A new mining law, requiring foreign-owned companies to cede a 50 per cent stake to the public in Tanzania, is threatening to cripple the thriving $500 million Tanzanite gemstone business.

One company, TanzaniteOne, has rejected a demand by the government to relinquish half of its shares to the State Mining Corporation (Stamico), setting the stage for a major dispute.

TanzaniteOne, a multinational listed on the London Stock Exchange, said it could not dispossess its investors of their shares.

Instead, the firm, which extracts Tanzanite in the Mererani Hills, about 40 kilometres southeast of Arusha, offered to offload 20 per cent of its shares through an IPO at the Dar es Salaam Stock Exchange.

Executive chairman Ami Mpungwe said the firm’s shareholders comprised institutions like pension funds, whose interests could not be taken for granted. They could not be dispossessed of their shares through a “simple announcement.”

But Mr Mpungwe said the company was negotiating a solution with the State.

The new Mining Act of 2010, which became effective this year, requires foreign-owned companies to cede 50 per cent of their stake to the public or lose their mining permit.

The matter is urgent for TanzaniteOne, as its licence expired in August 2012 and the government is threatening not to renew it until the firm surrenders the 50 per cent shares.

Deputy Minister for Energy and Minerals Stephen Masele told The EastAfrican that the firm must relinquish the stake to Stamico as a precondition for renewing its operating licence.

“The company wants the state to buy the shares, but our position is that the firm ought to offload the stocks to Stamico free of charge or else lose the licence,” said Mr Masele.

The new law stipulates that gemstones will be exclusively mined by Tanzanian nationals, unless the mining requires heavy investments and sophisticated technology, where foreign investors will be allowed, but on condition they offload 50 per cent of their shares to the public.

Lusekelo Mwakalukwa TanzaniteOne corporate governance manager told The EastAfrican that the company has invested heavily in its designated mining block and has just started to realise profits.

He adds that the firm has also been paying revenue, including corporate taxes, royalties and other related income to the government.

Increased production

Bernard Olivier, chief executive officer of Richland Resources, which owns TanzaniteOne, says production at the mine is still rising at a record 2.4 million carats in 2011 with decent grades.

The firm employs 650 people and has paid $26 million in tax over the past five years.

Cash costs per carat are rising too, however, from $1.41 a carat in 2005 to $3.69 in 2010. While the company made a $6 million profit in 2008, today that figure is less than $1 million. Mr Olivier says prices are still 20 per cent below those of 2008.

TanzaniteOne, operating in an eight square km block ‘C’ tanzanite site, planned to produce and export 2.5 million carats worth $24 million in 2012.

Records show that TanzaniteOne has invested over $100 million, but analysts say the company has provided marginal contributions to the communities surrounding its area of operation.

“I don’t see a significant impact of TanzaniteOne’s investment on nearby communities,” said Dr Gasper Mpehongwa, a lecturer in development studies at Tumaini University.

However, records show that TanzaniteOne provides over 2,000 villagers and 4,500 cattle with water at Neisinyai village in Mererani Hills.