Laying down the law for mining companies

As Kenya plans to capitalise on the riches of a fledgling mining sector, industry stakeholders are in an uproar over the decision to increase royalties to an internationally unprecedented high. Local miners, however, are delighted. Report by Aamera Jiwaji

Mining Cabinet Secretary Najib Balala has executed a series of strong opening moves shortly after being appointed head of the country’s newly formed Ministry of Mining, and his hard-line stance has raised the hackles of some international investors. 

In August, he revoked all licences that had been issued between January and May, claiming that they had been irregularly issued. A gazette notice in the same month proposed an increase in royalties on a range of precious minerals, from a low of 0.01%, to between 2% and 12%. Minerals like rare earths, niobium and titanium which previously attracted 3%, have seen their rates triple to 10%, double or more than double the world average, while rates on coal and gold have doubled to 8% and 5% respectively.

The boldness of his actions was surprising since in his former role as Minister of Tourism, Balala was known for a more conciliatory manner.

Minerals have traditionally played a minor role in the Kenyan economy limited to the production of soda ash from Lake Magadi, fluorspar, gemstones and gold. This has, however, changed, and there are now over 300 local and foreign firms prospecting for minerals or producing on a small scale, up from less than 30 two years ago, according to the Kenya Chamber of Mines (KCM). 

Figures from the Kenya National Bureau of Statistics show that Kenya produced $210m (KSh18.3bn) worth of minerals in 2012, but according to Balala, the country only receives $244,000 in royalties annually. His amendments to the royalty structure aim to annually collect $12.5m, representing a 50-fold increase in revenue. 

The largest current venture is the Mineral Sands project in Kwale spearheaded by Base Titanium, a subsidiary of Australian-listed parent company Base Resources. This $305m project represents the first foreign direct investment into Kenya’s mining sector. Construction is in its final stages and the first bulk shipments of rutile, ilmenite and zircon are scheduled for January 2014. The project is expected to double the mining sector’s contribution to Gross Domestic Product to 1.8% (it is currently at 0.8%).

Kwale County is also home to a niobium and rare earth mining project, which was started in 2007 and is estimated to be worth over $640m. The project is managed by Cortec Mining, a subsidiary of the Canadian Pacific Wildcat Resources, and is deemed to be the world’s sixth largest. Production will begin in 2016.

Kenya also has sizeable deposits of titanium, gold, coal, calcite, graphite and alkalite and is thought to have copper and manganese. The county of Taita-Taveta also has various precious stones including the internationally acclaimed tsavorite, the garnet and the recently named Colour Change. Taita-Taveta will soon establish a gemstone cutting centre, which will allow value additions to be made to precious stones before export.

The lack of value additions is a continental phenomenon that reduces export earnings of African countries, according to Boubacar Sarr, policy expert for the mining industry at the African Development Bank.

“Productive governments need to take proactive stances in order to embrace the technologies and experience needed to add value to mineral products and further enhance revenues to Africa,” he says.

The burgeoning sector is attracting a bevy of international attention and, among others, Nigerian billionaire Aliko Dangote has announced plans to invest $400m.

Stakeholder opposition

Balala’s revocation of licences and hiking of royalties – just a year after other sectoral policy changes – is being challenged by stakeholders, who say it poses a threat to foreign investment, which the country relies on to accelerate economic growth. 

Last year, the government announced that mining firms were required to have a 35% local shareholding. The latest Bill, however, which is to be tabled in Parliament, says miners have to surrender 10% of their equity to the state. 

“The politics of the day are threatening the space within which businesses in the mining sector can operate,” said co-owner and country director of Cortec Mining, Jacob Juma. He estimates that such policy extremes will lead to an annual revenue loss of $62.5m for the country.

Stakeholders also fear that Kenya’s intransigent stance on royalties will see the country bypassed for others that offer better rates. 

Kenya Chamber of Mines (KCM), the sectoral representative and lobbying body, faults the unilateral way in which the increase was decided. KCM Chairman Adiel Gitari said, “The Cabinet Secretary has gone against the spirit of collaboration between the industry and government by arbitrarily imposing royalties that are out of sync with international best practice … The impact of this will be like killing the cow that produces the milk.”

He proposes the rates be reduced to 5%, which brings it in line with Tanzania’s range of 3% (industrial minerals) to 7% (diamonds). But the Kenyan government insists their 10% proposal is benchmarked with other African mining nations.

Storm of controversy

Balala’s conviction has not wavered in the face of national outcry. At October’s Mining Business and Investment Conference in Nairobi, which was designed to woo investors into the local mining sector, he directly addressed the criticism of the proposed increase in royalties.

“We have been accused as government that our royalties are chasing away investors. But when we make our rules, those rules are good for Kenya. Investors, we will roll out the red carpet for you but respect our rules. Pay the royalties we have agreed you should pay. If you think those royalties are too high, it’s [your] bad luck.”

He emphasised that the only way for Kenya to avoid the notorious mineral curse was to ensure a balance between the profits of a mining company, taxes for government and investment in local communities.

“When there is a three-part balance, I do not see a curse. I would rather see those minerals buried in the ground than being exploited and our people remain poor for life,” he said. His comment drew gasps from investors. It seemed all the more forceful as it was preceded by a placatory address from the Kenya Investment Authority praising Kenya’s virtues as an investment destination, and a cautionary one from Tanzania’s Deputy Minister for Energy and Minerals Stephen Masele, who warned Kenya on the need to maintain a tripartite balance. 

Rules of the game

Kenya’s proposed Mining Bill 2013 will replace its Mining Act of 1940. It adopts a five-pronged strategy, which includes a legislative framework; a 10% free-carry interest on larger mining concessions; sharing of royalties between national and county government; revenue saving for future generations; and a web-based licensing portal.

Balala noted that the country was working from data that was 70 years old, and said, “As a country we don’t know how much we have and we are making arrangements to start an airborne survey that will tell us how much we have, what value and what quantity.”

Last month, the Cabinet Secretary banned mining companies from announcing their findings without the approval of the ministry, and said prospectors were exaggerating results to talk up their share prices. While KCM says such a rule will encourage insider trading and hurt investors further, capital market experts say the directive will discourage speculative actions by firms holding licences for quick gains and that the practice of sharing important information with government is an international standard. Balala has also initiated discussions for a metals and minerals board at the Nairobi Securities Exchange, in an attempt to build an industry around the nascent sector.

While his decision continues to attract censure from investors and lobby groups, it has been celebrated by small-scale miners and local communities, who laud the renewed interest in a neglected sector. His decisive moves are being seen as an “answer” to their prayers. Balala’s first name, Najib, means ‘answer’ in the local language of Kiswahili.

As power struggles continue in the highly watched mining sector, the next couple of manoeuvres will indicate how much leeway international financiers are willing to give the Kenyan government and ultimately how successful Balala will be as the country’s first Mining Cabinet Secretary.