Analysis of the Mining (State Participation) Regulations 2020
The Mining (State Participation) Regulations 2020 have been introduced to provide further clarity on matters concerning Non-Dilutable Free Carried Interest (FCI) in the capital of a mining company or person holding mining license or special mining license.
The scope of these regulations only extend to holders of a ‘Mining License’ and a ‘Special Mining Licence’. The Mining Act, Cap 123 (“the Act”) defines a Mining Licence as a “mining licence for medium scale mining operation, whose capital investment is between US$100,000 and US$ 100,000,000 or its equivalent in Tanzania shillings”; and a Special Mining Licence as “a licence for large scale mining operation, whose capital investment is not less than US$100,000,000 or its equivalent in Tanzania shillings”.Therefore, the scope of these regulations do not extend to Primary Mining Licence holders which is reserved for small scale mining.
With the introduction of the Mining Act 2010, the FCI was incorporated into the Act which gave the Minister of Mining power to enter into a development agreement with the holder of a Special Mining Licence and grant the government an FCI. There was no minimum FCI holding requirement mention in the Mining Act 2010. This meant that the level of FCI and Government participation had to be negotiated between the Government and the mineral rights holder depending on the type of minerals and the level of investment. Furthermore, the level of FCI was not free of dilution; shares could be diluted at any time. This meant that where there was an injection of capital or increase in shares, the FCI and thus the Government’s stake in the mining operations would be significantly reduced.
These regulations provide that the Government shall acquire not less than sixteen (16%) percent and has the option to acquire up to fifty (50%) percent non-dilutable free carried interest shares in the capital of a mining company. Non-dilutable free carried interest shares are based on:
(i) special class of shares in which the holder of the shares shall be entitled to the payment of dividend of a fixed amount in priority to another class
(ii) shares shall not decrease in value or percentage of ownership of a shareholder or loss of percentage of equity.
This calls for a mandatory ownership by the Government in persons and mining companies holding mining and special mining licenses. It should also be noted that the right of the Government to own these shares also confers several rights including but not limited to:
- automatic allotment to the Government shares without any direct financial contribution
(ii) actual ownership of the non-dilutable free carried interest shares;
(iii) receipt of a proportionate share from any repayment of either equity, shareholding loan or third party loan; and
(iv) having all the rights of a shareholder in accordance with the Companies Act Cap, 212.
What does this mean?
Free Carried Interest (FCI) has been defined under the Mining Act, Cap123, as the interest derived from holding shares of which the holder enjoys all the rights of a shareholder but has no obligation to subscribe or contribute equity capital for the shares. For the Government, this means as follows:
- its FCI is non-dilutable;
- the Government will have an actual stake in a number of mining companies holding a Mining Licence and Special Mining License;
- the Government shall receive dividends in the event companies in which they have an FIC, make profit; and
- it would be able to acquire up fifty percent (50%) of shares in the mining company corresponding with the total tax expenditures incurred by the Government in favour of the mining company through tax exemptions and reliefs.
The computation of Government shares shall base on an amount of tax expenditure enjoyed by that mining company or person up to the date of computation divide by the market value of shares at the date of computation.
What does it mean for Investors?
The implementation of the Amendments to the Mining Act in 2017 and currently the Mining (State Participation) Regulations 2020, have addressed the previously existing inconsistencies and loopholes. This gives the Government a minimum non-dilutable FCI, which will always remain at a minimum of 16%, regardless of any changes pertaining to any capital injection or increase in shares of the affected mining companies. Another issue for the investor is that the requirement may be applied retrospectively to affect all existing holders of Mining Licenses and Special Mining Licenses, however we are yet to see how these will be implemented.
This is in line with the Government’s efforts to safeguard the country’s natural resources and ensure that citizens benefit from each Mining Development Agreement. With the provision of minimum and maximum threshold, this provides further clarity on the previous concerns on FCI.