Acacia Mining
Underground mining activities the Bulyanhulu gold mine in Tanzania
LSE-listed Acacia Mining has noted a reduced cash balance of US$176 million from US$318 million in its un-audited results for the six months ended 30 June 2017.

“The first half of the year has posed significant challenges to our operations in Tanzania following the introduction of the concentrate export ban in March. I am pleased with how we have performed in light of this”, says Acacia Mining CEO, Brad Gordon.

“It is a complex and fluid situation which has led to a significant reduction in our cash balance to US$176 million from $318 million, as a result of being unable to realise $175 million of revenue during the half together with a $51 million VAT outflow.

“We continue to take steps to preserve long-term shareholder value and have served Arbitration notices for our Bulyanhulu and Buzwagi mines and will work to achieve a negotiated resolution, which is the preferable outcome for all parties, continues Gordon.

In spite of the challenges Acacia Mining faced, it delivered the highest H1 production in the history of the company, with gold production of 428 203 oz.

AISC for the first six months was $893/oz sold, 5% lower than H1 2016, and if Acacia Mining had been able to sell all of the concentrate produced, AISC would have been approximately $800/oz.

As a result of the impact of the ban Acacia Mining is now targeting the lower end of the production guidance range of 850 000 – 900 000 oz for 2017, but due to strong cost discipline it is leaving AISC guidance unchanged.

Export of metallic mineral concentrates

On 3 March 2017, the Ministry of Energy and Minerals of the Tanzanian Government announced a general ban on the export of metallic mineral concentrates following a directive made by the President of the United Republic of Tanzania in order to promote the creation of a domestic smelting industry.

Following the directive Acacia Mining ceased all exports of its gold / copper concentrate including the 277 containers that had been approved for export prior to the ban which are located in Dar es Salaam at both the port and a staging warehouse.

The prevention of exports impacts Bulyanhulu and Buzwagi which produce gold in both doré and in concentrate form due to the mineralogy of the ore.

North Mara is unaffected due to 100% of its production being doré.

In the first half of 2017, concentrate accounted for 36% of group level production, with 64% of Buzwagi production and 46% of Bulyanhulu production respectively being concentrate.

Acacia Mining has been exporting concentrate from Bulyanhulu since 2001 and from Buzwagi since 2010 and has fully declared all associated gold, copper and silver revenue.

Whilst the proportion of gold in the concentrate is less than 0.02% it represents approximately 90% of the value of the concentrate, with copper representing approximately 10% of the value and silver less than 1%.

Bulyanhulu and Buzwagi are permitted under their agreements signed with the Government of Tanzania to sell their concentrate products to overseas customers and to export the concentrate in containers, and have been in full compliance with these laws and their export permits.

During the second quarter two Presidential Committees announced their findings following investigations into the technical and economic aspects of the historic exports of gold/copper concentrates.

Acacia Mining fully refutes the implausible findings of both committees, which claim that Acacia and its predecessor companies have historically significantly under-declared the contents of exports of concentrate which has led to an under-declaration of taxes of tens of billions of dollars.

Following the committees’ announcements, the government commenced various investigations into the allegations of undeclared revenue and unpaid taxes.

Acacia Mining is fully co-operating with these investigations and has provided extensive documentation and information to the investigating authorities.

In addition, Acacia Mining employees in Tanzania have been and continue to be interviewed by government agencies as part of this process.

Acacia Mining re-iterates that it has declared everything of commercial value that it has produced since it started operating in Tanzania and has paid all appropriate royalties and taxes on all of the payable minerals that it has produced.

In addition, Acacia Mining’s consolidated accounts and each local company’s accounts are annually audited to an international standard in accordance with IFRS.

Acacia Mining has requested copies of the two Presidential Committees’ reports and called for independent verification of the reported results, but to date has not received a response.

As reported at the end of Q1 2017, included in the concentrate shipments retained in Dar es Salaam were approximately 18 200 oz of gold for which Acacia Mining received advance payment.

As mentioned, there was the possibility that the advanced payment would have to be refunded as these shipments did not leave Tanzania within the contractual period.

During Q2 2017, Acacia Mining repaid approximately $22 million, being the full advance payment received, and have subsequently reversed the sale.

Should the ban be lifted, these ounces can be sold again immediately as all royalties have been paid and export permits were previously granted.

Acacia Mining has continued to operate at Bulyanhulu and Buzwagi during the first half and continue to stockpile concentrate at each of the sites.

This has resulted in the build-up of approximately 127 000 oz of gold contained in unsold concentrate.

In addition, Acacia Mining has approximately 8.3 million pounds of copper and 107 000 oz of silver contained in the unsold concentrate.

If the concentrate had been sold, net revenue and cash flow would have increased by approximately US$163 million.

AISC was impacted on a unit cost basis by the concentrate ban, and had Acacia Mining sold all of the ounces produced, AISC for the half year would have been approximately $800/oz, and before the impact of the share based payment revaluation credit would have been approximately $818/oz.

In June, the Government of Tanzania and Barrick Gold agreed to commence discussions with the aim of resolving the current situation.

Whilst these discussions are yet to commence, Acacia Mining understands that they will do so in the near future and that both sides will seek to achieve a timely resolution to the dispute.

At this stage, Acacia Mining is not participating directly in the discussions.

Any potential resolution that might be identified as a result of the discussions will be subject to approval by Acacia Mining, and the company is working with Barrick Gold to support such discussions.

Acacia Mining’s preferred outcome remains for a negotiated settlement with the government, and whilst it sees a route to achieving this it believes that it makes sense to continue operations at all three of its mines despite the losses it is incurring, predominantly at Bulyanhulu.

However, given the scale of the cash outflows at Bulyanhulu, Acacia Mining does not believe that this situation is sustainable at that operation beyond the end of the current quarter.

In the event a decision was made to move Bulyanhulu to temporary care and maintenance, Acacia Mining estimates that it would incur approximately $30 million of upfront costs to retrench employees and end contracts in addition to the natural unwinding of around two months’ worth of accounts payable with minimal gold production over the same period.

Going forward, monthly costs of $2-3 million would be incurred to maintain the mine in good standing ahead of a future re-start, when the mine would then benefit from the initial build-up of accounts payable.

Update on legislative changes in Tanzania

On 29th June, three new Parliamentary Bills, which recommended significant changes to the legal and regulatory framework governing the natural resources sector as a whole in Tanzania, were published under a certificate of urgency which led to the extension of the parliamentary session.

Post period end, these bills were enacted by the Tanzanian Parliament and published in the country’s official Government Gazette of new legislation.

All of the legislation is now in force and some of the terms within the acts are being applied by Tanzanian authorities.

The Natural Wealth and Resources (Permanent Sovereignty) Act, No 5 of 2017, the Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act, No 6 of 2017 and the Written Laws (Miscellaneous Amendments) Act, No 7 of 2017, purport to make a number of changes to the operating environment for Tanzania’s extractive industries.

This legislation is in addition to the recent amendments introduced to the Finance Act, which require mining companies to pay a 1% clearance fee calculated by reference to the gross value of minerals to the government in order to obtain clearance for export.

It is Acacia Mining’s belief that a number of the changes contained within the laws will require supplementary regulations over the coming months to set out the proposed practical implementation of the new laws.

At this stage, Acacia Mining is not aware of this process having commenced.

Acacia Mining continues to monitor the impact of the new legislation in light of its Mineral Development Agreements (MDAs) with the Government of Tanzania.

However, to minimise further disruptions to Acacia Mining operations it will, in the interim, satisfy the requirements imposed as regards the increased royalty rate applicable to metallic minerals such as gold, copper and silver of 6% (increased from 4%), in addition to the recently imposed 1% clearing fee on exports.

These payments are being made under protest, without prejudice to Acacia Mining’s legal rights under the MDAs.

Filing of Notice of Arbitration

Subsequent to period end Acacia Mining announced that it served Notices of Arbitration in Tanzania on behalf of Bulyanhulu gold mine, the owner of the Bulyanhulu mine, and Pangea Minerals, the owner of the Buzwagi mine.

These notices refer the current disputes between the Government of Tanzania and each of Bulyanhulu gold mine and Pangea Minerals to arbitration.

This is in accordance with the dispute resolution processes agreed by the Government of Tanzania in its MDAs with Bulyanhulu gold mine and Pangea Minerals.

The serving of the notices was necessary to protect the Acacia Mining, and is currently with the government to respond, but Acacia Mining remains of the view that a negotiated resolution is the preferred outcome to the current disputes and the company will continue to work to achieve this.

Minimum local shareholding and listing requirements for mining companies

During the latest Tanzanian parliamentary session, the legislation impacting the ability for foreign investors to buy shares in initial public offers was amended, which significantly broadens the potential investor base for future offerings.

At this stage, other than Acacia Mining’s existing cross listing on the Dar es Salaam Stock Exchange, no companies in either the mining or telecommunications sectors have successfully completed a listing on the Dar es Salaam Stock Exchange.

Acacia Mining supports the attempt to build capital markets in Tanzania and the promotion of local ownership and it has engaged with the Capital Markets and Security Authority, the Dar es Salaam Stock Exchange, the Ministry of Energy and Minerals and all other relevant authorities in Tanzania with a view to finding a route forward that is both beneficial and practical for all stakeholders.

Acacia Mining: contribution to Tanzania

In the first half of 2017, Acacia Mining paid a total of $53 million of taxes and royalties. This is made up of provisional corporate tax payments year of $17.3 million, royalties of $18.6 million, payroll taxes of $11.5 million and other taxes of $5.6 million.

In addition, Acacia Mining has also paid $10 million in tax deposits which is recognised as part of other assets.

If the gold/copper concentrate produced since March was sold during the first half then approximately a further $7 million would have been paid in royalties.

Acacia Mining has also paid local service levies due on H2 2016 revenues of $1.6 million during the first half and is due to pay a further $1.2 million in July for H1 2017.

These amounts are 300% higher than the requirements set out in Acacia Mining MDAs.

The provisional corporate tax payments have been offset against the indirect tax receivable under the existing Memorandum of Settlement entered into with the Tanzanian Government.

Over the last six months, Acacia Mining’s Sustainable Communities team continued to focus on delivering community benefits despite the uncertainties in the operating environment.

The focus for the first half of the year was to begin and/or complete key infrastructural projects which Acacia Mining had committed to the communities and also to begin the roll out of the new sustainable community strategy by building some of the foundations for implementation.

By end of June 2017, through the Maendeleo Fund, Acacia Mining implemented six social infrastructure projects with a total value of approximately $1 million at the three mines sites – some of which began at the end of 2016.

The key projects per site include:

  • Bulyanhulu: Constructed additional classrooms at Lwabakanga Primary School which has almost 600 students
  • Buzwagi: Completed the construction of the 2.5 km Mwime Chapulwa gravel road to benefit the Mwendakulima, Mwime and Chapulwa villages with a population of over 13 500 people
  • North Mara: Completion of the Kerende and Nyamwaga Health Centres which will benefit a population of about 25 000 people in six villages

An additional 10 infrastructural development projects are currently underway across all Acacia Mining sites with a value of $940 000 which include school infrastructure, water supply, sanitation and maintenance of community roads.

Other development projects in the last six months include continuing Acacia Mining’s support to 2 700 students with uniforms and books under the CanEducate partnership; supporting sports through coaching clinics in partnership with Sunderland Football Club and provision of reconstructive surgery for 36 burns and cleft lip and palate patients through Acacia Mining’s partnership with Rafiki Medical Missions.

In addition, Acacia Mining, in partnership with TANESCO, has invested $2.5 million to construct a STATCOM centre at Bulyanhulu that will enhance the quality of power supply in the area.

The investment will greatly improve the stability of the electricity at the Bulyanhulu and Buzwagi mines and will reduce Acacia Mining’s reliance on self-generated diesel power.

Residents in the Shinyanga and Geita districts around the mines will also benefit from improved quality power supply resulting from the commissioning of the STATCOM in July 2017.

During the reporting period, Acacia Mining shared its sustainable community strategy with key partners including government officials, development partners and other interested parties to increase awareness of the strategy.

A database is under design to allow Acacia Mining to effectively monitor and evaluate its development efforts and it is expected to be completed in Q3 2017.

Acacia Mining’s future development projects will be informed by research and a consulting firm has been contracted to do an assessment of opportunities for development in the agricultural and small business sectors around our mine sites.

Results from this study are expected in Q4 2017 and will be used to plan 2018 development initiatives. This study is in addition to the education scoping study which was completed in January 2017.

Dividend

Acacia Mining has a cash flow based dividend policy where it aims to pay a dividend of between 15-30% of its operational cash flow after sustaining capital and capitalised development but before expansion capital and financing costs.

As a result of the inability to export concentrates Acacia Mining has experienced negative free cash flow in the first half of 2017 and due to the level of uncertainty over full year cash flow expectations, the board of directors has not recommended the payment of an interim dividend.

International employee work permits

During the second quarter Acacia Mining, and a number of its key contractors, experienced difficulty when applying for work and residence permits (as both are required to work in country) for international workers.

This has had a particular impact on Acacia Mining’s underground development contractor at both Bulyanhulu and North Mara and led to a reduction in development metres as a result of the reduction in available staff.

Together with the contractor, Acacia Mining is working to resolve this issue with the Tanzanian Ministry of Labour, but expects full year development metres at both Bulyanhulu and North Mara to be behind plan.

Outlook for Acacia Mining

Acacia Mining’s three mines continue to produce and sell gold doré whilst stockpiling gold / copper concentrate.

At 30 June 2017 Acacia Mining has approximately 127 000 oz of gold, 8.3 million pounds of copper and 107 000 oz of silver contained within unsold concentrate.

Acacia Mining reiterates its group production guidance range of between 850 000 and 900 000 oz, although it is now targeting the lower end of this range.

This is a result of full year expectations at Bulyanhulu being approximately 10% lower than previously planned due to lower underground productivities.

Despite this, Acacia Mining continues to expect full year group all-in sustaining costs of between $880 – $920/oz and cash cost per ounce of between $580 – $620/oz.

Acacia Mining’s cost guidance is inclusive of the payment of the higher royalties and clearing fee, which are currently being paid under protest.

In light of ongoing developments in Tanzania Acacia Mining continues to assess its capital expenditure and now expects this to be between $180-200 million for the year as it defers non-essential spend.

Acacia Mining continues to review broader spending across the business to ensure that we manage cash outflows whilst we are unable to export 100% of our production.

Feature image credit: Acacia Mining

(Underground mining activities the Bulyanhulu gold mine in Tanzania)