Kenya: The Next Mining Frontier?

Kenya has reformed its institutions and passed a new Mining Act in an effort to dramatically develop its mining potential that is hoped can rise from accounting for 1% of GDP today, to 10% by 2030.

By Catherine Howe

IMAGE: Courtesy of Base Titanium

Whilst mining has historically not been a core area of focus within Kenya’s economy, representing only 1% of GDP, the country’s relatively nascent sector is set for transformation as the government pushes for development and attracting investment. The third largest producer of soda ash worldwide and seventh of fluorspar, Kenya is also home to a large cocktail of minerals but has been relatively underexplored up to this point. Although the government has not previously spent much time optimizing the environment for investment into the sector or sought to quantify Kenya’s mineral offering, change is on the horizon now that the mining industry has been identified as a strategic area of focus going forward. With occurrences of minerals including gold, coal, iron ore, niobium, titanium, limestone, manganese and gemstones, the Kenyan government estimates recent discoveries to be worth US$62.4 billion.

Kenya is the ninth largest economy in the Sub Saharan Africa region, posting growth rates of above 5% for the last few years and with growth projected at 6% for 2017 by the World Bank Group. With its market-based economy, strategic geographical situation and liberal foreign trade policy, Kenya is widely regarded as a regional trade and finance hub within East Africa. Having set the ambitious target to develop the extractives sector to account for 10% of GDP by 2030, the government is on the right track in creating a transparent and favorable investment environment, while setting the foundation for sustainable growth. Kenya’s current Cabinet Secretary for Mining, Hon. Dan Kazungu, is particularly enthusiastic about driving business and investment in the sector, seeking to make all the necessary provisions to facilitate an easily navigable business environment. “We are currently working on a strategy to attract international investment and grow Kenya’s mining sector,” stated Kazungu. “We want the mining sector to become a pivotal industry in the country and one of the strongest in the region. […] We are therefore engaging professional institutions to help us create win-win scenarios for investors, the government and local communities.”

Kazungu’s six pack model includes a 20-year mining strategy, the new 2016 Mining Act, a stable fiscal regime and mining framework, and an airborne geophysical survey. The new Mining Act in particular, alongside open dialogue with the private sector, will assist in maintaining an attractive and sustainable environment, also protecting the interests of the Kenyan people, whilst the airborne survey will begin to fill in the data gaps.

 

2016 Mining Act

The first major revision since the 1940s, Kenya’s new Mining Act provides a much needed update, particularly under a new constitutional order. “The previous act was very opaque regarding timelines, requirements and conditions for granting mining licenses, with a very rudimentary compliance and enforcement structure,” explained Wangui Kaniaru, senior associate at Anjarwalla & Khanna, a Kenyan corporate law firm. “Post-independence, the changes in the market meant the legislation was lagging behind the commercial reality on the ground.”

The new Mining Act seeks to implement international best practices and add clarity across policy, regulations and community management, whilst ensuring that mining activities bring benefits to Kenyan citizens. Assigning ownership of minerals in trust for the people of Kenya to the national government, the implementation of new policies is intended to balance investor interests with allowing the country to benefit from its mineral wealth.

Along with a clearer and more stable framework, greater efficiency in terms of processes has also been a focus of the government and the Kenya Chamber of Mines. The recent implementation of an online mining cadaster has streamlined license application processes, for example.

 

Implementation and further development

 

Whilst the Mining Act is certainly progressive, it is unrealistic to expect every aspect to be implemented completely seamlessly and without need for review, and there will need to be some further development. Because the act is modelled on legislation from more mature mining jurisdictions, it still needs to be adapted somewhat to its local context. Already-highlighted aspects include the 10% free carried interest, but such ‘teething issues’ are to be expected and the government, and in particular the Cabinet Secretary, have shown themselves to be open to dialogue.

“The Act encompasses many moving parts, which necessarily have to be tested and modified to be effective in Kenya’s context,” voiced Kaniaru. “Various parts of the Act conflict with other pieces of legislation, so it would be very helpful to harmonize these laws – otherwise companies may be caught in an impossible web of compliance issues.”

Commenting on the 10% government carry, Rainbow Field, director, Kenya at Bowmans, noted: “While certain other countries do have a free carried interest in mining, Kenya’s relatively new industry may mean that giving away 10% for free is slightly premature. We also have a concern that this provision is unconstitutional: the constitution states that a person or company cannot be arbitrarily deprived of their assets without market value payment.”

Some of these requirements may even counter some incentives to invest in exploration, the necessary first step towards discovery. “The tax and fiscal regimes can create an incentive if individuals are able to offset the potential tax losses in unsuccessful exploration activities against other business incomes as is the case in some of mineral rich countries. This would encourage individuals to take up the risky venture of mineral exploration,” commented Denis Kakembo, senior tax manager at Deloitte East Africa. “The general overriding question the government should ask is whether they are taxing profit or investment. If the tax imposed reduces the amount of money that is available for investment, this in inconsistent with the government aspiration of attracting foreign direct investment.”

The key will be to maintain a system of open dialogue to optimize the environment and achieve a sustainable balance. Nevertheless, companies such as Base Titanium clearly demonstrate that the environment is operable and are extremely positive about the opportunity and potential for success.

 

Quantifying potential resources and gathering data 

Whilst stability and a favorable investment climate are hugely important when considering entering a new market, even more important is the ability to assess the resource and size of the opportunity. The government has committed funds to carry out country-wide airborne geophysical surveys, and recently awarded the contract to IGS, a U.K.-based geoscience consultancy company that will lead the project in partnership with PGW of Canada. “It is of utmost importance to have credible data on our mineral deposits,” commented Hon. Dan Kuzungu, Kenya’s Cabinet Secretary for Mining. “We budgeted approximately $3 billion USD for this project, and are considering increasing this amount as we believe in the importance of this project.”

The Kenyan government will also receive previously collected geological data from the British Geological Survey (BGS). Although there is some speculation that the survey should have been carried out before changes to the fiscal regime and mining policy, all the necessary elements should have fallen into place by early 2017.

 

Operating in Kenya: the investment climate

Kenya is far ahead of most other East African countries in terms of economic development, including financial sophistication and infrastructure. When considering Kenya as part of the African continent, the country is therefore very attractive, despite facing common challenges. Additionally, having no restrictions on capital outflow is a huge plus point for investors, and the ease of doing business has been greatly improved by the simplification of processes and the government’s move towards uniformity and clarity.

Kenya’s Vision 2030 is underpinned by infrastructure development, building on the country’s position as East Africa’s leader in this area. Out of the KES 169.5 billion allocated to infrastructural projects, Kenya’s 2016 budget allocates KES 5.5 billion for the Mombasa Port Development project and KES 154 billion towards the nationalization of the Standard Gauge Railway (of which China will contribute KES 118.2 billion) as highlighted in Deloitte’s Kenya Budget Highlights 2016. Kenya is already in a good position to benefit from the East African Community (EAC) integration initiatives, and the government plans to focus on the development of the Lamu Port – South Sudan – Ethiopia – Transport Corridor (LAPSSET), further cementing the country’s position as a logistical hub within the East Africa region. The East Africa road network will also be an area of focus to boost regional trade, and the goal to generate 5,000 MW of power by 2017 is equally crucial in supporting the projected increase in industrial demand.

 

Getting results: lower risk, high potential reward

Echoing the sentiment of many investors, Jackson Mbui, managing director of Tata Chemicals Magadi, remarked: “Kenya’s business environment is coming out of a time filled with a lot of anxiety and legislative concerns, and we are now in an environment in which we feel confident and can start modelling our investment proposals with much more security. We need this predictability in order to invest further with a sense of how our operation will develop in the long run.”

Tata Chemicals Magadi is one of Kenya’s largest exporters, with roots that can be traced back to 1902 and business valued at US$90 million, and has access to the only replenishable trona resource.

Meanwhile, Kenya’s other most prominent player, Base Titanium, acquired the Kwale project assets in 2010 and commenced mining in October 2013. Over the 13-year life of mine, Base Titanium’s contribution to GDP is estimated at US$1 billion, with a contribution to export revenues estimated at upwards of US$120 million a year. Placing a great deal of emphasis on sustainability and investment into the region, Base Titanium seeks to set the standard for future investors. “As the country’s flagship mining operation, Base Titanium is working collaboratively with the Ministry of Mining to demonstrate what can be achieved in developing Kenya’s mineral resources,” stated Joe Schwarz, Base Titanium’s general manager.

Acacia, primarily focused on Tanzania, has also turned its attention to Kenya, with an exploration project on the same greenstone belt as is prevalent in northern Tanzania. Other notable operations in the country include Karebe Gold, Mayfox Mining, Kilimapesa Gold, East African Copper, as well as promising projects such as Kencoal.

Kenya is already an appealing investment opportunity in many ways, and investors are waiting on the side-lines. The geophysical survey will go some way in outlining the scale of the opportunity – the minerals are there; it is just their quality and quantity that is so far uncertain. A number of service companies report that new investors have already started to show interest and are beginning to test the water – it is now simply a case of who will jump in first.

 

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