Assessing the impact of Botswana's fiscal regime on the Karowe Mine

Abstract

Lucara Diamond Corporation's Karowe Mine was commissioned in mid-2012 and it has since turned out to be a very profitable operation with a nominal internal rate of return (IRR) of 58%. We extracted information from Karowe Mine's annual financial statements and constructed a financial model to evaluate the average effective tax rate (AETR) that was realized up until December 2019. We then assessed whether the variable rate income tax formula, which was intended for less profitable base metal mines, was effective in taxing the mineral resource rent from Karowe Mine. Finally, we ran scenarios for government participation in order to test what the effective rate would have been had the Government of Botswana acquired up to 50% paid equity. We find that the AETR for Karowe Mine is 71.9%, which exceeds the recommended range of 40% to 60% for non-diamond mines but falls slightly short for the case of large scale diamond mines as a 50% paid equity results in an AETR to 79.2%. We conclude that the current variable rate income tax formula fails to capture the mineral rent in profitable diamond mining projects based on the robust project economics and therefore should be used only for the purpose it was originally intended.