How Kabanga nickel deal echoes unexamined Barrick’s model

Tuesday February 09 2021
kabanga pic
By Dastan Kweka

On January 19, 2021, the Tanzania government signed a framework agreement for the exploitation of nickel, and associated resources located in Kabanga, Ngara District, with a  United Kingdom based company – LZ Nickel Limited. The company immediately changed its name to Kabanga Nickel Limited.

The signing of the framework agreement, about three months after President Magufuli won a second term, is a big milestone for the fifth phase government, because of two main reasons.

Firstly, the agreement is the most significant, symbolically and in terms of value, since President Magufuli initiated his reform of the extractives sector in 2017. The period following the dispute with Barrick (2017-2020) was characterized by a great deal of uncertainty for many prospective investors, mainly because of a strictly nationalistic legal framework underpinning the quest to maximise revenues from the natural resources sector. The significance of the Kabanga deal is that it sends a positive message to other potential investors, that it is feasible to engage Tanzanian authorities, and agree on a viable business.

Secondly, the Kabanga nickel agreement replicates the ‘Barrick Model,’ in terms of ownership structure, government participation, and distribution of potential benefits. The model is based on 16 percent free carried interest, 50/50 sharing of economic benefits, representation in corporate governance, localization of operations, and significant local content commitments. By reproducing the Barrick model, the fifth phase government has reaffirmed its confidence in the Barrick deal, and demonstrated that the model is, after all, implementable. Barrick’s recent report that its joint venture with the government of Tanzania, through Twiga Minerals Corporation, was able to pay a maiden dividend of $250 million to its shareholders in 2020, points to the potential success of the 2017 reform agenda.

The downside of the ‘Barrick Model’ is that it has not been sufficiently examined by independent analysts, largely because the government has consistently chosen not to disclose the details of its agreements with investors.

Kabanga Nickel Limited, the government’s Joint Venture partner, is a privately owned company. Unlike private companies, publicly listed companies are subject to mandatory disclosures, especially in developed countries. Analysts were able to see a framework agreement that Barrick had negotiated with the government of Tanzania because of mandatory disclosure rules. Unfortunately, as a privately owned company, Kabanga Nickel isn’t subject to mandatory disclosure rules in its home country, the United Kingdom. While the Tanzania Extractive Industries Transparency Act (TEITA) provides for disclosure of a broad range of information, including investment contracts, the implementation of the law has been consistently selective.

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Through its 2020 general election manifesto, the ruling party - Chama Cha Mapinduzi (CCM) - made a commitment to implement the country’s obligations as a member of the Extractive Industries Transparency Initiative (EITI). The manifesto notes that fulfilling EITI obligations is key to enhancing the reputation of the minerals business in the country. It is worth noting that the manifesto is silent about the link between transparency and accountability, a central pillar of the EITI framework. The government has been keen not to overtly reject the EITI rationale, but has instead elected to let the agenda die a slow, unmournable death.

The framework agreement that the government signed with LZ Nickel Limited (now ‘Kabanga Nickel’) includes the formation of a subsidiary firm that will be responsible for establishing a smelting facility to be based in Kahama. It is clear that through this agreement, the government has sought to make up for its failure to get Barrick to commit to investing in a smelting infrastructure. The establishment of a smelting facility, if successful, will enable mining firms that have struggled to obtain license for exporting concentrates to monetize the stockpiled resource, and expand their operations.

Nevertheless, the government’s decision to place the obligation of developing the nickel resource, and building a smelting facility under one Joint Venture partner is risky due to potential sequencing problems, and because it gives the company a lot of leverage as it works to unblock a key value-addition bottleneck. This remains the case, even though there are, reportedly, two other smelters - one in Mwanza, and another in Dodoma - which may become operational soon.

The nickel deal has come at a time when engagements to advance the Liquified Natural Gas (LNG) project have stalled. Apart from project economics, and political risk arising from reforms in the extractives sector, the security uncertainty emanating from the potential spill over of the Cabo Delgado conflict into Southern Tanzania is likely to continue to affect decision making by corporations.

While it has taken years for the government, and investors to devise a conducive investment structure, some recent developments, such as the ongoing construction of the Julius Nyerere Hydro-electric dam will, if successful, enable the government to adjust its priorities in future negotiations, especially as far as the obligation for servicing the domestic market is concerned. Although the nickel deal may encourage corporations interested in the LNG project to redouble their efforts, the fifth phase government must be vividly aware that it will not be able to deliver the project before its term in office expires.

With two joint venture arrangements - Twiga Minerals Corporation, and Tembo Mining and Refinery - that are based on the same model, and whose negotiations were led by the same person, Palamagamba Kabudi, the government has now garnered the experience, and the stamina it needs to reopen existing concessions that are considered unconscionable. The main risk facing the government is that it is replicating a model whose veracity is uncertain. As the two joint ventures mature, their efficacy, or lack of, will become clearer.