Industry Trend Analysis - Regulations Shaking Up SSA Mining Landscape - AUG 2017


BMI View: Regulatory changes to the mining codes of a number of Sub-Saharan countries will pose risks but also present opportunities for investors in the coming years. Various mining jurisdictions, including major producers, will be affected by an uptick in populist policy positions that call for greater local beneficiation and will lead to increased costs for miners. On the other hand, several g overnments across the region will seek positive reforms to their domestic mining sectors in order to leverage the recent rise in commodity prices or to increase inward investment in a bid to kick-start growth.

Miners in Africa will face a number of regulatory changes in the coming months as governments across the continent embark on a series of mining code revisions. Tanzania, South Africa and Namibia have implemented or aim to introduce far-reaching amendments that will overhaul existing mining regulations and pose downside risks to growth in their mining sectors, as a result of broader populist policy stances in their respective governments. Other countries, including DRC and smaller mining markets have announced their intention to revise their current mining codes in a bid to improve local beneficiation or kick-start investment into the sector. We expect regulatory changes to remain one of the most pertinent themes for investors in the region to take into account in the coming years ( See 'Regional Overview - Africa Mining: The Four Key Themes', July 7 2017).

SSA - Key Regulatory Updates
Country Key Details Effects On Business Environment Date
Source: BMI Research
South Africa
  • Black ownership participation increased from 26% to 30% and must be maintained throughout life of the mine

Negative Passed 14 June 2017, currently suspended
  • 1% of turnover of new mining rights must be paid to Black Economic Empowerment (BEE) shareholders before others

  • New prospecting rights must be 50% plus 1 back-owned

Tanzania
  • Ore exports banned

Negative All passed between March and July 2017
  • Government stake in projects increased to 16%

  • Existing contracts can be renegotiated or dissolved

  • Mining and export royalties increased

Namibia
  • 25% of Previously Disadvantaged People (PDP) ownership quota in mining companies

Negative Planned for 2017/2018
Senegal
  • Simplification of mining rights, end to 100% ownership restriction for foreign investors

Positive Passed 8 November 2016
DRC
  • Government stake in projects up from 5% to 10%, rise in royalties from 2% to 3.5% and rise in taxes on profits from 30% to 35%

Neutral Planned for 2018/2019
Kenya
  • Proposals to amend current income tax structures and royalty rates in order to increase inward investment - further details to be revealed

Unknown Planned for 2018/2019

Populism Spills Into Mining

The spike in changes to the regulatory environment of mining sectors across SSA is most evidently reflected by recent and ongoing political developments in key mining markets in the region. In South Africa, president Jacob Zuma's efforts to whip up popular support ahead of the ANC leadership elections at the end of 2017 has led to an increase in populist rhetoric which culminated in the introduction of a new and more stringent mining charter ( See: 'New Mining Charter Confirms Bleak Growth Outlook', June 20 2017 ). The new charter will force miners to raise black ownership levels from 26% to 30% and maintain this participation rate throughout the life of the mine, forcing mining companies to reshuffle or even dilute existing share structures, thus severely impacting their value. Furthermore, mining firms must now pay 1% of their annual turnover to the Mining Transformation and Development Agency, while new prospecting rights must be 50% plus 1 black-owned. As of July 14 2017 the new charter is suspended until a legal battle between the country's Chamber of Mines, which has taken the government to court on the issue, is resolved. As a result, we expect policy uncertainty to be a key concern for miners in South Africa in the coming months, further eroding an already bleak investor sentiment towards the country's mining sector.

Similarly, in Namibia, the ruling South West African People's Organization (SWAPO) looks set to implement regulatory changes that will affect the mining sector as the government looks to gain the support of hard left-leaning factions within the party. More notably, BMI's Country Risk Team believes the government will implement a requirement that 25% of all companies in the country are owned by previously disadvantaged persons (PDPs) as part of the New Equitable Economic Empowerment Framework (NEEEF) and is unlikely to give any concessions to the business community on the issue. The new rules will be put to a vote in parliament in late 2017 or early 2018.

Tanzania and South Africa Lagging Behind
SSA - Mining Regulatory Scores
Scores out of 100, higher score = More attractive market. Source: BMI Mining Risk/Reward Index

Tanzania is another key regulatory hotspot at present, where the government of President Magufuli has passed a series of investor-unfriendly regulatory changes in the mining sector since coming to power in 2015 on a populist, anti-corruption platform. As recently as 10 July 2017, Tanzanian lawmakers approved new legislation allowing the government to force the renegotiation or dissolution of existing contracts with mining and energy companies, imposed new taxes and made it mandatory for the government to own at least 16% of mines in the country. This latest action follows a controversial measure introduced in March this year that bans all ore exports from the country and a requirement announced in November 2016 that forces miners with special licenses to list 30% of their shares on the Dar Es Salaam stock market ( See: 'Regulatory Headwinds Mounting For Tanzania's Mining Sector', March 15 2017). While these measures - aimed at increasing local beneficiation - will dissuade new entrants into the sector, they are unlikely to cause existing miners to exit the country. As an example, Tanzania's largest mining company Acacia Mining, which is losing up to USD33mn of revenue per month following the government's export ban, is committed to keep operations in the country active. The company has no restrictions on the amount of gold and copper ore it can stockpile and is therefore maintaining production levels while engaging in talks with the government in an attempt to reach a negotiated solution ( See: 'Tanzanian Production Drives On Despite Acacia Dispute', June 21 2017).

New Regulations Hurting Miners
Select Tanzanian and South African Equities, Rebased
Note: January 1 2017 = 100. Source: Bloomberg, BMI

DRC To Revisit Changes

In the DRC, the government also aims to introduce modifications to the country's mining regulations in the coming months, although this is not the result of a broader uptick in populist government policy. The current mining code, formulated in 2002, includes a very favourable fiscal and ownership framework. While this regulatory regime was necessary to attract investment to the undeveloped mining sector following years of civil war, it is now deemed out-dated in relation to the framework in place in other countries in the region. The latest rounds of changes were originally submitted to parliament in March 2015 but were suspended due to the commodities slump. However, in May 2017 the DRC government announced it would revisit shelved regulatory amendments, leveraging the recent recovery in global commodity prices and the country's growing strategic importance as the largest global supplier of cobalt, used in the booming batteries market ( See: ' DRC To Top Global Mining Sector Growth In Coming Years ' , May 2 2017). The new proposals include a raise in taxes on profits from 30% to 35%, increase the government's stake in new mining projects from 5% to 10% and increase royalties from 2% to 3.5% for copper and cobalt. These measures will increase costs for miners operating in the country but are unlikely to impact investor sentiment, as royalties and government stakes in projects remain below the norm of other important mining jurisdictions. As an example, Zambia - considered a favourable mining investment destination in the region - has a maximum copper royalty rate of 6%, while most African countries demand at least a 10% stake in mining projects. Furthermore, the current mining code in DRC includes a 10-year stability clause so that any changes in regulations will not immediately affect current mining operations.

Investor Interest To Remain Elevated In DRC
DRC - Inward FDI Stock (USDmn)
Source: BMI/UNCTAD

Positive Reforms Also Visible

Smaller mining markets including Kenya and Senegal have also recently introduced or signalled that they aim to change their existing mining codes in a bid to increase investment into their respective mining sectors. In Senegal a new mining code entered into force on 8 November 2016 which simplifies rights in line with the latest mining codes across the African continent. The new code divides mining rights between small permits and a normal mining permits, removes the restriction on foreign investors not permitted to own 100% of a Senegalese company, while taxes for commodities produced will not exceed 5% in any circumstance. In Kenya meanwhile, the government has announced it is currently reviewing the existing mining code in a bid to boost investment following stagnating growth in the sector over the last five years. To this end, the government will work with the UK Department for International Development-funded Extractives Hub and will likely amend the current income tax structures which are currently set at 30% for domestic companies as well as mining royalty rates. Further details on the new revisions and their date of implementation are yet to be confirmed.