‘Curveballs’ force Acacia Mining to ditch dividend, post loss

Changing tax, royalty regulations in African countries pose challenges

TORONTO Acacia Mining produces gold and copper, both of which are surging in price, so why did the company ditch its dividend and post a $700 million loss?

“We were thrown ... a lot of curveballs,” chief executive Peter Geleta said on an investor earnings call Monday. “In fact, I don’t think many people would have faced what we faced last year in their whole careers.”

He blamed the company’s woes on the Tanzanian government, which wants to renegotiate how it shares in the wealth from minerals extracted inside its borders.

Last March, the east African country banned the export of unprocessed minerals, leaving London-based Acacia, 64-per cent owned by Toronto-based Barrick Gold, with large stockpiles of gold, copper and silver ore and leading the company to file for arbitration.

Now, as commodity prices rise and industry experts speak of a coming boom, governments around the globe, particularly in impoverished, developing regions, are clashing with mining companies over royalties, taxes and, in general, the amount of wealth flowing out of their countries.

From the Democratic Republic of Congo to Tanzania, a raft of new laws were passed in 2017 that challenge how mining companies have hewed to previous agreements, creating tension during a commodity upswing.

Geleta cited the “stress and uncertainty” of operating in Tanzania, where President John Magufuli, elected in 2015, has been leading the country under a new regulatory regime.

After banning exports of concentrates in March, the Tanzanian government in July said Acacia owed $190 million in unpaid taxes and other penalties; and the legislature enacted new laws. One raised the royalty rate on gold and other metal exports from four to six per cent while another law created a requirement the government own at least 16 per cent of any mining project.

Acacia, which Geleta took over on an interim basis in November after his predecessor quit, has responded by filing arbitration claims challenging the taxes and royalty rate, which other mining companies in the country have followed.

According to Acacia’s investor presentation in 2017, it paid US$143 million in taxes and royalties, including US$36 million in corporate taxes. Since 2008, the company contributed on average US$104.4 million annually, it showed.

“It’s important not to forget the big part of the economy we are in Tanzania,” Geleta said.

Still, about 26 million Tanzanians live below the international poverty line of US$1.90 per day, and about 12 million Tanzanians live on less than US$0.60 per day, according to a 2016 World Bank report.

Acacia’s dividend historically was pegged at 15 to 30 per cent of operational cash flow, and in 2016 totalled 10 cents per share.

The biggest loser in Acacia’s standoff with Tanzanian authorities may be its biggest shareholder, Barrick Gold, which reports its fourth quarter results on Wednesday.

In October, Barrick negotiated a tentative framework for Acacia to pay US$300 million to resolve the tax dispute, and make other concessions to the government, including a 50-50 even split of economic benefits from the mines, plus handing over a 16 per cent ownership stake.

That deal would need approval by Acacia’s board, and Geleta told investors he still hasn’t seen any documents with details.

Other mining companies are protesting a proposed change in the Democratic Republic of Congo that would increase royalties on base metals from two to 3.5 per cent, and create a five per cent royalty on so-called strategic metals.

Last week, at the Indaba Mining Conference in South Africa, Congo’s Ministry of Mines spoke about the proposed changes. According to one person who attended, a Congolese representative said the legislature had passed the proposed change, but that President Joseph Kabila had not signed the law, and that the government is concerned about creating a more equitable sharing of the wealth gleaned from its mineral extraction.

The DRC is the leading producer of cobalt, the price of which quadrupled from 2016 to a record high of US$81,500 per ton this month, and it has vast amount of other resources such as copper. But it is one of the poorest places, ranking 176th out of 187 countries in 2015, according to the United Nations.

At the Indaba conference, Robert Friedland, executive chairman of Ivanhoe Mines, which has two mining projects in the DRC, said mining companies operating in the country may form an organization to challenge the law, if enacted.

Combined the challenges could provide an interesting test to international arbitration forums, many of which were conceived decades ago and may be used more frequently going forward.

Phil Hopwood, global mining leader at Deloitte, said mining companies and countries need to communicate more clearly, so that each side understands what’s happening in terms of investor returns, “tax optimization” and transparency.

“It’s all about rebuilding trust, and building trust between the mining companies and the countries,” said Hopwood.