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EXECUTIVE SUMMARY
Doris Akol, the commissioner of Uganda Revenue Authority, has a task of ensuring that investors pay their fair share of tax
The government tabled its broadest Income Tax Amend- other cobalt target in Kasese.
ment bill in five years, with some proposals that could place a For more than two years, one of the main discussions in the
burden on companies sourcing for loans to invest in capital-in- power industry has been the refinancing of the loan for the
tensive projects. Bujagali hydropower project. In this edition, we give you some
In this edition, we discuss the amendment of the Thin Capi- of the exclusive details of the costs of this refinancing.
talisation rules and what that means for companies that were Across the border in Kenya, the national oil company had a
looking to put up investments using debt. busy April, signing key agreements that position it as a strong
The battle to win the Engineering, Procurement and Con- player in the country’s petroleum industry. The national oil
struction contract for the Tilenga oil project is nearing its end company signed a deal with Schlumberger for a field devel-
as both companies, Flour and Chicago Bridge & Iron Company, opment plan for the Lokichar basin and also one that will see
submit their second proposals on the price. We discuss what it supply petroleum products for some geothermal power
is at stake and what plans the companies have in case they projects.
win the contract. We also touch on some of ongoing Front In Tanzania, Swala Oil and Gas, which wanted to carry out
End Engineering Design works at the Kingfisher oil field, and some oil drilling in the Kilosa-Kilombero basin, has hit through
some of the risks that the project faces. a brick wall. The Australian junior firm is crying foul over frus-
In the March edition, we told you how Black Mountain tration from some government agencies and decided to call a
Resources Limited had decided to relinquish its license for the force majeure on its Production Sharing Agreement.
Namekara vermiculite mine in exchange for a debt relief. In There is a change of guard at two key ministries in Rwanda.
this edition, we discuss what the company is doing as it plans Claver Gatete was transferred from his position as minister of
to embark on phosphate production at the Bukusu complex. Finance to the ministry of Infrastructure. We discuss some of
Canadian firm M2 Cobalt has some positive news coming Gatete’s plans for his new ministry and what that could mean
out of its geological surveys for the Bujagali cobalt targets. for local content in the country.
Find more about that and what the company is doing at its
OIL AND GAS
Tullow Oil's country manager for Uganda Jimmy Mugerwa (L) chats with former Vivo Energy Uganda MD Paul Hansen
Uganda has introduced new income tax incurred during the next year of income.” revenues out of the country.
measures that are bound to impact on This amendment borrows from the Uganda has struggled to come up with
how much debt international companies Organisation for Economic Cooperation a conducive thin capitalization rule, with
can use to finance their projects. and Development’s Base Erosion Profit the policy being a subject of amendments
The scrapping of thin capitalization rules, Shifting policy, which seeks to become over the last five years.
which determined how much debt a a blueprint for a model global taxation Also, Uganda has abolished the VAT
company was allowed to hold compared policy. The OECD is in favour of a fixed exemptions that investors enjoyed for
to its equity, could present multinational ratio that limits interest deductions that supplies of passenger automobiles and
firms a challenge on how to finance their companies make. entertainment for the extractive sector
investment projects such as those in the The limitation of interest deductions and donor-funded projects. The catch
oil midstream industry. Finding the debt and capping it at three years could here is the definition of entertainment
to invest in Uganda has just got harder. hamper the financing of long-term in regards to Uganda’s tax law. In
As part of the new rules, Uganda has projects, which usually face delays Uganda’s tax law, entertainment is
amended section 25 of the Income Tax Act in completion. Companies will defined as the provision of accom-
to read as follows: “the amount of deduct- now have to look at efficient modation, food, beverages, and
ible interest in respect of all debts owed ways of sourcing and using debt. a couple of other amusement
by a taxpayer who is a member of a group There was growing fear within activities.
shall not exceed thirty per cent of the tax Uganda Revenue Authority that The scrapping of this VAT re-
earnings before interest, tax, depreciation some multinational companies prieve might make it more expen-
and amortisation.” were exploiting thin capitalization sive for the construction of projects
It adds: “A taxpayer whose interest rules to abuse the tax system by limiting like the East Africa crude oil pipeline,
exceeds thirty per cent of the tax earnings their tax bills. Many companies were said which is supposed to go through remote
before interest, tax, depreciation and to be front-loading a lot of debt – much of areas where food and accommodation
amortization may carry forward the excess it through shareholder loans – into their are in drastic short supply.
interest for not more than three years, Uganda subsidiaries as a way of reducing
and the excess interest shall be treated as their tax burden and extracting more TO NEXT PAGE
OIL AND GAS
New tax
rules to hit
oil industry
The amendment of the Income Tax
Act comes at a time when the project
owners and the financiers of the crude
oil pipeline are in the final stretch of
concluding negotiations over the Final
Investment Decision for the project. The
announcement over the completion of
the FID is expected to come in the third
quarter of this year.
It had been anticipated that the
amendment of this year’s income tax
law would make a pronouncement on
the validity of taxing carries, especially
as Tullow Oil continues to push for gov-
ernment approval of its second farmout
to Total E&P and Cnooc. The $900 mil-
lion farmout, which was announced in
the first quarter of 2017, is yet to receive
Uganda government’s approval partly
because of negotiations on whether this
kind of transaction should be taxed. As
part of the farmout, Tullow Oil agreed
Negotiations between the Uganda The same negotiations, which started in companies can shore up debt for the crude
government, Total E&P, Cnooc and Tullow February this year, are happening in Tanza- oil pipeline. A final investment decision for
Oil over the Host Agreement for the East nia too. the pipeline is expected to be concluded in
African crude oil pipeline are expected to be The host agreement stipulates the the third quarter of this year.
concluded in May. obligations of both the governments and The Uganda negotiation team is being led
Officials from both sides were locked up in the oil companies in regards to issues such by officials from the Uganda National Oil
closed-door meetings in late April at Serena as access to land, local content, financial Company, with support coming from the
hotel trying to thresh out the finer details obligations, and the raising of debt for the Petroleum Authority of Uganda and the
of an agreement, which will spell out the project. It is not yet clear what concessions Directorate of Petroleum.
commitments needed to have the pipeline both parties have agreed to. The Host
constructed with less risks. Agreement must be in place before the
ELECTRICITY
Black Mountain
launches rights
issue to raise
$1.7 million for
Busumbu and
Bukusu mines
Black Mountain Resources Limited is to spend much
of the month of May trying to convince its shareholders
to participate in a $3.2 million rights issue, the substan-
tial amount of which is planned to be invested in the
Busumbu phosphate project in eastern Uganda.
The launch of the rights issue comes less than three
months after Black Mountain Resources, an Australian
mining company, agreed to relinquish its license over
the Namekara vermiculite mine for a debt relief.
According to some of the terms of the rights issue,
$1.7 million of the proceeds will be booked as explora-
tion funding for the Busumbu project and other existing
copper and rare earth targets identified in the Bukusu
complex.
For the Busumbu project, Black Mountain Resources
has planned to spend $500,000 for drilling; $200,000
for preliminary mine planning and optimization studies;
$150,000 for broad sampling and metallurgical test
work; and $150,000 for preliminary processing plant
optimisation studies.
In a statement, Black Mountain Resources said:
“Previous exploration on the Busumbu Phosphate
Project identified up to a 3km of strike extent of phos-
phate mineralisation likely between Busumbu and the
Namekara Vermiculite Mine. The results also indicated
a substantial phosphate mineralisation footprint for
future exploration.”
For the Bukusu project, the Australian mining com-
pany intends to spend $150,000 for ground survey
geophysics and sampling and $250,000 for drilling in
some areas.
A recent baseline study estimated that there are
about 50 million tonnes of phosphate at Bukusu.
Black Mountain says it is preparing an exploration
programme for the Bukusu carbonatite complex, which
hosts the Busumbu phosphate mine. The company says
it is engaged in “advanced negotiations with a strategic
partner to progress the Busumbu phosphate project.”
MINING
M2 Cobalt
survey
reveals
two strong
mineral
sites
Uganda is vying to develop its cobalt minerals to almost the size of DR Congo, which is the biggest producer of the mineral in the world.
Canadian firm M2 Cobalt Corporation has confirmed two dif- On a national level, the initial results from the soil samples go a
ferent discoveries of mineral anomalies at one of its two licensed long way in de-risking the mineral potential of the country, and
areas, reaffirming its belief of the potential to generate mining offer critical data on which other investors can build on to make
revenues in Uganda. investment decisions.
M2 Cobalt, in early April, said “results from rock and soil sam- The company noted that “all samples were sent to ALS Chemex
pling and high-resolution ground magnetics have con- South Africa (Pty) Ltd., an independent and fully
firmed the discovery of a large-scale nickel-cobalt-cop- accredited laboratory in South Africa, for further
per anomaly (characteristic of a presence of minerals) analysis. It is expected that after results from the
at Bombo, one of the company’s principal exploration South African lab come through, M2 Cobalt will mo-
targets at its Bujagali licenses in South-Central Uganda.” bilize teams to conduct infill sampling, trenching and
A week later, the company announced that it had also drilling on its licensed area.
discovered “a new cobalt and copper anomaly delineat- At its other mineral target in Kilembe, Kasese
ed by both soil and rock samples (named the ‘Waragi district in western Uganda, M2 Cobalt embarked on
Target’). a high resolution airborne geophysical survey. The
From a company perspective, the results offer M2 Co- survey, which was undertaken using a helicopter, was
balt a fairly good idea on how to get the licensed areas done by Geotech Ltd. The results of that survey are
to production, and what kind of commitments need to be made. yet to be formally announced.
MINING
Hima
Hon. Amelia Kyambadde (R) hands over a certificate of appreciation to Hima Cement's
Trade Marketing Manager Sophie Mirembe during the Masons' training
Hima Cement will launch its new For much of March and April, the main
Cement
grinding station in Tororo in May in what cement companies – Hima and Tororo
should ease cement prices in the country, Cement – were undertaking maintenance
which had shot up by about 20 per cent works, creating a shortage of cement
in April. in the country. Kampala Cement, the
to launch
The grinding station is valued at $40 other company, is said to have exploited
million and it is expect- this shortage and sold most of its
ed to increase Hima cement, nearly wiping out its clinker
Cement’s capacity to in order to meet market demand.
Tororo
produce about 1.9 million Also, it is believed that the biggest
tonnes per year from cause of the price jump was down
the current one million to traders hoarding the cement.
tonnes. That was partly why the minister of
grinding
The launch of the Trade, Industry and Cooperatives
Tororo station comes a Amelia Kyambadde, warned that
few months after Hima she would allow cheap imported
Cement got a new chief cement in the market if the price
station
executive officer, Nicolas George, who, did not reduce. Imported cement would
among his other plans, is to get the not only push prices further down, but it
company’s Kasese plant operating at near would hurt the big cement companies as
full capacity. their margins would narrow.
KENYA
Swala, Govt
relations
hit new low
Relations between Swala Oil and Gas and the government of
Tanzania have turned sour and hit new depths. After months of
negotiations over the Production Sharing Agreement (PSA) for the
Kilosa-Kilombero basin, the Australian company is fed up with the
delays from government agencies to issue it with permits needed
to drill an oil well that it says could be worth $10 billion. Left with
no choice, the company declared a force majeure on the PSA.
Swala blames its woes on Tanzania Wildlife Authority and the
ministry of Natural Resources and Tourism for the delays in issuing
it with a permit to proceed with drilling in the Kilosa-Kilombero
basin, which is located in an environmentally sensitive area. The
company says it has incorporated all of government’s concerns in
the Environmental Impact Assessment studies but still it has not
received the permits.
In a statement, the company said it “considers the time taken for
such an MNRT [Ministry of Natural Resources and Tourism] inter-
nal assessment to be unjustifiably long. The assessment had not
been completed, and the TAWA (Tanzania Wildlife Authority) per-
mit not been received, by 20th April 2018 and the Joint Venture
had no alternative but to declare Force Majeure under the PSA.”
Swala has been planning to drill the Kito prospect, which is locat-
ed in the Kilosa-Kilombero basin, for the last four years. The basin
is thought to hold about 185 million barrels of oil.
The company received the PSA for the basin in 2012. The follow-
ing year, it undertook a seismic survey over 370km in the basin. In
2014, it carried out another seismic survey over a longer distance.
However, despite making some progress, Swala started hitting
brick walls when the Tanzania Wildlife Authority and the ministry
of Natural Resources and Tourism started making demands. By
this time, the company says it had invested at least $20 million on
making preparations to drill an oil well in the basin.
One of the worries by the Tanzanian government is the impact
of the drilling in Kilosa-Kilombero on the water from River Rufiji,
especially as construction of a power plant, Rufiji hydropower, is
ongoing. Swala says the water they will use during drilling cannot
even fill up an Olympic-size swimming pool, and they see govern-
ment’s demands as a mere form of frustrating their project.
The declaration of force majeure means the company has
dropped its plans to go ahead with the PSA over the Kilosa-Ki-
lombero basin in its current form.
President John Pombe Magufuli
TANZANIA
Canada’s East Africa Metals Inc is engaged in arbitration with completed the updated addendum for the definitive agreement
Tanzanian Goldfields Company Limited over the violation of two for the purchase of the Handeni property. In the addendum, East
separate agreements. The arbitration is taking place in Vancouver, Africa Metals said Tanzanian Goldfields had paid “$688,972 to set-
Canada. tle outstanding payables owed to East Africa Metals and provide
The announcement of the arbitration is the first official state- advance payments towards the final purchase of the Assets…”
ment about the collapse of the agreement that the company had East Africa Metals was supposed to receive other payments
with Tanzanian Goldfields. from Tanzanian Goldfields. It is not clear if these payments came
In March 2016, more than two years ago, East Africa Metals through.
announced that it had “completed the execution of the Definitive The announcement that the two parties are in arbitration
Agreement with [Tanzanian Goldfields] to develop East Africa’s appears that some sections of the definitive agreement, and the
Magambazi project in Tanzania.” amended one, were breached. It could mean that East Africa
One of the conditions under the terms of the deal was that Metals might pay less attention to its Tanzania assets in favour of
Goldfields was to pay East Africa Metals $1 million in cash for the its Ethiopia interests where the company is a lot more active.
entire interest in the Handeni property, which includes the Mag- There is no timetable as to when this arbitration will be con-
ambazi project, and all properties owned by East Africa Metals in cluded. Should the parties fail to agree in the arbitration, then a
Tanzania. lawsuit in a court of law will be the next option.
In January this year, East Africa Metals announced that it had
Irene Batebe is the new acting Commissioner, Midstream at At its next annual general meeting,
the Petroleum Directorate. Her position is crucial in light of the Stanbic bank is expected to announce
recent signing of the framework contract for the construction of the appointment of Sam Zimbe, the
an oil refinery in Kabaale. She is also the board chairperson of deputy managing director of Umeme
the Uganda Refinery Holding Company. Limited, on the board of its directors.
Her key roles as commissioner, midstream will be to review The appointment of Zimbe is reasonable.
technical designs, formulate legislation to govern the midstream Stanbic bank is one of the main bankers
petroleum section and promote the refinery project. She is also of Umeme Limited. Also, Stanbic bank
part of a team of Ugandan officials who are taking care of Ugan- was one of two banks that organized
da’s interests in the different negotiations around the crude oil term facilities worth $30 million for
pipeline project. Umeme in 2013.
Batebe has a Bachelor of Science degree in Chemical and Also, Stanbic has undergone a cor-
Process Engineering from the University of Dar es Salaam. She porate reorganization, where it has es-
also holds a master of Science degree in Sustainable Energy En- tablished a holding company, a banking
gineering from the Royal Institute of Technology, Stockholm, subsidiary and other non-banking sub-
Sweden. She also has a Master of Science in refinery design and sidiaries.
operations from the University of Manchester, United Kingdom. The bank is looking at deepening its
footprint in the energy space by provid-
ing products, especially long-term instru-
ments like corporate bonds, and risk-mit-
igating facilities such as derivatives to
Jennifer Hinton, Director, M2 Cobalt generate more non-interest income.
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