Wednesday, 26 July 2017

Killing the goose that laid the golden eggs

By Charlie Gibson


In London, the shares of Acacia Mining (formerly African Barrick Gold, the 62%-owned, listed subsidiary of Barrick Corp) have fallen by almost half in the last 24 hours, after the Tanzania Revenue Authority demanded $190bn ($40bn in alleged back taxes, with the rest in interest and penalty charges).

It is difficult to pinpoint the exact origin of the dispute between Acacia and the government and, arguably, it goes back to Barrick’s first major investment in the country in the late 1990’s. Then, the price of gold had fallen to a 20 year low of US$250/oz and Barrick, which had had some good exploration success in the Lake Victoria goldfield negotiated some very keen fiscal terms with the government to develop its new mine, Bulyanhulu. Had the price of gold stayed where it was, perhaps the current dispute would never have arisen. However, as the gold price rose to US$1,250/oz (via a record high of US$1,900/oz in 2013), Barrick’s tax breaks (duly enshrined into Tanzanian law) became – if you will excuse the pun – a gold mine, effectively shielding its assets from actually paying cash taxes for years, if not decades. As the old saying goes however, wealth begets envy and, while Acacia (as it had been renamed) trumpeted its attractions to western investors, the Tanzanian government looked on ever more covetously as its natural wealth (as it saw it) was shipped overseas. If that was the environment, then it only took a spark to set the plains ablaze. In this case, that spark was provided by the election of a populist Presidential candidate in 2015, John Magufuli, who was easily able to incite lingering anti-colonial resentment to paint a picture of rapacious western investors cynically depriving Tanzania of its natural wealth.

The first Acacia knew of it was when the government passed a law banning the export of metalliferous concentrate in February 2017 under the guise of wanting to develop a domestic smelting industry. That was rapidly followed by the reports of two Presidential committees in the following four months that alleged that Acacia had been under reporting its gold exports in concentrate form by a factor of ten. That is to say, when Acacia declared 100oz of exports, the committees accused them of selling 1,000oz. The implication of the committee’s findings is that Bulyanhulu and Buzwagi each produce more than 1.5 million ounces of gold per year and are the two largest gold producers in the world, that Acacia is the world’s third largest gold producer and that it produces more gold from its three mines than AngloGold Ashanti from 19 mines, Goldcorp from 11 mines and Kinross from nine mines. Suffice it to say that Acacia is a publicly listed company and that its financial, production and gold reserve records are audited to international standards and that it must comply with government oversight agencies in Tanzania, the UK, Canada, and the USA that have the right to impose heavy penalties on companies that do not report their production and financial results accurately. Despite requesting it, Acacia has yet to be given a copies of the reports, nor has it been provided with details of the sampling protocols followed by the committees.

At the same time as the Tanzania Revenue Authority (TRA) ceased providing Acacia with VAT refunds, parliament then passed the Natural Wealth & Resources Contracts (Review & Re-Negotiation of Unconscionable Terms) Act and the Natural Wealth & Resources (Permanent Sovereignty) Act. The former allows the government to dissolve existing contracts deemed prejudicial to the interests of Tanzanians, while the latter prohibits the involvement of foreign courts or tribunals in disputes between the government and investors and compels companies to process minerals within the country rather than exporting them as raw materials. New laws have also increased the royalty rate applicable to metallic minerals by 2% as well as imposing a 1% clearing fee on exports, while President Magufuli has ordered the Energy & Minerals Ministry to neither issue new mining licenses nor renew expired ones.

With the dispute apparently escalating, earlier this week, Acacia announced that it had received a series of Notices of Adjusted Assessment from the TRA for historical corporate income tax, covering the period from 2000 to 2017, which assert that it owes the Tanzanian government approximately US$40bn of alleged unpaid taxes and approximately a further US$150bn in penalties and interest. To put that in context, the GDP of Tanzania is only about US$50bn! At the same time, local regulations now require miners to list operating assets locally and to achieve a 30% minimum local shareholding by 23 August. Finally, as if to add insult to injury, the Tanzania government appears to be deliberately sidelining the company by insisting on negotiating solely with its parent, Barrick, rather than with it, directly.

Resource nationalism has a long and bleak history, from the Russian Revolution in 1917 through the tribulations of British Coal from the 1940’s to the 1980’s and, latterly, all manner of government taxation initiatives and interference from countries as far afield on the political spectrum as Australia and Guinea. Almost none has been blessed with any success and almost all have consigned their mining industries to years, if not decades, of underperformance, inefficiency and underinvestment, with the result that governments have rarely (if ever) reaped the benefits for either themselves or for their populations that they had envisaged. Hitherto, Tanzania had been one of the relative success stories in Africa of a country that had created a stable and trustworthy environment for international mining investors. It would be a shame if it became the most recent candidate to mistakenly (and unnecessarily) kill the goose that laid the golden egg.

Friday, 14 July 2017

Oil and share prices for mid-cap E&Ps

By Will Forbes

With the tribulations of the London-listed E&Ps with the oil price slide, investors have seen large moves in the share prices. 

What has been the  relationship between moves of oil price (in GBP) and shares? Since January 2015, cairn has been materially less volatile than the others. This is not surprising given its cash balance, lack of debt and exposure to immediate oil prices through production. This will change as more and more of its value is dictated by production.
How tight is the relationship?