As representatives from Kenya’s two Houses of parliament — the National Assembly and Senate — come together in a mediation committee to finalise the Mining Bill 2014, it is time to consider the current state of the global mining industry, some of the key risks faced by both investors and governments in this sector and how they might impact the mining industry in Kenya.
The state of international commodity markets is no secret. The so-called super cycle or boom period of 2000-2011 has long passed while the slowdown in China and the sluggish recovery in Europe continue to negatively impact demand.
A recent report produced by Deutsche Bank titled Africa: The Next Frontier provides excellent insights into the current state of the extractives sector and how investors view risk on the continent.
It states that the current price environment has changed the focus of management teams, with priorities now to “finish in-progress projects, shelve all greenfield options for now…”
This approach has seen global mining capital expenditure cut drastically, with 2016 levels expected to drop to $40 billion from a high of $140 billion in 2012.
In a cash-tight phase this approach makes sense. However, it has significant implications for Kenya and the development of its mining industry. While there are currently no “in-progress” projects of substantial size, the shelving of greenfield exploration will further delay the discovery and development of the next large-scale mine.
Given the limited geological data available and the underdeveloped nature of the industry, Kenya can be classified as a greenfield investment jurisdiction. The Deutsche Bank report notes that it typically takes 12 years to take a greenfield project into production.
By extension, if the trend by companies to shelve greenfield exploration continues for another three years, Kenya could be 15 years away from a new large-scale mine coming into production.
It is therefore imperative that the Mining Bill, when finally enacted, focuses on countering the effect of “shelving” greenfield projects by making Kenya stand out as an attractive investment destination for serious exploration.
The Deutsche Bank report also notes that just two of the 50 lowest-cost copper/gold/iron ore/coal mines globally are in Africa. Why is this? And how can this situation be improved?
Low-cost mines are commonly characterised by established infrastructure; large ore bodies or high grades; polymetallic deposits (containing two or more minerals that can be simultaneously extracted economically) and security of tenure (demonstrated by minimal government/stakeholder interference and consistent, fair mining codes).
Kenya did not fare well in the 2014 Fraser Institute Report on investment attractiveness for mining, which ranked it second last globally and last in Africa. Since the publication of the report, various stakeholder forums have emphasised the need for a different approach, which is a key step forward.
The work the Kenya government is doing on infrastructure — notably on the railway — improving efficiencies at the Mombasa port and reducing the cost of energy will undoubtedly help lower the cost of business for miners.
Sustained exploration will increase the likelihood of a significant discovery of polymetallic deposits while it is hoped that the new mining legislation will enshrine security of tenure in the law to counter current negative perceptions.
From an investor perspective, the Deutsche Bank report identifies four categories of risk. Interestingly, these are similar to the categories set out in the Fraser Institute Report. These were geopolitical stability, security of tenure, infrastructure requirements and mining input requirements, particularly skilled labour.
Deutsche Bank ranks security of tenure as “by far the most important consideration in assessing prospective mining investment in Africa.”
The report argues further that “miners operating in Africa need reliable, stable and pro-investment mining legislation. This is even more critical in the current environment where depressed commodity prices have reduced profits and visibility, and increased competition for more scarce [financial] resources.”
Of course, not all the responsibility of developing a sustainable mining sector rests with the government. Companies have a key role to play as well. The report identifies several characteristics of successful mining companies, such as maintaining deep, transparent relationships with government and communities, investing in infrastructure, job creation, skills transfer and patience, given the long term nature of project development.
Finding the balance between the interests of government, local communities and investors is a challenge, but one that can be managed through open and honest relationships built on trust, predictability and mutual support.
The goal for policy makers is to ensure they are nimble and flexible enough to respond to changing market circumstances.
Cliff Otega is the managing director and head of energy and natural resources at Standard & Mutual Ltd.