Project Financing the Development of a Mine in Tanzania

Mining companies in Tanzania are at the point of development of their projects. ‘Development’ in this context meaning large scale construction which is often undertaken in phases. This development requires significant capital expenditure. The model generally favoured is project finance. There are various key issues to consider in respect of such projects. In this month’s legal update, we set out these key issues and our proposed approach to mitigating some of the associated risks:

Tanzania Mining Legal Framework and the typical project finance structure

The Tanzanian legal framework envisages a newly incorporated company limited by shares with participation between Government of Tanzania (GoT) which takes a minimum 16% free carried interest and the private sector (usually a foreign investor mining company) taking an 84% share. This newly incorporated company is the Project Company for the purposes of the mining project. It is a special purpose vehicle created in order to execute the mining project (the Project). 

Prior to the establishment of the Project Company, there may be a legacy period where the foreign investor mining company may have licences (for example mining licenses and/or former prospecting licences). These need to be transferred to the Project Company in order for it to operate. Depending on the value of the deposit, a special mining licence is issued to the Project Company.  A special mining licence is generally issued because the capital expenditure required for the Project is over $100 million and therefore meets the requirement for a special mining licence under Section 4 of the Mining Act RE 2019 (the Mining Act).

The State Participation Regulations required existing holders of mining licences and special mining licences, within ninety days from the date of publication of the Mining (State Participation) Regulations 2022 (the State Participation Regulations) (23 September 2022), to give notice to the Mining Commission to initiate negotiations for a joint venture arrangement to enable GoT to acquire a shareholding in the venture. This legislative trigger necessarily requires a transfer of the licences discussed above.

The relationship between the investor and GoT is governed by a framework agreement and governance of the Project Company is contained in a shareholders’ agreement. Templates of these documents are set out in the State Participation Regulations. 

The Tanzanian Project Financing Structure

Financing restrictions  

 The Mining (Local Content) Regulations 2018 (the Local Content Regulations) provide at regulation 34 that a contractor, subcontractor, licensee or other allied entity that requires financial services with respect to a mining activity shall retain only the services of a Tanzanian financial institution or organisation. 

Despite this, a contractor, subcontractor, licensee or an allied entity may with the approval of the Mining Commission engage the services of a foreign financial institution or organisation.

This issue is key as the Local Content Regulations at first instance limit funding sources to local banks. As parties structure their projects they need to consider this issues in terms of potential interest rates and the effect on the internal rate of return (IRR) in their financial model. There will be a joint financial model agreed upon between the investor and GoT as a schedule to the framework agreement, however the investor will naturally have modelled their own requirements separately and prior to engagement with their counterparty.  

Similar local content restrictions apply for insurance over the Project, unless written approval of the Commissioner of Insurance has been obtained to use offshore insurance services, local providers must be given priority.  All such elements need to be considered by investors as the typical view to ‘crowd in’ an international bench of lenders, insurers and other stakeholders in order to create a competitive environment to create cost efficiencies does not entirely apply given the in-built legal requirements. This is not to say that an efficient funding cycle and typical protections cannot be achieved. It simply means that both local and international structuring advice is required from the outset.

Issuance of loan notes

Pursuant to regulation 8 of the State Participation Regulations, a mining company has an obligation to issue loan notes to GoT representing a percentage of free carried interest shares for:

1. any shareholder loan which bears interest; and
2. any shareholder loan raised from an external third party for the purpose of on-lending the funds to the mining company

However, there is no obligation to issue loan notes to GoT for:

1. any shareholder loan which does not bear interest; and
2. any shareholder loan agreed by the parties which bears a reasonable interest rate that is advantageous to the company. The term ‘reasonable interest’ has not been defined by the State Participation Regulations.

Offshore accounts

In relation to offshore accounts, the Foreign Exchange Regulations 2022 state that a resident of Tanzania is not allowed to open or maintain a bank account outside Tanzania, unless it is for settlement of securities in the prescribed territory or unless expressly permitted by the Bank of Tanzania. ‘Prescribed territory’ has been defined in the Foreign Exchange Regulations 2022 as a member country of the East African Community or Southern Africa Development Community. ‘Resident’ is defined as a person who resides consecutively or whose centre of predominant economic interest is in Tanzania for twelve months or more.

Furthermore, Section 10 of the Natural Wealth and Resources (Permanent Sovereignty) Act 2017 states that any arrangement or agreement for extraction, exploitation or acquisition and use of natural wealth and resources shall require that earnings from disposal or dealings be retained in the banks and financial institutions established in Tanzania. This section goes on to state that it shall be unlawful to keep such earnings in banks or financial institutions outside Tanzania except where distributed profits are repatriated in accordance with the laws of Tanzania.

This point is important as a typical project finance structure requires a 6 month debt service reserve account (DSRA).  Lenders will be keen to have the DSRA and a network of project accounts offshore. They will typically want to take security over such accounts. They will also want financial proceeds of the mine to flow offshore.  The solution here is to have proceeds to first go onshore and then to repatriate offshore, provided that all authorisations are gained from GoT stakeholders including Bank of Tanzania.

Restrictions on pledging shares and other assets of a mining company

In relation to share transfers in the mining sector, it is important to note section 127 of the Mining Act, which provides as follows:

Where a mineral right or dealer's licence is granted to a company, or other body corporate, the company, or such body corporate, shall not, after the date of the grant of the right, without the written consent of the [Mining Commission]- 

1. register the transfer of any share or shares in the company to any particular person or his nominee; or
2. enter into an agreement with any particular person, if the effect of doing so would be to give that person control of the company or other body corporate.
3. On an application for consent under this section, the [Mining Commission] shall require the applicant to submit documents and information which are necessary for the purpose of obtaining a consent.
4. The consent of the [Mining Commission] under this section shall not be unreasonably withheld.

We recommend that consent is sought prior to pledging the shares of mining companies and again prior to registering the actual transfer of the shares on enforcement of the pledge. 

A mortgage over mining licences is possible in Tanzania however, this is subject to consent from the Mining Commission. Section 9 of the Mining Act states that holders of mineral rights are entitled to assign their mineral rights to third parties. However, in the case of mining licences and special mining licences, these cannot be assigned without the prior written consent of the Mining Commission.

The ‘lenders perspective’

In a typical Tanzanian project financing, repayment of the loan is made from the revenues generated by the sale of the end product of the Project. If the Project does not proceed according to plan, a lender may suffer a loss since the only recourse they will have is against the Project Company and the Project Company’s only asset is likely to be the Project. Although extensive security will be taken, the nature of project finance in Tanzania is such that it is unlikely that the security taken will provide full collateral for the amount of the loan.  It is a typical non-recourse lending structure.

Given a lenders reliance on the success of the Project, the technical feasibility of the Project and its economic viability will be of enormous importance and extensive due diligence by a lender’s lawyers, independent consultants, accountants, engineers and insurers will take place. Therefore, the input of independent experts will be far greater at the early stages of a Tanzanian project financing than in a traditional facility as it is the success of the Project, rather than the scope of the security, which will be fundamental to a lender’s prospects for repayment.

Offtaker

In order to demonstrate to the lenders that there will be sufficient cash generated by sales of the end-product to repay the loan, the purchaser is usually identified at the outset in a Tanzanian context and, if at all possible, tied into the transaction at an early stage. The various offtake agreements will therefore require significant scrutiny and be tied into financial close.

EPC Contractor 

Tanzanian EPC and EPCM contracts for large scale projects generally follow FIDIC. The FIDIC Green Book with amendments has often been the base document. The construction contractor will occasionally be linked to the Project sponsor. It will have primary responsibility for ensuring the timely completion of the Project and may also take on post-completion operation and maintenance roles. The construction contractor will employ sub-contractors.  Lenders and the Project Company will be concerned to ensure that the ultimate responsibility for performance by the sub-contractors is always met by the construction contractor itself.

Please contact Peter Kasanda should you have any questions: