5 November 2012

Kenya: Why State Is Terribly Wrong On the New Mining Laws


"That is not the way to go. It is going to kill any interest in the mineral sector because it is not practical. Mining starts with a high-risk operation of exploration" said Geoffrey Mwau in a Reuters Interview on Friday with Duncan Miriri.

The economic secretary was making reference to the Special Issue Kenya Gazette Supplement no. 147 Legislative Supplement no 49 Legal Notice no 118 The Mining Act [Cap 306] on October 12 2012 where, in exercise of the powers conferred by Section 92 [1] [ix] of the Mining Act, the minister of environment and mineral resources made the following regulations:-

It shall be a condition of every mining licence that the mineral right in respect of which the licence is issued shall have a component of local equity participation amounting to at least 35 per cent of the mineral right.

The company that was caught in the crosshairs of this announcement was Base Resources, whose share price fell 47.619 per cent October 26th through October 30th before recovering slightly by Friday.

The cause and effect was brutal and evidence that we are not a distant frontier is seen in that price reaction on the Australian Securities Exchange. The Australian headlined the story as follows; '

'Base Resources have plunged by more than one-third on fears that the Kenyan government is poised to expropriate a 35 per cent interest in the group's Sh25.3 billion ($298 million) Kwale project."

Note the word 'expropriate', which is a very loaded word and notorious in its use when describing somewhere like Zimbabwe. By the way, 1,200 people are already employed in Kwale and a string of heavy hitting lenders have already participated in lending to the project on the basis of an agreement already reached between Base and the Government of Kenya.

If Base Resources [and more importantly its lenders] walk away, then Sh29.7 billion ($350m) in royalties and taxes that the government was due to receive over the life cycle of the mine and an entire sector is essentially torpedoed. The project is set to add 1 per cent to GDP from Q4 2013 when the 1st shipment is set to start.

Jobs, training, community development, technology importation and transfer will all evaporate. What looked like our calling card will have become a red card to every investor.

The message we are sending is that we can change goal posts on a whim and if we feel like it, we will not honour commitments on which others have relied.

If the minister forces Base to sell shares in Base Titanium, then the company will be in breach of its loan agreement for its Sh14.4 billion ($170m) debt facility.

The banks would be able to withdraw funding and the project will collapse. The slump in Base Resources' share price is confirmation that the markets are pricing this possibility into the share price.

Everyone I have spoken to is trying to understand why the minister would have introduced such a law without any discussion or public debate. Where are these investors?

Mining Mineral Sands is a specialist art and you will recall that this project was mothballed for eternity before Tim Carstens came along.

In its last iteration, it was known as Tionmin, you might recall. The Nairobi Securities Exchange to date has not permitted any company to list unless it has a sequence of three years of profits. Unless the minister is proposing a free carried interest [and for whom?], then this idea of 35 per cent is simply a kite that cannot fly.

I absolutely accept that we need to increase local participation in this important new area of our economy but lets bake the cake first otherwise we will be scrapping for crumbs.

Let's create the enabling environment at the Securities Exchange and let's understand that every utterance [especially the left field ones] echo all around the world and it is evidently a lot easier to reprice our political risk higher and much more difficult to price it lower.

It is crystal clear, the minister's announcement spiked our political/ regulatory risk many notches higher. We need to differentiate ourselves from countries like the DRC [where curiously and coincidentally the government floated the idea of a 35 per cent equity participation as well but announced it would not be implemented retrospectively] not to seek to play in the same league.

We need to champion this project so that mining companies the world over come knocking. The minister needs to act expeditiously.

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