Investment To Remain Strong Despite Greater Resource Nationalism
BMI View: Rising precious metal prices have prompted the government of Tanzania to impose a 30% corporate tax on mining companies. Although this move will inevitably weigh on miners' profits, we expect Tanzania to continue attracting interest from foreign investors given that much of the world is enacting similar tax increases and that the country has an abundance of high-grade mineral reserves. Furthermore, our view that prices for precious metals will remain elevated over the long run as we expect further quantitative easing suggests that exploration projects in Tanzania will remain profitable.
The government of Tanzania recently enacted a 30% corporate tax on gold mining companies, in line with our view that further state intervention will occur in Africa's mining sector as metal prices remain elevated and governments see the sector as an easy way to increase budget revenues while ensuring greater fiscal independence and sustainability. Although this move will inevitably weigh on miners' profits, we believe the impact it will have on the industry to be limited as it will only be imposed on companies operating for more than five years. Furthermore, much of the world is enacting similar tax increases, notably Australia's 30% super tax and Indonesia's 20% export tax on 14 raw materials.
|Australia||30% super tax on iron ore and coal miners' profits.|
|Brazil||Mining royalties to increase from 2% to 4%.|
|China||Government planning to roll out a 5% tax on domestic coal production.|
|Indonesia||20% export tax on 14 raw materials.|
|Mozambique||Government plans to revise mining code to ensure higher revenues from the sector.|
|Peru||President Humala plans to raise taxes on mining firms and increase government involvement in the sector.|
|Russia||5% tax on nickel exports recently introduced.|
In our view, Tanzania will remain an attractive destination for foreign investment as demand for the country's abundance of high-grade mineral reserves remains strong. We expect mining sector value to reach US$1.5bn by 2016, growing at an annual average rate of 11.6% from US$1.1bn in 2011.We believe the mining sector is set for rapid growth as gold and nickel production, which accounts for majority of the mining sector value, take off from their low bases. African Barrick Gold, which has four projects in the country, is set to boost gold production from 1.4moz (mn ounces) to 1.9moz in 2016, while African Eagle and Barrick Gold develop the country's first commercial nickel mines.
|Moderating, But Still Strong Growth Ahead|
|Tanzania - Mining Industry Value & Growth|
The government received bids from 16 foreign and local mining companies for a joint venture project to develop a state-run coal mine with 35.5Mt of reserves. We expect to witness a continued stream of Chinese investment into the region on improving political and commercial links and as Chinese companies seek iron ore, bauxite and copper projects overseas due to significant domestic supply deficits. This is further supported by the fact that Chinese companies, both in the oil and mining sectors, have greater risk tolerance and are more willing to invest in regions where western companies are deterred by political concerns and a lack of adequate infrastructure.
In addition, our view that prices for precious metals should remain elevated over the long run on market expectations for further quantitative easing suggests that exploration projects in Tanzania will remain profitable despite the tax increase.
Risks To Outlook
The lack of adequate infrastructure in Tanzania, notably transport routes and power supplies, remains a key impediment to investment. Mining projects will continue to be dominated by the larger companies, with the expertise and capital to develop projects and the required infrastructure. We expect greater state intervention in the mining sector to occur in the coming years, as metal prices remain elevated and the government sees it as an easy way to boost tax revenue. Hence, further tax increases might be enacted on mining companies, up to a point where it becomes unprofitable to invest into the region.