INTRODUCTION
In an endeavour to ensure Tanzanians are continuously enjoying a share of their minerals, Section 10 of the Mining Act, Cap. 123 imposes a mandatory requirement to mining companies in Tanzania to grant the Government of Tanzania a minimum of 16% non-dilutable Free Carried Interest shares in the capital of a mining company. However, the aforesaid non-dilutable free carried interest (FCI) shares can be increased by the Government up to 50%. The Minister for Minerals published the Mining (State Participation) Regulations, 2020. The Regulations were published to give more details on the acquisition and control of the Government of Tanzania’s non-dilutable free carried interest shares in a mining company, amongst others. However, the 2020 Regulations were not detailed thus created mayhem regarding, among others, types of minerals to be involved in FCI; and when and how to initiate state participation discussions.
Following the challenges brought by 2020 Regulations, the Government revamped the 2020 Regulations in order to address these areas. Ultimately, on 23 September 2022, the Minister for Minerals yet again issued the Mining (State Participation) Regulations, 2022 (Government Notice No. 574 of 2022) revoking similar regulations made in 2020. The new 2022 Regulations empower the Government to participate in mining activities through holding direct equity interest in any mining venture including mineral beneficiation.
Also, the 2022 Regulations require Mining License (ML) and Special Mining License (SML) holders to initiate negotiations for the joint venture arrangement to enable the Government of Tanzania acquire shareholding in the venture within 90 days from the date of publication of the 2022 Regulations, that is, on or before 22nd December 2022. This update therefore the new Regulation 2022 to highlight the changes brought about these amendments with the view of enlightening important regulatory and compliance requirements as well as provide necessary general legal information to our esteemed clients and the general public.
INTRODUCTION OF REVERSIONARY MINERAL RIGHTS
The 2022 Regulations have introduced reversionary mineral rights. The reversionary mineral rights have been defined under Regulation 3 to mean mineral right which revert to the Government upon cessation by operation of law and includes Prospecting License, Retention License, Mining License or Special Mining License. Specifically, these mineral rights as provided for under Regulation 4, they include mineral rights which cease to exist by operation of law or mineral rights which cease to exist due to closure of mines thereby reverting to the Government upon determination of the surrender value and upon a mineral resource estimation by Geological Survey of Tanzania or any other company commissioned by the Government.
Further, to govern the Joint Venture arrangement the license holder will negotiate and execute Framework Agreement set out in the First Schedule of the Regulations. The holder of a license will also need to negotiate and execute a shareholding agreement (SHA) to govern the management of the Joint Venture entity; and the memorandum and articles of association (Memarts).
Moreover, except for Free Carried Interest (FCI) shares which are in fact undiluted, all other shares shall be held by shareholders as ordinary shares, hence dilutable. As provided under Regulation 6(4) the Government equity interest shall comprise of any or a combination of the following:
- statutory allocation of shares by every mining interest in the form of undilutable free carried interest.
- shares acquired by the government through contributing its reversionary mineral rights to the joint venture, which shall reflect the surrender value of such rights.
- shares acquired through quantification of tax expenditures enjoyed by the mining entity during its establishment, provided that the total government shares in such entity shall not exceed fifty percent thereof; and shares mutually negotiated and agreed upon between the Government and the Mining Company.
FREE CARRIED INTEREST (FCI) SHARES AND RIGHTS ATTACHED
As delineated under Regulation 7, the Government of Tanzania shall be entitled to not less than 16% non-dilutable free carried interest shares in the equity capital of any mining interest. The Government efforts in developing the public infrastructure for servicing a particular joint venture should be considered in negotiating the percentage of Free Carried Interest shares to be issued to the Government over and above 16 percent.
Further, as per 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: provided that any other management positions created by the Company shall be shared with the Government Shareholder on a ratio of 3:1.
- participate in assets distribution on winding up.
- receive distributions made by the company, including loan notes in respect of qualifying shareholder loans.
The Regulations provide further that, no financial contribution shall be required from the Government on account of its shares, even in the case of an increase in share capital and free carried interest shares shall not be diluted even when shareholders increase or on account of the borrower.
LOAN NOTES TO THE GOVERNMENT
Unlike to the 2020 Regulation, the 2022 new Regulations under Regulation 8 stipulates rules which shall apply in determining the right of the Government to receive loan notes. The rules applicable are as follows:
- any shareholder loan which does not bear interest can be made without any obligation to issue loan note to the Government.
- any shareholder loan which bears interest shall be subject to the obligation to issue loan notes to the Government representing a percentage of free carried interest shares therein.
- any shareholder loan raised from an external third party for the purpose of on-lending the funds to the mining company shall be subject to the obligation to issue loan notes to the Government representing a percentage of free carried interest shares therein; and
- Any shareholder loan agreed by the parties which bears reasonable interest rate that is advantageous to the company, shall not be subject to the obligation to issue loan notes to the Government.
PREFERENTIAL SHARES
Free Carried Interests (FCI) shares under the Regulations shall be treated as preferential shares which are liable to dividend immediately as a distributable profit is recognized by the company. This distributable profit in that regard is the profit for the year less prior losses and withdrawals for constitution of legal reserves, payment of corporate income tax and increased by retained earnings. It shall be paid prior to any other allocation of the distributable profit at the rate equal to the percentage of Free Carried Interest issued to the Government.
DETERMINATION OF LEVEL OF INVESTMENT
The Mining Commission in consultation with the Government Shareholder and Tanzania Revenue Authority is required to determine the types of minerals or level of investment made by a holder of special mining license or mining license on which the Government shall be entitled to acquire the 16 percent non-dilutable free carried interest shares or more. However, in determining the level of investment, the Mining Commission shall take into consideration the following:
- capital invested,
- mining technology involved,
- profit, and
- total value of tax expenditures enjoyed by the mining company.
PRINCIPLES UNDERLYING THE MINING JOINT VENTURE (JV) ARRANGEMENT
The Regulations significantly set out various principles underlying the mining joint venture arrangement. They include among others:
- incorporation of a joint venture company with the Government Shareholder.
- application of the equitable economic benefits sharing principle shall be on the life of the mine.
- having a jointly agreed financial model to guide the management and operations of the joint venture.
- company substantially in the form set out in the Fourth Schedule to the Regulations.
- jointly managing the joint venture company pursuant to the Shareholders Agreement substantially in the form set out in the Second Schedule to the Regulations.
- agreeing on the fiscal assumptions underlying the economic benefits sharing principle.
- joint venture company to hold all proceeds from sale of mineral products in local and foreign currency bank accounts in Tanzania.
- issuing a Mining License or Special Mining License to the Joint Venture Company.
- preference of Tanzanians for appointment to management positions subject to the provisions of Regulation 7(4)(b); and
- agreeing on modalities of in-country beneficiation of minerals.
Further, the Regulations provide that in an event where the Government opts for another modality of state participation in any mining joint venture, the following conditions shall apply:
- special request shall be submitted to the Ministerial Cabinet giving details of the modality proposed.
- articulation of the most economic benefits to be acquired; and
- detailed reasons on why such most economic benefits cannot be achieved through the principles stipulated under Regulation 11(1).
Generally, the Shareholders Agreement provides for the management of mining joint venture entities. However, the day to day running of the joint venture entity shall be governed by the Articles of Association of the respective Joint Venture entity.
