Advertisement

Unease over new mining regulations

Saturday November 24 2012
mining

Expert drills titanium at Nguluku Maumba, Kenya to test the extracted samples for feasibility studies update. Photo/FILE

An intriguing power game is quietly playing out within the Kenya government over whether to implement a new rule requiring all foreign mining companies to cede 35 per cent shares to local investors and institutions.

The new requirement, referred to as the “Mwakwere rule” and introduced by Environment Minister Chirau Ali Mwakwere in September this year, is now the subject of power politics pitting the Office of the Prime Minister and the Treasury against the Environment Ministry and the Office of the President.

Pitched in nationalistic terms —as the formula that will at last allow citizens to share in the benefits of mining activities in the country—the Mwakwere rule has been widely criticised as a ploy by sections of the ruling elite to arm-twist foreign mining companies into selling them shares on the cheap.

Critics are drawing parallels to what happened in the 1990s when a similar arrangement introduced by the administration of former president Daniel arap Moi for the telecommunications sector only served to allow the elite of that regime to be allotted shares on the cheap in privatised telecommunications companies.

The regulations are the latest in a raft of policy changes lined up in which Kenya, like its East African counterparts, will be overhauling regulations in the minerals business, in the wake of increased exploration and mining interest in the East African region.

ALSO READ: New, profitable mining laws coming

Advertisement

Two weeks ago, Uganda said it had suspended issuance of new mining licences, arguing most of them had ended up in the hands of speculators who had no financial or technical capability to deliver.

Uganda’s licensing authority —the Department of Geological Survey and Mines in the Ministry of Energy — has put on notice all non-performing licence holders, asking them to justify why their licences should not be revoked.

In Tanzania, mining firms are grappling with new mining regulations that have raised royalties payable to the government.

The firms are now required to pay at least 0.3 per cent of their annual turnover, up from the previous ceiling of $200,000. Rwanda has been renegotiating expired mining licences in a review that could see some companies lose lucrative contracts.

Back to Kenya, an Australian company, Base Titanium Ltd, has become an unwitting pawn in the complex power game over the Mwakwere rule.

The company is currently in the middle of implementing Kenya’s first large-scale mining project, namely, the Kwale mineral sands project.

Since Mwakwere gazetted the controversial rule in September, Base Titanium — which is listed on the Toronto Stock Exchange — has seen its market capitalisation crash by 40 per cent, reflecting investor fears about the implications of the Mwakwere rule.

Indeed, the Australian company has found itself in a tight spot. When the gazette notice first came out, it did not occur to the Australians that the intention was to have the 35 per cent rule apply to their project.

The practice the world over is that new laws and regulations are not applied retroactively.

But as it turned out, the Ministry of Environment followed the gazette notice with a letter to all mining companies asking them to provide details on how and when they intended to implement the 35 per cent rule.

Base Titanium Ltd found itself in a quandary. With its shares already charged to lenders for a $170 million loan it has taken out offshore for the project, the Australian investor was in no position to implement the Mwakwere rule even if it wanted to.

Thus, the only option open to Base Titanium was lobbying one power centre in government after another, in the hop of having the Mwakwere rule rescinded or suspended.

Apparently, what is now emerging is that the Mwakwere rule does not have the support of the length and breadth of the government.

The fact that power centres in the government are pulling in different directions over the Makwere rule emerged on Monday last week, when a delegation led by the general manager of Base Titanium, Joe Schwarz, visited the Treasury to make a representation to Finance Minister Robinson Githae on the new rule and how it was likely to affect their operations.

According to sources who attended the meeting at the Treasury Building, Mr Githae made it clear to the Australian investors that the Ministry of Finance does not support the Mwakwere rule.

Sources said that minister expressed the view that the rule should have been delayed until after promulgation of the Mining Bill 2010.

Accompanied at the meeting by Investment Secretary Esther Koimett and the Director of Economic Affairs, Dr Geoffrey Mwau, Githae also stated that his position was that laws and regulations should not be implemented retroactively

There are also signs that the Australians have the support of the Office of the Prime Minister as well.

Correspondence seen by The EastAfrican shows that the Permanent Secretary in the Office of the Prime Minister, Mohammed Isahakia, and the prime minister’s economic adviser, Prof Hiroyuki Hino, have been in discussions with the chief executive officer of the Capital Markets Authority, Paul Muthaura, on a formula that will allow existing mining projects to implement the Mwakwere rule with minimum disruption to ongoing operations.

According to correspondence seen by The EastAfrican, the CMA has proposed what it calls a ‘restricted public offer,” where a foreign mining company can be allowed to file short term prospectuses prescribed to a category of persons.

In a letter to Mr Isahakia, Mr Muthaura says the CMA is aware that circumstances may arise where the local community from the county where the natural resource is found needs to share ownership in a mining company.

He has suggested that, in the Kwale case, a special purpose vehicle in the form of a trust be set up and shares allocated to retail investors from the geographical area where mining is taking place.

Revenue-sharing formula

Under such an arrangement, said Mr Mwaura, the shares can later be financed through a revenue-sharing arrangement to make sure that the shares allocated to the community are actually paid for.

Whether the formula suggested by the CMA will be acceptable to the forces pushing for the Mwakwere rule remains to be seen.

Even though Kenya’s mining industry is on the brink of a major explosion, and is beginning to attract big names, the country is still a frontier area in terms of actual mining activity.

Very little actual drilling has taken places and most of the licences given out are for prospecting. The Kwale mineral sands project is by far the largest operation.

Apart from the mining licence, Kenya has signed an investment agreement containing a series of fiscal incentives for the investor. The project is financed by both equity and debt, with debt financing at $170 million and equity at $140 million.

Only recently, Base Titanium successfully completed a further share placement to raise $40 million in additional capital.

As part of the security package for the debt facility, the lenders insisted on a security debenture that permits treatment of rights under the investment agreement as security for the loan.

The fear right now is that if the Kenya insists on implementing the rule, it will have far-reaching consequences for the whole project financing arrangement.

Advertisement