such verification, the debt is dis-allowed because it is considered not to meet the criteria of a debt rather an advance contribution to capital meaning, it is not recoverable through debt servicing. If it is considered as advance capital contribution, yet this debt sits at PL Holder entity not in MineCo, and even if it is now considered as part of MineCo, the investor cannot acquire more than 84% of the issued equity to benefit from what is now considered as ‘advance capital’ since any increase of share capital should be reciprocated to the TR so that the balance of 84% and 16% is maintained. How can the investor recover the debt (now considered advance capital) extended to a PL Holder which now is redundant remains to be a riddle.

Also, another issue which comes into play is, will loan verification process be applicable for future debts issued to MineCo? If it will be applicable, it raises a question why the verification process should apply if the MineCo from the start is a joint venture between the Government and the investor meaning if a loan is received subsequent of issuance of a mining licence, it must have been discussed and approved in all board and shareholders’ meetings? But the issue of using foreign bank accounts may come into play and it remains to be seen how the local regulatory body can verify the loan, which is directly deposited into foreign bank accounts, if this is approved.

4. Economic benefits sharing arrangement

One of the key points in the FWA is the economic benefits sharing arrangement where the parties aim to ensure that both are put in an equitable position towards the other. The investor should be able to gain the anticipated profits from the project and the Government should be able to collect dividends equivalent to the FCI and other collections through taxes etc. The 4^th schedule to the FWA is an extract of the joint financial model which aims to clearly indicate the agreed financial model which will be strictly observed by the parties to achieve equitable benefits sharing throughout the life of the project. If there is any change of circumstances, the parties will meet promptly to discuss how to re-establish the agreed equilibrium.

The key challenge on this aspect is how to attain the equal benefits scheme because the Government gains through taxes, dividends (when declared), regulatory fees imposed on licences and permits held by the MineCo and BenCo, royalties etc, and on the other hand, the investor gains from declaration of dividends. Parties must agree whether the Government’s share include direct taxes only or will indirect taxes be accounted as part of Government’s’ share? Also, there is central government e.g. Ministries and other government bodies but are not part of central government, e.g. municipal - will fees paid to it be included as the Government’s share? What about those paid to regulatory bodies e.g. to BRELA, Workers Compensation Fund etc.?

During the negotiations, parties usually spend time to identify those which are included and excluded in determining the Government’s share and if any collection is to be excluded, it is important to highlight such exclusions in the FWA. It is not a surprise that negotiating and agreeing to the joint financial model takes a considerable time and usually the FWA will be signed whilst the joint financial model remain pending.

5. Existing ownership by a State corporation

There are some mining projects which precedes the Regulations which are partially owned by a State-owned corporation i.e. a corporation which is 100% owned by the Government. If the Regulations are to be implemented as drafted, it means the Government will be owning more than the allocated 16% FCI because part of the existing ownership is by a State corporation.

Can the ownership by State corporation, sometimes as high as 40% amount to satisfaction of the requirement to issue FCI to the Government under the Regulations? If it does not, and the Government is issued with 16% FCI on top of the 40% owned by the State corporation, that makes the investor a minority and how does the investor recover its financial contributions made when it was a majority?

6. Establishment of beneficiation facility

The Mining (Mineral Beneficiation) Regulations, 2018 provides as follows “beneficiated minerals” means any metallic or industrial minerals which have been processed, smelted or refined. The key issue is whether an investor can negotiate out of being obligated to establish a beneficiation facility in Tanzania.

As stipulated above, exportation of raw minerals is prohibited under the MA. This means that, minerals must be beneficiated within Tanzania prior to export and the value addition regulations may be helpful.

The current stance during these negotiations is that establishment of a beneficiation facility suitable for the mineral in question is mandatory. However, there are minerals which cannot be beneficiated without being depleted or completely changing its nature. In such instances, discussions can be had to remove the beneficiation requirement. It can be noted above that, beneficiated minerals appear to be limited to metallic and industrial minerals which brings a presumption that some minerals can be exempted from the requirement to be beneficiated in Tanzania and/or obligation to setting up a beneficiation facility in Tanzania under BenCo.

The timeline to setting up a beneficiation facility range from project to project, and this should be negotiated and the specific timeframe stipulated in the FWA.

At the same time, if there is a third-party beneficiation facility which may process similar minerals, subject to upgrade or additional investment, a proposal can be tabled during the negotiations that instead of establishing a new beneficiation facility, a joint venture can be entered with an existing third-party facility, subject to their consent.

It is critical to note that, the facility must be able to process all minerals mined by the MineCo prior to domestic or international disposal.

7. Dispute settlement

Whilst the applicable law will always be Tanzania law, the dispute settlement mechanism is subject to discussions and negotiations. Usually, the parties are aligned that it must be arbitration, but the forum and seat of the arbitral processes is what must be agreed by the parties.

The investors prefer to use foreign arbitral forum and seat, while the Government may be more open to Tanzania based and UNICITRAL. Whilst it is usually a point of discussion, it rarely leads into a pro longed issue because so far there are several precedents already established so parties are more likely to agree on one or the other which are already included in the multiple FWA already signed by the Government.

8. Useful links

1. Minerals available in Tanzania
2. Mining projects in Tanzania
3. Practical guidance to Tanzania's mining sector
4. Understanding the Mining State Participation Regulations of 2022
5. The Mining (State Participation) Regulations, GN No. 574
6. The concept of free carried interest in Tanzania
7. The Mining Commission of Tanzania
8. Fair Competition Commission
9. Tanzania Revenue Authority
10. The Ministry of Minerals
11. Tanzania Investment Circle