Determined digging: Exploration and new legislation are driving the mining sector

Kenya’s most aggressive push to develop its mining sector dates back to 2013, when President Uhuru Kenyatta was recently elected and established the country’s mining ministry. While no major deposits are known to be ready for exploitation – as is now the case in the energy sector, where recent discoveries are likely to contribute a major new revenue stream – Kenya does have several small and mid-sized mines that are already productive. Moreover, historical surveys of the land have identified deposits of over 77 minerals.

A new mining law passed in 2016 imposes higher fiscal burdens on mining operators, but the hope is that Kenya’s relatively advanced economy and proven track record with foreign investors in other economic sectors will create a low-risk operating environment that foreign mining companies will find attractive.

Facts & Figures

Undefined. According to the Kenya National Bureau of Statistics, mining and quarrying contributed KSh53.8bn ($524.8m) to GDP in 2015, coming in at 0.9% of the total. However, Dan Kazungu, cabinet secretary of the Ministry of Mining, said the department is aiming for a goal of 10% of GDP by 2030 – which would require a revenue surge above $6bn. Total production of mineral resources tallied 1.6m tonnes in 2015, down 11.3% from a figure of 1.8m in the previous year. While output of soda ash, fluorspar, zircon and refined soda dipped in 2015, increased production of salt and titanium minerals ilmenite and rutile filled some gaps.

The largest investment in Kenyan mining to date is at the mineral sands in Kwale, on the coast of the Indian Ocean near the country’s southern-most point. Base Resources, an Australian mining firm, spent $300m developing the area and began production in 2014 by mining and processing primarily titanium ores. These operations more than doubled Kenya’s mineral output.

Smaller mines extract a range of metals and minerals including gold, soda ash and diatomite. The soda ash deposits at Lake Magadi in the south-west are mined by Tata Chemicals Magadi – a division of the Indian conglomerate Tata Group – and production has been ongoing since 1911. Kenya had been Africa’s second-largest fluorspar producer after South Africa – and sixth globally – but Kenya Fluorspar, a leading mining company, ceased production in April 2016, citing low prices. The company expects to resume operations if prices for the commodity swing up again.

Mineral Potential

A hopeful sign of significant new gold production comes from the operations of Acacia Mining, a UK-based firm. Acacia is currently exploring in south-western Kenya near the border with Tanzania. The Busia-Kakamega Greenstone Belt that it plans to tap is an extension of one that the firm currently mines at Bulyanhulu, in northern Tanzania.

As of August 2016 Acacia had completed 30% of its drilling programme, and expects to publish a reserves estimate in 2017. The company also announced that month that it had bought out a minority partner in its two licences covering western Kenya for $5m, bringing its ownership of projects in that area from 51% to 100%.

A study of the big four minerals conducted by McKinsey consultancy found the most potential for gold and coal production in Kenya, with a less positive outlook on copper and iron ore. Kenya’s geology hosts only small-scale iron ore deposits, and copper is likely to be found only mixed in with gold.

Coal from the Mui Basin, however, could be mined at a commercial scale, as the deposit there is known to contain at least 400m tonnes. Still, due to the low quality of the coal, it may be below export grade and more suitable for domestic consumption. Investment proposals are on the table for coal-fired power plants – particularly in Lamu and Kitui – which could potentially support commercial coal mining if they are built.

New Law

Kenya passed a new mining law in May 2016, replacing a law that had been on the books since 1940. In addition to stricter environmental provisions before being granted a licence, the law made a number of changes to the fiscal terms of mining activities. While existing operations will not be impacted, the new law contains terms that could be difficult to comply with and suggest a less-favourable profit split.

The law entitles the government to 10% free carried interest in any mine’s share capital and allocates a further 10% of revenue to local impacted communities. Miners are also required to sell a 20% stake in their ventures on the Nairobi Stock Exchange (NSE) within three years of starting production. However, the NSE’s rules state that a company must be profitable for at least three years before being eligible to list, leaving little room for error unless an extension is granted.

The law is very specific about how state revenue is to be divided: 70% to the National Treasury, 20% to the local county government and 10% to the local community. What is unclear is the precise definition of a “local community”, and whether authorities at that level have the capacity to spend the allocated funds due to disbursement, project design and bidding issues – all of which have limited the ability of local authorities to increase spending in recent years.

Additional Measures

The law mandates the creation of a national mining company, allowing the state to declare any mineral deposit strategic, thus reserving it for the national miner to exploit. That would render deposits off-limits to private investors unless one acts as a minority partner with the government. The law also legalises the activities of artisanal miners.

Royalties are not outlined in the law, but are to be determined by the cabinet secretary instead. Royalties were a highly debated concern most recently in 2013 when Najib Balala, the former cabinet secretary of mining, proposed increasing royalties for most minerals from 2.5% to 5-12%. Base Resources, the company that was in the process of developing a titanium project at the time, would have seen its royalty rate on titanium ores quadruple from 2.5% to 10%.

Local Interaction

Relations with local communities and local content rules are incorporated into the new law, in line with a trend across Africa. Kenya has not set strict mandates for local content, but instead requires rights holders to submit a plan to the cabinet secretary for recruiting and training Kenyans, with a focus on community relations and giving preference to local entities in procurement procedures. The Ministry of Mining has the power to issue more detailed regulations or guidelines as needed.

In addition to the formal obligations of investors, companies must shape their attitudes and actions in ways not explicitly monitored by the law in order to create a positive reputation in the areas in which they operate. Local communities worldwide have sometimes clashed with extractives companies, and Kenya is not an exception. In May 2016 Kenya Fluorspar denied accusations that it had polluted the Kimwarer River, harming people, plants and livestock in the process. Communities can often times view large, extractive firms as detrimental to their way of life instead of a welcome local employer if the relationship between land and people is not handled openly and respectfully.