By TZ Business News Staff.
Two news websites from the West have jumped on Tanzania’s complaint the London based ACACIA Gold Mining PLC has evaded payment of royalties and profit tax for years through a scheme of deception, describing the complaint as “extreme” and “inflated”.
The websites www.canadianminingjournal.com and www.cgdev.org dispute the accuracy of findings made by two teams appointed by President John Pombe Magufuli in March 2017 which determined that the Barrick Gold subsidiary listed on the London Stock Exchange with a cross-listing at the Dar es Salaam Stock Exchange has lied for 19 years about the value of exports out of Tanzania.
The outlet www.canadianminingjournal.com says the Tanzania Government has a “beef” with Acacia Mining while www.cgdev.org describes the probe teams findings as “geologically implausible.”
Two presidential probe teams in Tanzania have determined that ACACIA Gold Mining PLC has under declared the value of mineral sand exports from Tanzania since 1998 todate. ACACIA is a Barrick Gold subsidiary registered on the London Stock Exchange with a cross listing at the Dar es Salaam Stock Exchange in Tanzania. Barrick Gold is the world’s leading gold producer.
Acting on an advance tip-off in March, 2017, President Magufuli paid an impromptu visit at the Dar es Salaam port where he found shipping containers filled with undervalued unprocessed ‘mineral sand’. The President formed an eight-man probe team of experts, led by Prof Abdulkarim Mruma, to investigate and establish the amount of minerals and their correct values in the shipping containers which were just about to be exported abroad.
Some 277 containers with capacity for 20-tonnes of mineral concentrates each were detained at the Dar es Salaam Port and later at other Inland Customs Depots to await verification of content. The mining companies exporting the mineral ‘concentrates’, which included ACACIA Mining Plc, claimed each of the containers carried only 3Kg of gold and only 3 tonnes of copper in individual containers.
The presidential probe team found individual containers to hold between 28 and 47.5kgs of gold each. The probe team also established there was between 6 and 7kgs of silver in the individual containers and between 5.2 and 6.75 tonnes of copper. The mining companies started exporting mineral sands since 1998. President Magufuli said over 3,000 containers with mineral sand were being exported every year. The probe team established that the total value of the seized 277 containers was between Tsh. 829.4bn/- and 1.439 trl/- where the exporting companies put the total value of the containers at 85.87bn/-.
The containers were seized. The President formed a second team to determine the extent of cheating and evasions since 1998 when the export of mineral concentrates in containers started. The second probe team has revealed that Acacia Mining Plc has operated in the Tanzania for 19 years without legal registration or certificate of compliance.
According to the second probe team report, Acacia Mining Plc has for 19 years committed various offences, including providing wrong information, obtaining minerals by false pretense, evading tax, economic sabotage, transfer pricing manipulation and occasioning loss to the government. Barrick Gold owns 63.9% shares in Acacia Mining. The offences committed by the subsidiary are criminal and punishable by a jail sentence. The government has imposed a travel ban on everybody mentioned in the probe teams.
www.canadianminingjournal.com warns: “We sincerely hope the Tanzanian government comes to its senses very soon or business will vote with its collective wallet to put its money elsewhere.”
Acacia has been exporting concentrate from Bulyanhulu since 2001 and from Buzwagi since 2010, and the company insists it has declared all the associated gold, copper and silver revenue, the news website argues, adding that “the company continues to export gold doré, but the ban on concentrates is cutting into cash supplies by as much as US$1 million a day.”
Acacia is 63.6% owned by Barrick Gold. Barrick has said that if the export ban is not lifted, it could cut production guidance by 6% this year. Thank goodness Barrick is the world’s largest gold producer. This gives it the wherewithal to fight the charges. It is going to need persistence and deep pockets to make its case, www.canadianminingjournal.com says.
Second, the extreme response of the Tanzanian government points up an additional risk factor when working in some far-flung corners of the globe. Such sudden changes to the business climate can be as devastating as uncontrollable forest fires. Without a transparent and predictable tax or regulatory regime, such regimes will find investors very hesitant to spend their money in their countries.
Not many small companies could withstand a problem such as Barrick is facing. Without the corporate resources to fight a tax bill that runs to the billions of dollars, they would disappear.
The website www.cgdev.org presents some figures not reported by the Presidential probe teams to defend their argument that “these findings are geologically implausible.” The report by Maya Forstater and Alexandra ReadHead says “Inflated Expectations about Mineral Export Misinvoicing are Having Real Consequences in Tanzania,” then presents inflated figures not in probe team reports. The website’s report follows:
At the Buzwagi and Bulyanhulu gold mines in Tanzania, and at the Port of Dar Es Salaam, around a thousand containers of copper-gold concentrate (a processed product between rock and refined metal) are stockpiling. They belong to Acacia Mining PLC, who operate the two mines, and are not moving because of a ban on concentrate exports that has been in place since the beginning of March.
In May, President Magufuli appointed two special committees to investigate the contents of 277 of the containers stuck at the port. The first committee reported that the concentrate contained around twice as much copper and silver, and eight times as much gold than was declared by the company (the main value of the concentrate comes from gold). They also detected a range of rare earths. According to their calculations, each container contains 28 kg of gold and is worth $1.36 million while information published by Acacia suggests that each container contains 3.3 kg of gold, 2.8 tonnes of copper, and 2.6 kg of silver and is each worth around $0.15 million. If the committees’ findings are accurate, the extent of the undervaluation would be enormous, amounting to almost $4 billion annually (one tenth of Tanzania’s GDP). The second committee scaled these figures up to cover 61,320 containers exported between 1998 and 2017, suggesting the true value of concentrate exports was $83 billion and that the government had lost $31 billion of revenue trade due to misinvoicing and transfer price manipulation. Acacia maintain that they have always declared all materials produced and paid all royalties and taxes that are due.
President Magufuli responded to the committees’ reports: “We should summon them and demand that they pay us back our money. If they accept that they stole from us and seek forgiveness in front of God and the angels and all Tanzanians and enter into negotiations, we are ready to do business”.
The business in question is the demand that Acacia build a local smelting facility (the government’s stated aim for the ban on concentrate exports). In 2011, The Tanzania Minerals Audit Agency examined the viability of a smelter and concluded that it would not be profitable given the volumes and quality of concentrate involved. If the concentrate produced by the mines turned out to contain eight times more gold than previously thought, these calculations might look different.
However, the committee’s belief that they have uncovered a case of massive misinvoicing (i.e., misrepresentation of the value or quantity of exports) does not seem plausible for five reasons:
- The findings suggest a massive scale of hidden metals production.
The committee’s reports say that the 277 containers (which represent around one month’s production) contain around 7.8 tons of gold. This is roughly equivalent to the total amount of gold Acacia reports that these two mines produce in a year. Acacia note that the committee’s findings on the amount of Iridium in the concentrate (16.9 tonnes annually), would be nearly three times global consumption of the metal. The findings for Ytterbium (9.8 tonnes annually), would be on par with largest producer in the world.
- These findings are geologically implausible.
Acacia notes that the results imply that they produce (from Acacia’s three mines in Tanzania) more than AngloGold Ashanti produce from 19 mines, Goldcorp from 11 mines, and Kinross from 9 mines, and that this is implausible given the size of the mines. They also argue that economic Iridium concentrations are only found as by-products in certain types of mines, not in gold deposits of the type found at Bulyanhulu and Buzwagi, and similarly, that significant levels of rare earth elements such as Ytterbium are not found in this kind of deposit.
- The committee’s analyses suggest an extraordinary conspiracy has undermined Tanzania’s efforts at monitoring minerals exports, as well as international financial regulations.
The Tanzania Mineral Audit Agency (TMAA) undertakes careful work to monitor minerals exports. Normally four samples are taken from every shipping container—one for Acacia (which is verified by SGS), one for the TMAA, one for the smelting company, and an umpire sample in case of disputes. Furthermore, Acacia is a FTSE250 company; it must comply with international regulatory agencies in the UK, Canada, and the United States, which require the company’s financial statements and figures to be audited in accordance with international standards. For Acacia to under-report its gold production and revenues would mean defrauding shareholders through an enormous global conspiracy.
- The committee’s approach to pricing the concentrate does not reflect how the metals industry works.
The committees calculated a value for every element including trace elements such as tantalum, beryllium, and ytterbium, and bulk ones such as sulphur. However, smelters do not pay out for every element in the material, but only the ones they contract for, since the rest end up in the waste pile or eventually as “anode slime” by-products at the end of the copper refining process. Acacia say they are only paid for copper, silver, and gold (and MRI Group which buys the concentrate from them confirm this).
- There is no sign of an additional $4 billion a year of unexplained sales in Acacia’s accounts.
Acacia’s shareholders, who have some skin-in-the-game to know what is going on, are not reacting like they have just found out that the company’s management have been defrauding them, nor that the company owns assets which are worth several times more than they thought.
While the committees’ findings are hard to believe, this doesn’t necessarily mean government isn’t justified in its concern that Acacia has not been paying enough tax. Between 2010 and 2015, Acacia paid $444 million in dividends to shareholders, despite not yet paying any income tax in Tanzania. OpenOil explains that generous fiscal terms are the primary cause, specifically, an additional capital allowance meant Acacia could deduct 100 percent of its $4 billion investment, plus a 15 percent margin, before paying any income tax.
$252 million was a “special” dividend following an initial public offering (IPO)—in other words, these funds went from new shareholders to Barrick Gold, not from the Tanzanian subsidiaries to all shareholders. However, the question of how profits to pay the rest of the dividend were available in London has never fully been answered. One possibility is that Acacia is engaging in “base erosion and profit shifting” via its Group Finance Company in Barbados. Acacia may be raising equity, and, through the Group Finance Company, providing it as intercompany loans to its Tanzanian subsidiaries. Because interest payment on the debt can be deducted from taxable income, the more debt the mines have the less taxable income they generate. Plus, interest payments are a way of shifting profits earned in Tanzania, to the Group Finance Company in Barbados. This practice of “earnings stripping,” could explain how Acacia financed the dividends. But, without access to disaggregated data for finance charges, it is not possible to know whether this theory is correct.
In Tanzania, there is significant risk attached to challenging the committees’ findings. The Minister of Mines and the chief of the TMAA were both fired following the first committee’s report, and a weekly magazine was ordered to shut down for two years after publishing an article questioning the role of previous presidents in negotiating the original mining agreements. The “Publish What You Pay” coalition of NGOs working on extractive industry transparency report has issued a general statement, but has not offered any analysis, while the Tanzania Extractive Industry Transparency Initiative has made no public statement.
It is not clear that compelling Acacia to build a smelter would be a win for Tanzania. Thomas Scurfield at NRGI warns that it would distract government attention and power supplies from other areas of the economy and might result in lower government revenues, not higher, if the marginal increase in export value it generates is offset by higher costs. Without balanced coverage of the issues related to revenues, and the economic prospects for smelting, Tanzania may end up worse off. To date, media coverage of the situation has been unbalanced, and potentially misleading.
Securing mining revenues is a major challenge for Tanzania, as with other resource-rich developing countries. Often governments know something is wrong, but lack the information, resources, and expertise to pinpoint the precise cause. However, it is vital that public debate is informed and critical, and that simplistic narratives portraying multinational mining companies as undertaking massive ‘illicit financial flows’ through widespread mispricing of ores and metals are not accepted without evidence. Governments should also avoid this trap at risk of raising public expectations of mining revenues to unsustainable levels.
Acacia and the government are now sitting down to talks with the hope of reaching a “win-win” solution. Finding a way to unwind inflated expectations, build trust and effective, realistic public scrutiny will be critical to finding a solution which is not just win-win for the president and Acacia but also for the people of Tanzania.