A wave of African tax increases is engulfing some of Canada's biggest mining companies, leaving them scrambling to negotiate with newly assertive governments that have lost patience with traditional tax deals.
First Quantum Minerals Ltd. is the latest Canadian company to be hit with a massive tax bill. Zambian authorities have told the company to pay an additional US$8-billion in taxes and penalties for failing to pay proper duties on imported supplies over the past five years.
First Quantum's chief executive, Philip Pascall, admitted on Wednesday that he had been completely blindsided by the shock announcement. "I literally heard about this the day before yesterday," he told investors in a conference call as he tried to mollify their concerns.
The amount of First Quantum's tax bill is huge – larger than Zambia's entire annual government budget. But it is just the latest in a series of tax manoeuvres that have hit Canadian companies hard in the past year in Africa.
Barrick Gold Corp.'s subsidiary, Acacia Mining, was handed an astonishing tax bill of US$190-billion in Tanzania last year. That amount is four times greater than Tanzania's entire annual GDP.
Barrick responded by promising that Acacia would pay US$300-million to Tanzania, along with a new benefits-sharing arrangement that would include a 16-per-cent government stake in Acacia's gold mines in the country.
In the Democratic Republic of the Congo this year, the government announced a sharp increase in mineral royalties and the elimination of existing stability agreements that protected mining companies from tax hikes. A delegation of top mining executives, including Robert Friedland of Ivanhoe Mines, flew to Kinshasa for an emergency meeting with President Joseph Kabila, but he approved the new tax code shortly afterward.
Mali, another favourite destination for Canadian mining investors, announced this week that it is drafting a new mining code and is prepared to impose it unilaterally if it cannot reach agreement with the mining industry.
In some cases, the tax increases could be money grabs by cash-strapped governments seeking new sources of revenue. But they also reflect a growing popular mood in Africa, where much of the population is convinced that mining companies have benefited from cozy deals to minimize their taxes or to conceal their full income.
"Governments, probably rightly, don't think they're getting a fair share of the wealth," former Acacia CEO Brad Gordon told The Globe and Mail in an interview last year.
Jamie Kneen, communications co-ordinator at MiningWatch Canada, an independent group that monitors Canadian mining companies worldwide, said many companies have lost public legitimacy in Africa. "To some extent the tables are turning," he said. "African governments are beginning to act like the legitimate owners of their own resources, and even the biggest mining investors are being forced to respond."
Fielding questions for about an hour on Wednesday, First Quantum's top management sought to reassure investors about the unexpected tax bill.
On Tuesday, First Quantum said the Zambia Revenue Authority (ZRA) sent the company a letter claiming it had drastically underpaid its taxes over a period of five years by misclassifying imports of consumables and spare parts as mining machinery, which only incurs nominal duties.
Instead, First Quantum should have been paying significantly higher rates, ranging from 15 per cent to 25 per cent on the items, according to the ZRA.
Others in the company, however, had been initially contacted by the ZRA a few weeks prior on March 1, Mr. Pascall said. First Quantum then responded on March 14 and received the letter of assessment on March 19.
First Quantum said it intends to contest the tax assessment, which covers about US$540-million of imports for its Sentinel copper mine in Zambia. Mr. Pascall said that while imports payable on certain items were complex and open to interpretation, it was "very unlikely" it had misclassified a significant number of the imported goods.
Of the US$8-billion tax bill, Mr. Pascall said that US$5.7-billion is interest and US$2.1-billion is penalties. However, penalties of that magnitude would only be payable in the event of smuggling , which the company refutes.
"Every one of these items has a comprehensive set of documentation to go with it," chief financial officer Hannes Meyer said.
First Quantum's initial review of about 23,000 separate line items in question will take about six months. Company representatives were unable to give definitive answers on how long the process might take to be fully resolved, how much the company may ultimately pay in penalties, and how First Quantum would pay should the final charges run in the billions.
With a market capitalization of $12.3-billion, First Quantum is one of Canada's biggest mining companies. It operates the Kansanshi mine, the largest copper mine in Africa.
Shares in First Quantum lost 12.4 per cent of their value on Tuesday, but rebounded nearly 4 per cent Wednesday.