Mining firm Acacia is staring at hard options in its Tanzania operations after Dar es Salaam slapped it with one of the world's highest tax bills -- $190 billion -- only days after it announced a significant reduction in its cash balance, which could see it close down one of its key mines.
The London Stock Exchange-listed firm saw a reduced cash balance of $176 million, from $318 million, in its unaudited results for the six months to June 2017.
But it is the tax demand that will be the ultimate test to the gold miner's relationship with the President John Magufuli administration.
"The first half of the year has posed significant challenges to our operations in Tanzania following the introduction of the concentrate export ban in March," Acacia's chief executive officer Brad Gordon said.
He added that they are in a complex situation that has led to a significant reduction in their cash balance as they were unable to realise $175 million of revenue during the half-year together with a $51 million VAT outflow.
The firm is now banking on the arbitration, set to start next week, to unlock the impasse. Should this fail, the firm could shut down its Bulyanhulu goldmine to concentrate on the North Mara business and its new operations in Kenya.
"Through our holding firm, Barrick Gold, we have already served the arbitration notices," Mr Gordon said during a dial-in press conference last Friday as the firm released its interim results.
"We hope that we will achieve a negotiated resolution, which is the preferable outcome for us. If that fails, we may be forced to close the Bulyanhulu facility in order to protect our cash flow."
Mr Gordon will not sit in the arbitration team.
On Tuesday, the firm announced that it had received a demand note from the Tanzania Revenue Authority for a historical corporate income tax, covering the past 17 years.
The taxman claimed that Acacia, through Bulyanhulu Gold Mine, owes $154 billion, and $36 billion from the Buzwagi mine.
The firm says it has, since its inception, realised total revenues of $9.4 billion from these mines.
But the tax assessment claimed $40 billion in alleged unpaid taxes and about $150 billion of penalties and interest. The assessments were over alleged under-declared export revenues and appear to be a follow-up on the findings of two presidential committees.
In a response to queries by The EastAfrican, the firm said that it disputes these tax assessments, "which have been compiled without due process and do not include the required underlying basis of calculation."
"If you look at the findings, you will notice the inconsistent and ludicrous figures of undeclared revenue and unpaid tax numbers. We are considering all of the options but, in the meantime, we are pleased that negotiations between Tanzania and Barrick Gold are due to commence shortly and believe that a mutually beneficial negotiated resolution remains the preferable outcome for all parties," the firm said.
Investec Securities mining analyst Hunter Hillcoat said a solution to the impasse is difficult to envisage, adding that the $40 billion tax bill is more than twice what the top five global mining firms have jointly paid in tax in the past 17 years.
Costly legal battle
In its investor note, Investec said that Acacia faces a protracted and costly legal battle in international courts with the Tanzania government, unless a resolution is reached.
"It was our expectation that the concentrate ban would be quickly resolved, probably through increased tax prepayment penalties. However, given the assertions by the Tanzanian government, it appears that there may not in fact be an equitable resolution to come," Mr Hillcoat said in the note.
"Our sense is that Acacia is now more of a binary investment -- it is either worth what it was before this situation, or it is worth the cash that it has in its non-Tanzanian banks.
"We cannot recommend investment in Acacia until the Tanzanian authorities provide some comfort that companies can operate there under predefined agreements," Mr Hillcoat added.
In its half year results, the firm saw its revenue drop by 22 per cent to $391.7 million, largely because the firm has been unable to sell 127,000 ounces of gold concentrate from its Tanzania operations since March.
In the six months to June, revenue fell 22 per cent its pre-tax profits dropped marginally by 2 per cent to $99.5 million.
The firm is staring at a bleak future on the Bulyanhulu mine, as the cash flow at this mine was now unsustainable beyond the end of the current quarter.
Roughly 46 per cent of Bulyanhulu's production is sold as a concentrate, and in case its operations there grind to halt, it could incur $30 million in costs to retrench employees and end contracts.