Mining & Trade News

There are exciting features in the Mine Development Agreement (MDA) that the Malawi Government signed with Lancaster Exploration a subsidiary of UK firm Mkango Resources for the Songwe Hill Rare Earth Mining Project in Phalombe, which symbolises hope that Malawians including the local community will enjoy ample benefits from the future mining operation in accordance with the country’s laws.

Going through the MDA, it is clear that the mining company is respecting the Malawi laws as it has committed to conduct its operations and pay taxes and royalties as prescribed in the laws, and has not raised any issues of tax exemptions that dwindle amounts of revenue collected by government.

“The two parties agreed that the provision of the tax legislation shall apply,” reads the MDA.

It also states that the Company will pay according to the Malawi tax legislation a royalty of 5% of the Gross Revenue at Mine-Gate.  

“The Royalty base will be calculated as the proceeds that the Company receives through the sale of Mine Product into the spot market or contract as appropriate for each sale, net of post Mine-Gate costs.”

The MDA states that the company will pay Capital Gains taxes which shall be charged where a gain has been realised by the company which is the reporting company in Malawi.

The agreement also gives the State the right to acquire up to 10% free equity in the mine, which will permit the State to exercise 10% of the voting rights for the mining project.

Community, employment and procurement

In the MDA, the Company agrees to implement a Community Engagement Plan that complies with the Law and to the extent practicable, embraces the concepts outlined in Malawi’s Community Engagement protocol.

In addition, above and beyond Malawi legislation during the first five years of normal operations the Company agrees to a minimum employment guarantee to engage not less than 150 Malawian citizens It should be noted that there are also guarantees for all unskilled labour to be a minimum 100% Malawian citizens, 75% Skilled and Highly Skilled during production and 90% after 10 years commercial production.

The Company shall also train its Malawian employees for the purpose of improving their skills and knowledge consistent with the Mines and Minerals Act.

“The Company shall establish and update an employment and training plan that is consistent with the Mines and Minerals Act,” reads the MDA.

Tender criteria

  The Agreement says the Company shall develop a goods and services procurement plan and a business development assistance plan consistent with the Mines and Minerals Act.

“These plans shall address how to engage local businesses in the supply of goods and services where competitive,” the MDA reads.

Public response

In views sought from our readers including taxation experts; while commending the MDA for Songwe Hill, they also express some concerns regarding the royalty based on the net earnings after deducting costs including transport expenses from the gross sum realised from the sales of the minerals.

The commentators say such a method of collecting royalties may result in government earning reduced as well as the potential risk of cost inflation and difficulties for tax administrators to verify the costs arguing that the best arrangement is to calculate the royalties based on the sales contract.

In a written response, National Coordinator for the Natural Resources Justice Network (NRJN) Mr. Kennedy Rashid also hailed the Songwe Hill agreement on issues of taxation and levies saying it has been aligned with national laws. He describes the deal as a win-win situation if the parties adhere to the agreed terms.

Rashid said: “On a positive note while looking at the agreement and considering the model that was used, if the agreement can be adhered to, it gives assurance to the country in retaining a direct share in Songwe Hill revenues. “ “The corporate income tax has remained at a standard rate which aligns with national taxation laws, ensuring consistent government revenue generation.”

 “These terms show promise but several elements such as the royalty rate, community development agreement, and environmental safeguards warrant public scrutiny in their implementation.”

In terms of value realization, Rashid said that the MDA lacks obligations for on-site beneficiation, risking that Malawi will export raw concentrate. However, we have learnt that this is not an issue as the Songwe Rare Earth Mine, a ~ 400 million USD investment will have on site beneficiation as well as a Hydro-Metallurgical plant which will be producing a value add, high value Mixed Rare Earth Chemical Carbonate which can be exported and sold into international markets and provide significant FOREX revenues into Malawi.

He also said NRJN remains concerned about government enforcement capacity and transparency of the environmental management plan saying there is no clarity on environmental bonds requirement. However, the MDA clearly states that the company shall comply with all the Environmental Laws of Malawi and it should be noted that Mkango has gone above and beyond these and has already completed a full Environmental Social Health Impact Assessment (ESHIA) to World bank equator standard, which is signed off and approved by the Malawi Environmental Regulatory Authority (MEPA). It should also be noted that there is actually clarity with regards to the Environmental Performance Bond which shall be equal to the greater amount specified as being necessary for reclamation works in the Bankable Feasibility Study and the Rehabilitation and Mine Closure plan.

Rashid felt that state equity is low at 10% and as a country Malawi seems to have offered a low royalty rate without consideration of the type of mineral that will be mined which can potentially affect value realization and deprive Malawi of revenue gains.

To ensure further long-lasting benefit to Malawi, NRJN has made a number of recommendations including: tying royalties to the market performance to ensure that Malawi captures more value if rare-earth prices rise; review government equity in the project; introduce Community Development Agreement (CDA) independent oversight mechanisms; and strengthen environmental governance through pollution mitigation bonds managed by regulatory bodies.

However, Coordinator for Chamber of Mines and Energy Dr. Grain Malunga, who is a leading Malawian Mining Specialist and a former Minister of Natural Resources, Energy and Mining said in an interview that Malawians do not have to worry on benefits from the future Songwe mining operation to the Malawi economy since the country’s royalty rate is very much internationally competitive and rightly calculated on mine gate price.

“Please let all stakeholders be investor friendly and reasonable on benefit sharing with the intention of attracting mining investment and continuously attracting exploration capital,” said Malunga.

But NRJN urges the Government to take a proactive stance in implementing and supporting the Mining Development Agreement to ensure that the agreement transitions into a truly transformative project, catalyzing industrial growth, community empowerment, and sustainable mineral wealth for generations. 

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