TANZANIA: MINING (STATE PARTICIPATION) REGULATIONS 2022 PUBLISHED
On 23 September 2022, the Minister of Minerals (Minister) published the Mining (State Participation) Regulations via Government Notice No. 574 of 2022 (2022 Regulations) revoking the Mining (State Participation) Regulations, 2020 (2020 Regulations).
The 2022 Regulations apply to every mining company that holds a mining licence or special mining licence or a person holding a mining licence or special mining licence.
The 2022 Regulations introduce new terms that were not defined in the 2020 Regulations. Some of these include:
- Government Shareholder - the Treasury Registrar or a company established or designated as such to hold Government shares in accordance with these Regulations.
- Public Infrastructure - infrastructure facilities, systems and structures that are developed, owned and operated by the Government, including all infrastructure facilities that are open to use by the general public.
- Reversionary Mineral Rights - mineral rights that revert to the Government upon cessation, by operation of law and include rights covered by a prospecting licence, retention licence, mining licence or special mining licence.
- Surrender Value - the value of reversionary mineral rights in terms of these Regulations for the purpose of determining the Government’s equity contribution to a mining joint venture arrangement or any other arrangement.
- Top Executive Management - top management officials responsible for executive matters relating to the management of a company’s affairs.
Introduction of reversionary mineral rights
The 2022 Regulations introduce an additional category of mineral right, named reversionary mineral rights, as defined above and pursuant to regulation 4 of the 2022 Regulations. These include mineral rights which cease to exist by operation of law and revert to the Government, subject to the determination of the surrender value and upon a mineral resource estimation provided by Geological Survey of Tanzania (GST) or any other company commissioned by the Government. This excludes mineral rights which cease to exist due to mine closure.
The Mining Commission will then issue a reversionary certificate to the Government shareholder to replace each of the reverted mineral rights and vest the respective mineral right areas in the Government. The reversionary certificate is valid for 10 years and has similar rights to those granted with a prospecting licence. In determining if the mineral right is worth reverting to the Government, the Mining Commission will consider the economic benefits and geological advice provided by the GST or any other company commissioned by the Government.
A reversionary mineral right will have a surrender value to quantify the Government equity capital contribution to any mining joint venture (JV) arrangement and can be converted into either a mining licence or a special mining licence to carry out mining JV activities.
By virtue of regulation 6 (1) of the 2022 Regulations, State participation in mining activities has been expanded, to the effect that the Government can also hold equity interests in any mining venture including mineral beneficiation.
Holders of a mining licence or special mining licence are required to notify the Mining Commission, within 90 days from the date of the publication of the 2022 Regulations, to initiate negotiations for JV arrangements and enable the Government to acquire shares in their ventures.
Subsequently to this, the licence holder will negotiate and execute a framework agreement (FWA) to govern the JV arrangement; a shareholders’ agreement (SHA) to govern the management of the JV entity; and the memorandum and articles of association (MemArts).
The 2022 Regulations set out the prescribed form of the FWA, SHA and MemArts, whose contents can be negotiated and varied provided that the variation does not substantially affect part III, IV and V of the 2022 Regulations.
Free carried interest and rights attached to free carried interest shares
Government’s development of the public infrastructure servicing the mining venture will be considered in negotiating the percentage of free carried interest (FCI) shares to be issued to the Government over and above the required 16% non-dilutable FCI shares.
According to regulation 7 (4) of the 2022 Regulations, the Government shareholder, by virtue of holding FCI shares, has the right to:
- appoint two suitable persons, with pertinent qualifications, as independent members to the board of directors of the company;
- approve at least two suitable persons to the top executive management of the company as may be agreed in the shareholders agreement and subject to the structure of the company and qualifications set out by the company (other management positions created by the company will be shared with the Government shareholder on a ratio of 3:1);
- participate in assets distribution on winding up; and
- receive distributions made by the company, including loan notes in respect of qualifying shareholder loans.
Loan notes to the Government
Unlike the 2020 Regulations, regulation 8 of 2022 Regulations provides clarity on the obligation to issue loan notes (representing the 16% FCI) to the Government on shareholder loans. Pursuant to regulation 8 of the 2022 Regulations:
- interest free shareholder loans are not subject to the obligation to issue loan notes to the Government;
- interest bearing shareholder loans are subject to the obligation to issue loan notes to the Government;
- any shareholder loan raised from an external third party for the purpose of on-lending the funds to the mining company will be subject to the obligation to issue loan notes to the Government; and
- any shareholder loan agreed by the parties that bears a reasonable interest rate that is advantageous to the company will not be subject to the obligation to issue loan notes to the Government.
It is worth noting that the 2022 Regulations are silent on direct third-party loans.
FCI shares to be preferential shares
Regulation 9 of the 2022 Regulations requires FCI to be treated as preferred shares and be entitled to a preferred dividend immediately once a distributable profit is recognised by the company at the rate equal to the percentage of FCI and prior to any other allocation of the distributable profit.
Key principles underlying the JV arrangement
Pursuant to regulation 11 of the 2022 Regulations, the following are the underlying principles for any mining JV arrangement with the Government:
- incorporation of a JV company with the Government shareholder;
- application of the equitable economic benefits sharing principle will be on the life of the mine;
- having a jointly agreed financial model to guide the management and operations of the JV company substantially in the form set out in the Fourth Schedule to the 2022 Regulations;
- jointly managing the JV company pursuant to the SHA substantially in the form set out in the Second Schedule to the 2022 Regulations;
- agreeing on the fiscal assumptions underlying the economic benefits sharing principle;
- the JV company to hold all proceeds from the sale of mineral products in local and foreign currency bank accounts in Tanzania;
- issuing a mining licence or special mining licence to the JV company;
- preference of Tanzanians for appointment to management positions; and
- agreeing on modalities of in-country beneficiation of minerals.
Further to the above, the Government may opt for another modality of state participation in any mining JV. However, this is subject to the following conditions:
- a special request will be submitted to the Cabinet giving details of the modality proposed;
- articulation of the most economic benefits to be acquired; and
- detailed reasons for why such most economic benefits cannot be achieved through the principles set out under regulation 11 of the 2022 Regulations.
The 2022 Regulations are a significant improvement to the 2020 Regulations. However, there are still some areas of uncertainty and ambiguity which require further clarification. Additionally, there are also some inconsistencies between the prescribed forms of the FWA, SHA and MemArts that are set out in the Schedules of the 2022 Regulations. Nonetheless, we note that there is a level of flexibility which allows for the negotiation and variation of the contents of these prescribed forms to the extent that the variation does not substantially affect part III, IV and V of the 2022 Regulations.