Acacia Mining's Tanzania dispute 'no laughing matter', say analysts

A committee of experts appointed by Tanzanian President John Magufuli stated on Wednesday that Acacia had not fully declared all of the minerals contained in the concentrate and so its export ban would remain in place.

After mulling the committee's investigation of metal concentrate shipment containers that revealed that they had been undervalued by a factor of 10, Magufuli fired mines minister Sospeter Muhongo, dissolved the audit committee and called for a new probe.

Separately, but unlikely to be unconnected, Acacia has ongoing disputes relating to reclaiming an outstanding VAT receivable and also faces pressure to change the ownership of its local operating companies to include a 30% holding by Tanzanian nationals.

"This is not a laughing matter," said Investec, "but it sounds like someone in the committee has missed a decimal point somewhere along the line. Alternative explanations don’t bear thinking."

But Jonathan Guy at broker Numis said that given the scale of production at the mines, he did not believe that the accusation of a tenfold understatement is credible.

"However, it provides a further indication of how problematic the relationship between the company and the government has become," he said, but expressing confidence the company and government will resolve the dispute before too long.

RBC Capital Markets analyst Tyler Broda downgraded Acacia's shares to 'underperform' from 'sector perform' as he felt the developments may even put the miner's local operating license under pressure.

Broda felt the Tanzanian accusations were "highly unusual" and "metallurgically questionable" and therefore further investigations "may - in theory - provide some relief for the company although it is unclear what next steps can be taken to clarify this matter".

But with the lack of near-term resolution to the concentrate ban and uncertainty around the future implications, the shares were likely to sag as investors further discount the potential cash flows in the near and medium term.

Acacia, which finished the first quarter with net cash of US$196m, has already said it could put production from its Bulyanhulu and Buzwagi mines on pause if the ban was extended, and RBC and Numis felt this was likely in order to avoid a further build-up of working capital from the concentrate which it is unable to sell.

There is a chance Acacia could be cleared by any independent investigation, Broda wrote, although he thinks international litigation looks increasingly likely.

"The economic consequences to Tanzania of shutting down what would be otherwise viable mining operations, especially with the negative mark that this could place on foreign direct investment, could see an eventual resolution arise," he concluded, such as a government stake or higher taxes.

Numis' Guy was thinking on similar lines: "Ultimately what the government wants is for ACA to resume exports but with adjustments to the amount of cash tax and royalties being paid."

But he retained his 'buy' recommendation in the belief that these issues will be resolved, not least as Tanzania is aiming to attract significant long term investment into the development of its offshore oil and gas industry.