Kenya’s mining sector shows promise but shifting regulations concern investors

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A nascent mining industry is forming in Kenya, with the first large-scale mining project expected to begin exports this month, although a spate of changes to the regulatory framework over the past 18 months has made for a tighter operating environment for producers.

In late January, Australia’s Base Resources, operator of the $305m Kwale mineral sands project just south of Mombasa, said bulk shipments of ilmenite and rutile would start in February, following a launch of operations last October.

The mine is expected to produce 330,000 tonnes of ilmenite per year, which will contribute 10% of global supply, in addition to 80,000 tonnes of rutile, or 14% of global supply, and 30,000 tonnes of zircon. The minerals are used to manufacture titanium metal, plastics, ceramics and pigments in paper. Company executives estimate the project will generate up to $300m in government revenue over the 13-year life of the mine.

The state awarded the Kwale concession on particularly favourable terms, in an effort to encourage mining activities. Base Resources will pay corporate taxes of 15% for 10 years, half the standard rate, and royalties of 2.5%, below the 3% rate that was customary when the concession was signed in 2012.

A shifting regulatory landscape

Kenya has seen a burst of investor interest as global demand for precious metals and minerals has risen in recent years. However, as with many extractive markets elsewhere around the world, the country’s regulatory framework has been subject to a number of amendments over the past two years.

Perhaps the single biggest change was the establishment of a new Ministry of Mining, which was set up in April 2013, taking over responsibilities from the Ministry of Environment, with former MP Najib Balala installed as the first minister. A new mining bill, which will replace the Mining Act of 1940, is still awaiting final passage but once approved it will vest the new ministry with a range of new oversight powers and improve transparency in the licensing process.

The ministry has already moved to tighten enforcement, following the revocation of 42 prospecting and mining licences awarded between January and May 2013, stating that proper licensing procedures may not have been respected. An independent taskforce was created in August to review the suspended licences, and their results are due to be presented in the coming weeks.

The ministry’s establishment and subsequent flurry of activity came on top of a busy preceding 12 months. In September 2012 Kenya sought to boost local content and revenue capture via a law requiring foreign mining companies to cede a minimum 35% stake to local owners. Similar initiatives have been proposed elsewhere on the continent for both mining and hydrocarbon sectors, in markets such as Ghana, Gabon and Nigeria. However, in June 2013, the new government said the law would be repealed.

The mining industry has also been affected by other broader changes to the business environment. Royalties have been raised for a number of metals and minerals, for example, while the 2012 Finance Act introduced a withholding tax on the sale of property or shares for oil and mining companies. The rate has been set at 10% and 20% of the gross amount received for residents and non-residents, respectively.

While the law is intended to target speculative investors, particularly in the field of oil and gas, it has sparked concerns from the private sector. “Under the new withholding tax, companies are penalised before they have made any money. Mining exploration in Kenya is expensive and undertaken exclusively by the private sector. Exploration must be incentivised before any further development can take place,” Monica Gichuhi, the CEO of the Kenya Chamber of Mines, an industry association, told OBG.

Maximising resource wealth

The debate over the regulations is not unique to Kenya. Many resource-rich countries in sub-Saharan Africa have made revisions to their regulatory frameworks in the past 2-3 years, with the aim of preventing the loss of resource wealth. Tanzania, Africa’s fourth-largest gold producer, raised royalties on gold exports in 2010 to 4% of gross export value from 3% of netback value, which took into consideration production costs. Ghana, Africa’s second-largest gold producer, raised corporate taxes for miners from 25% to 35% in 2012 and aims to introduce a 10% windfall tax in 2014.

Kenya has proven deposits of titanium, gold and coal, and is estimated to hold significant deposits of copper, niobium, manganese and rare earth minerals. However, further geological studies are needed to get a clear picture of the country’s resources, and infrastructure upgrades will be necessary to exploit them. Increasing the local share of mining revenue will help to diversify and expand the economy, and it matches the current trend in sub-Saharan Africa. However, Kenya will need to balance efforts to boost national income with the need to attract investors to this fledging industry.

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