Tanzanian beginnings
Despite more recent, legitimate efforts to improve its reputation for foreign investment, Tanzania led the way with resource nationalistic overhauls of its legal framework for mining in 2017 and 2018. Tanzania’s “economic war” has served as an exemplar to many African States, particularly in the Coup Belt, which have focused more on the electoral popularity of such measures than on their costly financial aftermath.
Tanzania’s economic war resulted in a rash of legal claims and whilst some of these claims —particularly the one brought by Barrick—settled in such a way that Tanzania could claim a purported “victory”, others have proven needlessly costly.
For instance, in 2023, Canadian gold miner Winshear Gold Corp. reached a $30 million settlement agreement with Tanzania after the government revoked Winshear’s retention licence for its SMP gold project. Similarly, subsidiaries of Australian nickel miner Indiana Resources recently obtained a $90 million settlement with Tanzania (82.5% of the total original Award) over the government’s illegal expropriation of the Ntaka Hill nickel project.
Although Tanzania is not in the Coup Belt, Tanzania’s recent experience will likely serve as a crystal ball for the region—resource nationalism and arbitrary “reforms” come at a significant cost, which could be avoided through simple negotiations rather than heavy-handed tactics.
Key risks for mining companies
Recent coups d’état across West Africa have led to the contemporary resurgence of politically popular, but fiscally irresponsible, measures adopted from Tanzania’s policy playbook, including sweeping changes to mining codes to increase government royalties and free carried interest percentages, increased export duties and the renegotiation of existing mining conventions and mineral development agreements. Such changes have caused increased permitting delays and complete legal uncertainty about how to meet regulatory requirements.
Structuring investments to benefit from BITs
Companies can effectively mitigate the risks associated with resource nationalism by structuring their investments to benefit from the protections offered by bilateral investment treaties (BITs). BITs are agreements between two or more countries that guarantee certain protections to investors, including the right to pursue international arbitration in the event of a dispute.
BITs can protect companies against unlawful expropriation and provide a legal framework for resolving disputes outside of the host country’s jurisdiction. However, investments must be structured through countries that have BITs with the host country.
In the case of Tanzania, investors like Indiana Resources and Winshear successfully pursued compensation for the unlawful revocation of their mining licenses by incorporating subsidiaries through the United Kingdom and Canada, respectively. Notably, Tanzania has recently sought to terminate its BIT with Canada, a move which forces companies to structure their investments through other countries with treaty protections, like Mauritius, whilst underlining the risk that such jurisdictions pose in the first instance.
One of the primary lessons from recent events is that foreign companies should not rely solely on their licenses and agreements with local authorities; they should also explore international legal protections like those described above.
Negotiating robust agreements
Where companies have a direct agreement with the State, they should opt for a “Coup Belt and Braces” approach in negotiating robust agreements whilst also backstopping their investments with structuring that provides access to BITs. In respect of the former option, companies must ensure that their contracts with host governments include clauses that mitigate risks related to resource nationalism, such as:
- Stabilization clauses: These clauses protect investors from adverse changes in law or policy after the agreement has been signed by either freezing the regulatory framework in place or providing compensation if new laws negatively impact the investment.
- Dispute resolution clauses: Companies should negotiate to include international arbitration as the preferred method of dispute resolution, allowing them to bypass local courts, which may not be impartial or reliable. The same applies for local or regional arbitration centres, which are often untested and are supervised by the very courts foreign investors may wish to avoid.
Companies should avoid putting all their resources in one region, particularly in politically unstable areas. Diversification of assets across different countries reduces the impact of political and regulatory risks in any one location. If problems arise in one country, operations elsewhere can help cushion the financial blow. Many of our clients have been able to pursue their rights in respect of one project whilst providing value to shareholders by advancing another.
Engagement with local stakeholders
Whilst building strong relationships with local communities and stakeholders can help mitigate some risks, it cannot alleviate them entirely. Sadly, there is no evidence that governments are less likely to nationalize assets if companies operating in their country are benefiting local populations through job creation, infrastructure development, and other social programs.
Nevertheless, those efforts are laudable in their own right and provide terrible optics for a state seeking to explain away its nationalization of a mining project to an international tribunal.
Operating in challenging states, particularly those prone to political instability and resource nationalism, presents significant financial and operational risks—illegal expropriation, increased taxes, and revoked licenses, to name a few.
Mitigation of those risks demands adaptability and innovative strategies and frankly, good lawyers. In the current climate, it is down to mining companies to adapt to these challenging environments for as long as states prioritize nationalism over national long-term interest, and politicians in these states favour electoral over generational gain.
Timothy Foden is partner and co-head of the international arbitration group at Boies Schiller Flexner in London. Kristen Young is partner in Washington, D.C. and Rebecca Mee is an associate in London, both specialize in disputes in Francophone Africa.
Boies Schiller Flexner represented Indiana Resources and Winshear Gold in the cases mentioned.
