West Africa’s wave of mining reform

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A look at recent mining legislation reforms in West Africa and its potential impact on the local economy and foreign investment

The mining industry is fast evolving and faces, on the one hand, an increasing global demand for mineral resources and, on the other hand, pressure to comply with higher standards of health, safety, environmental protection and transparency.

Known for the riches of their sub-soil and as much coveted mining investment destinations, several African countries have engaged in a sweeping wave of reform of their mining legislation. This has been particularly striking among French-speaking Sub-Saharan African countries.

Among others, Cameroon and Mali completed relatively discreet amendments to their mining codes in 2010 and 2012 respectively, while in 2011 Guinea undertook a rather tumultuous reform of its mining legislation which was completed in April 2013, leaving the country’s mining sector in a state of legal uncertainty for a period of almost two years.

In addition to these, a number of jurisdictions have undertaken a process for the review of their mining legislation. These include Gabon and Burkina Faso where amendments to the existing mining codes, dated 2000 and 2003 respectively, have been adopted by the Council of Ministers and are currently under discussion before the National Assembly. Furthermore, both the Democratic Republic of Congo (DRC) and Ivory Coast have, over the course of the last year or so, released several proposed amendments to their mining codes of 2002 and 1995 respectively.

Recent mining legislation reforms in Africa have been driven by a need to bring existing laws in line with international standards, and to meet the demands of the local electorate who wish to see the mining sector contribute sufficiently to local development.

In practice however, they tend to follow a number of trends revolving around issues such as increased state participation, local procurement and beneficiation, support to local communities, adjustments to the tax regime, including reduction of tax stabilisation, and avoidance of land freeze.

State participation

Mining reforms in several African countries provide for an increase of state or local participation in the capital of mining companies. In Mali, the 2012 mining code maintained the State’s right to a 10 per cent free-carried interest, but also introduced a state option to acquire a further 10 per cent for cash as well as a requirement that five per cent of the company’s shareholding be held by local interests. In parallel, Guinea’s new code has introduced the right for the State to hold a 15 per cent free-carried interest, along with an option to acquire an additional cash participation allowing its equity stake to reach a maximum level of 35 per cent. Notably, it also entitles the State to sell its cash participation without the other shareholders benefiting from a pre-emption right. Comparatively, DRC’s proposed amendments provide for an increase of the State’s free-carried participation from five per cent to 15 per cent, to be increased by five per cent at each renewal of exploitation permits. In Gabon, the new draft bill suggests setting the State’s free-carried participation at 10 per cent with a state option to acquire an additional interest for cash, up to 25 per cent.

Local procurement

Promoting the training and use of local employees and businesses is another trend in recently introduced mining legislative amendments. On this subject, Guinea’s new mining regime provides for the most strenuous obligations, setting quotas for the sourcing of goods or services from Guinean-controlled firms, at up to 30 per cent from the 11th year of exploitation onwards. It also includes fixed quotas of Guinean employees, which, depending on their level of seniority and the stage of the project, can reach maximum rates of 90 per cent for higher management and 100 per cent for other employees. Moreover, in addition to a visa limitation on the length of stay for expat personnel, the new Guinean mining code introduces a requirement for a Guinean national to be named as deputy general manager from the commencement of commercial production and general manager from the fifth year following such production. Finally, Guinean mining companies are now required to file yearly reports on the use of local employees and businesses and must provide for training programmes including for recent graduates and, at the request of the authorities, the training of staff overseas.

The DRC currently proposes indirect means to invite companies to use local suppliers and employees. Under the draft amendments, a 14 per cent withholding tax on services provided by foreign suppliers would be introduced and the exceptional tax on the remuneration of expatriate employees increased from 10 per cent to 50 per cent of the standard rate during the first 10 years of the project and 100 per cent of the standard rate thereafter.

In Burkina Faso’s case, the proposed amendments include an obligation on the part of mining companies and their sub-contractors to (a) give preference to local businesses for the supply of goods and services, to the extent such businesses can provide equivalent services (note that no condition is imposed as to the equivalency of quality, price and delivery terms), (b) give priority to the hiring of local employees for executive positions, and (c) establish a training plan for local managers, with the objective of carrying out the gradual replacement of expat personnel. In Ivory Coast, the proposed amendments would introduce the following new obligations on the part of mining companies and their sub-contractors: (a) give priority to Ivorian companies for construction, supply and service agreements, to the extent offered on equivalent conditions as to quality, price, quantities and delivery terms; and (b) give priority to qualified Ivorian staff. In this respect, as and from the commencement of mining operations, the holder of a mining convention must establish and finance a training programme for local employees, regardless of their qualification.

Mining code reform has swept Francophone West Africa in recent years as governments attempt the fine balancing act of attracting foreign investment and satisfying voter demands

Local beneficiation

Governments are also acting to promote the local transformation of mineral production. Mali’s 2012 mining code requires that mineral products be treated, refined or transformed within Mali, unless otherwise authorised by the mining administration. Guinea has introduced taxes on the export of certain unprocessed mineral substances with tax rates ranging from 0.075 per cent (bauxite), to two per cent (iron ore, base metals) and 3 per cent (uranium and other radioactive substances). In addition, companies intending to transform their minerals locally benefit from one additional year to reach production – namely five years rather than four for exploitation permit holders and six years rather than five for concession holders. The DRC’s proposed mining code amendments introduce a two-thirds reduction of mining royalties if production is sold to local transformation entities; this should be considered in light of a thrice proposed increase of mining royalties.

Local communities

The development of local communities tends to be at the heart of mining law reforms in French-speaking Africa.

Guinea’s new mining code has introduced the obligation to contribute to a local development fund up to 0.5% of the turnover for permits covering bauxite and iron ore and 1% of the turnover for permits covering other substances.

Furthermore, title holders are required to conclude a local development agreement with the local community, providing for training of local population and more generally Guinean nationals, protection of the environment and health, and plans for the development of social projects. Preparing the local community for the cessation of activities must also be part of the mine closure process.

The proposed amendments to Burkina Faso’s code provide for the creation of a local development fund to which mining operators are required to contribute 1% of their turnover before tax.

The 2012 Malian code requires that an exploitation permit application be supported by a community development plan, elaborated in consultation with the regional authorities and the local communities.

Increased tax burden and reduced stability

Some of the most substantial proposed amendments relate to tax and customs provisions, with Guinea having notably led a complete overhaul of its tax regime. Guinea’s new regime applies uniformly to all new titles, and specifically excludes the possibility of negotiating a contractual tax and customs framework. Some of the other noteworthy features of Guinea’s new tax provisions include the non-exhaustive character of the tax and customs regimes provided in the mining code, the introduction of export taxes, as well as royalties on gold being payable upon weighing at the Central Bank, irrespective of sales. Moreover, it provides for a capital gain tax imposed on all transfers of titles and shares in mining companies and even indirect change of control, which is also applicable to holders of signed mining conventions.

DRC’s proposed amendments to the code provide for substantial increases in the rate of mining royalties applicable to strategic and precious metals (6% as opposed to 2.5%), non-ferrous metals (6% as opposed to 2%) and precious stones (6% as opposed to 4%). The corporate tax rate would also be raised from 30% to 35%.

This is supplemented by the codification of two new principles, namely (a) the pas de porte (initial payment) representing 1% of the value of a deposit, payable on the acquisition of “worked and documented” assets, and (b) the signing bonus, presumably payable when mining assets are acquired as part of a tender process.

In addition, a super profits tax at the rate of 50% is introduced, applicable when the price of the relevant commodity exceeds by 25% that anticipated in the feasibility study.

Like Guinea, Ivory Coast’s proposed new mining code provides for the non-exhaustive character of its tax regime. A previous version of the draft amendments to the 1995 code provided for a variable mining royalty set at 3% for gold (to be increased if the price of gold exceeds $US1,000), 3% for diamonds, and 2.5% for base metals, subject to increase in the event of a surge in prices. This has been removed in the latest available draft amendments, which provide that the rate of the mining royalty is to be set under the Law on Finance.

In Burkina Faso’s case, the draft amendments adopted by the Council of Ministers provide for the removal of certain tax benefits during the exploitation phase, such as the seven-year exemption on the lump sum minimum tax on industrial professions, the licence tax and the employer and apprenticeship tax (taxe patronale et d’apprentissage). In addition, the draft introduces a new capital gain tax at the rate of 20% on the assignment of mining rights.

The reduction of tax stabilisation appears as a recurring feature of recent mining reforms. Indeed, Guinea’s new mining code offers a stabilisation regime limited to a maximum of 15 years and which, except for production and export taxes, only covers the stabilisation of the tax rates – specifically excluding the tax bases.

In DRC, stability would be substantially reduced through the removal of the 10-year legal stability guarantee, proposed to be replaced by an undertaking not to amend the mining code for three years. As for companies already holding mining titles issued under the current code, not only are acquired rights proposed to be reduced from a 10-year stability guarantee to five, but such five-year protection would only apply if the title holder has secured minimum investments of $US500 million dependent on this investment producing high value-added mining products in-country.

Burkina Faso is considering limiting the tax stability to a maximum period of 20 years, as opposed to the entire duration of the exploitation permit.

Avoiding land freeze

Aimed at avoiding land freeze, many of the recent reforms have introduced limitations on the number, area and scope of mining permits.

Guinea’s new mining code provides for substantial restrictions on the land package available for exploration, namely a maximum area of 1,050sq km for bauxite and iron ore and a maximum area of 500sq km for other substances.

In the DRC, the proposed amendments would reduce the exploration timeframe from 15 to 10 years. In addition, while the number of exploration permits that could be held by an entity and its affiliates has been maintained at 50, a reduction is proposed on the number of exploitation permits which is now limited to 10 for each entity and its affiliates.

Moreover, new obligations have been created as regards the start of works. Guinea’s new code provides that exploitation title holders are required to begin development works within one year, failing which penalties of $US2 million per month would apply in respect of holders of mining concessions. In addition, titles may be withdrawn if work has not begun within 18 months of the issue of exploitation permits and two years for mining concessions. Additionally, projects are required to start exploitation within four years for holders of exploitation permits and five years for holders of mining concessions, keeping in mind that a one year extension is granted to projects entailing in-country transformation.

Mali has introduced the requirement that exploitation start within three years of the issue of an exploitation permit.

Finally, Ivory Coast proposes to reduce the delay within which exploration work is required to start from one year to six months from the issue of the title.

Mining reforms remain a challenging process, as their success depends on the country’s capacity to maintain a delicate balance between a fair distribution of revenue among the various stakeholders, the growth of the local economy and the legitimate concerns of foreign investors. Countries that undertake a substantive reform of their mining legislation must be careful to avoid creating legal uncertainty or to implement conditions that result in curbing international investments, all of which are counterproductive to the stated objective. As for investors, an awareness of risk mitigation and regulatory compliance is strongly recommended for any new miners looking to explore sub-Saharan Africa.

Norton Rose Fulbright partner Poupak Bahamin is a corporate lawyer based in Paris, specialising in the natural resources sector. She advises companies involved in mining, oil and gas and agriculture on regulatory matters, the establishment of joint ventures, partnerships, mining conventions, PSA, as well as sale and financing of assets. Over the past few years, her practice has been focused on French-speaking sub- Saharan Africa and in particular Democratic Republic of Congo, Guinea, Ivory Coast, Mali, Republic of Congo and Burkina Faso.