Exploration efforts and new legislation set to boost Kenya's mining sector

Building on its sizeable reserves of soda ash, fluorspar and titanium oxide, among other resources, Kenya’s burgeoning mining sector is poised for significant long-term growth. The industry’s potential is thus helping to draw in significant investments in its critical infrastructure.

At the same time, the sector faces headwinds with the burden of depressed global commodities prices, along with a strict regulatory environment, which included proposals in 2014 by the newly established Ministry of Mining (MoM) to hike royalties – part of a push by the authorities to ensure the country benefits from extractive activities. The sector’s potential for growth remains considerable, although the industry’s focus in the near term is likely to be on resolving a number of issues, including the expansion of currently limited exploratory activities and policy discussions with local and national governments, as well as the task of navigating through the current global slowdown in the mining sector.

Nascent Stages

Although the country has potential for the discovery of significant mineral resources, mining has only recently become a focus for growth and many of the challenges facing the industry can be attributed to growing pains.

Until 2013, mining activities in Kenya were overseen by the Mines and Geology Department of the Ministry of Environment and Mineral Resources (MEMR), with the March 2013 general elections resulting in the creation of the MoM. The ministry is tasked with undertaking mineral exploration, forming sector policy, creating mineral resource inventories and maps, and overall sector development.

Although detailed exploration work has been limited to date, the MoM reports that the country contains viable quantities of soda ash, fluorspar, titanium, niobium and other rare earth elements, gold, coal, iron ore, limestone, manganese, diatomite, gemstones, gypsum and natural carbon dioxide.

Mining Act

The Mining Act (Chapter 306), which was promulgated in 1940, remains the main institutional, legal and regulatory framework for the mining sector in Kenya, although this is expected to be replaced by the new Mining Act in the near term. In September 2015 the Senate passed a new mining bill, which will give the government a 10% stake in all new projects once it becomes law.

Under the current act, the government owns all mineral resources and serves as a trustee for the population, while the mining secretary administers the right to explore and exploit mineral resources, and appoints a commissioner of mines and geology (CMG) from the MEMR to implement the act’s provisions. Licensees may only prospect and mine on land if they have met the terms and conditions stipulated by the CMG, and all licences, fees and activity approval must come from the CMG.

Licensing 

The right to mine is granted to prospecting licence holders in the form of leases, all of which are subject to approval by the CMG. When granted, these leases confer exclusive rights to access the land to mine and remove mining materials, while the act also provides that the commissioner may authorise the mining of minerals other than those for which a licence was granted. Diamond prospecting and mining requires special authorisation, and is also regulated by the Diamond Industry Protection Act.

Under the act, mining and prospecting licensees must secure access to the land required for their activities, and offer fair compensation to the affected community. More specifically, the act requires that companies receive consent from local communities, owners and occupiers of the prospective mining area, as well as county governments, under Kenya’s ongoing process of devolution. As is the case in the upstream oil sector, which has seen development of some onshore blocks affected by local community unrest, this can prove to be a crucial, if challenging, task (see Energy overview).

Prospecting licences are generally valid for one year, and subject to renewal for a maximum of five years, while mining leases can be issued for between five and 21 years. Leases can be renewed for any duration not exceeding 21 years, while extensions on licences and leases can be granted by the CMG if deemed suitable. Licence and lease renewals are subject to fees, and predicated on the completion of work programmes, while special prospecting licences and special mining leases have no restriction on the duration of either activity.

Geographic Distribution 

The country’s diverse geography offers a wide range of potential resources, spread across areas including the Nyanzian Shield, which holds reserves of gold, copper, silver, ferrous and non-ferrous metals; the Mozambique Belt, where reserves of kyanite, corundum, graphite, marble, asbestos and fluorspar have been reported; the Palaeozoic and Mesozoic formations, which contain significant quantities, of limestone, gypsum, clays, manganese and construction materials; and the Rift Valley, which contains soda ash, fluorspar, limestone, gypsum, gemstones, gold, marble, granite and diatomite.

The Western and Nyanza regions are home to gold, copper, and iron ore, while gemstones, heavy mineral sands, rare earth elements and titanium minerals are found in the coastal region, and gypsum in the country’s dry north-east.

High Potential

The sector is currently dominated by production of non-metallic commodities, with the MoM reporting that the country is the third-largest global producer of soda ash, used to make glass, and seventh-largest producer of fluorspar, used in steel, while metallic minerals currently produced include titanium, gold and iron ore.

Industry output has been rising in recent years, with the country’s “Economic Survey 2015” reporting that mineral production rose by 16.7% in 2014, from 1.5m tonnes to 1.7m tonnes. A concurrent increase in exports has been driven by the launch of commercial operations at the Kwale Mineral Sands project, which added production of 281,543 tonnes of ilmenite, 52,465 tonnes of rutile and 40,123 tonnes of zircon to the country’s total output.

The Kenya National Bureau of Statistics reports that the sector’s contribution to GDP at current prices rose by 9.1% in 2014 to reach KSh42.35bn ($465.8m), up from KSh38.8bn ($426.8m) in 2013, although this represents just 0.87% of GDP. Nonetheless, growth has been strong over the previous five years, as the sector’s total contribution to GDP stood at KSh26bn ($286m) in 2010.

The government aims to boost the industry’s contribution to 10% of GDP by 2025, based on an expected increase in upstream activity, although some industry players have raised the concern that there is no clear policy outline to achieve this.

Kenya claims to hold large reserves of niobium, a soft metallic element used in steel alloys, arc welding and superconductivity research, though these are as yet unproven. Commercial coal deposits have also spurred new private investment, while other stakeholder point to the construction materials sector as an area that holds significant promise.

“Right now the most high-potential mining activities, in my opinion, would be projects related to manganese, for example limestone and those kinds of projects,” Stephen Mwakesi, CEO of the Kenya Chamber of Mines, told OBG. “There is also very significant activity in the gold sector, and in the budget every year we see more exploration going forward.”

Building Growth

The construction materials segment is widely expected to be a major non-metallic mining growth driver going forward (see Construction chapter). A number of cement manufacturers have rushed to establish operations in recent years in the hopes of capitalising on a spate of new construction projects throughout the region, joining established firms like Bamburi Cement (part of the Lafarge Group), the East Africa Portland Cement Company and Athi River Mining.

Cement has been a bright spot for the mining industry, and investment in new infrastructure has spiked over the past year: Nigeria’s Dangote Cement, a new market entrant, is planning to build a $400m cement plant in Kitui, and India’s Sanghi Group has stated that it intends to invest $119m in a new cement plant in West Pokot.

In January 2015 Savannah Cement revealed plans to build a second milling facility, while quarry operator Karsan Ramji & Sons, based in Kitengela, announced it would construct a new cement plant in Nakuru in August 2015, its second such project announcement over the past year.

Domestic cement production rose 16.3% in 2014 to reach 5.88m tonnes as a result of new players entering the industry. Likewise consumption increased by 21.8% to a total of 5.2m tonnes in the same period (see Industry chapter).

Most Kenyan manufacturers import semi-finished cement and clinker from China and the Middle East, then grind it into cement. A June 2015 article in The Standard reported that clinker imports stood at 1.2m tonnes in 2012. The country has significant deposits of limestone in the Kitui region, which have the potential to supply the domestic cement industry with enough raw materials for the next 50 years.

Coal & Metallic Minerals

Outside of cement, coal and metallic minerals are also poised for steady expansion in the coming years, despite facing some notable near-term challenges. The largest and most promising metallic minerals project in Kenya is the Kwale Mineral Sands Project (KMSP), located 50 km south of Mombasa. Base Resources, which acquired the KMSP from Tiomin Resources in 2010, holds an estimated 140m tonnes of ore reserves, and operates in Kenya through its subsidiary, Base Titanium. The project began commercial export in February 2014 and is expected to produce up to 80,000 tonnes of rutile – 14% of global supply – once fully operational, in addition to 330,000 tonnes of ilmenite and 30,000 tonnes of zircon.

In coal, China’s Fenxi Mining formed a joint venture with local firm Great Lakes Corporation in February 2014 to exploit two eastern blocks for coal deposits, with the companies estimating the area holds more than 400m tonnes of coal reserves worth some $40bn. The two will invest a collective $500m in exploration and production activities, with the output destined to be used in the steel, cement and utilities sectors (see Utilities chapter).

Near- Term Challenges 

Despite its promising long-term prospects, near-term expansion is unlikely as a result of depressed international commodities prices and weak global demand for key industrial metals and minerals coupled with a challenging regulatory environment. Global commodity prices have been declining steadily since 2012, with fears of a Chinese economic slowdown pushing the price of industrial metals and coal to their lowest levels since the 2008 global financial crisis in August 2015. This, coupled with domestic cost pressures stemming from high power costs, has had a serious impact on private mining companies in Kenya; for example, Tata Chemical Magadi, Africa’s largest soda ash producer and a major Kenyan exporter, was forced to mothball its $100m Lake Magadi plant and lay off 200 employees in July 2014 as a result of rising energy costs and debt.

More recently, the Kenya Fluorspar Company, which has mined the Rift Valley system since 1971 and stands as the second-largest mineral income earner for Kenya, cut its annual production forecast by 19% in August 2015 due to weak demand, after closing its facilities for six weeks in June and July.

Ironing Out 

The sector is also preparing for a comprehensive overhaul of its regulatory framework, as the government looks to clarify a number of issues. Although it has undergone several revisions, most recently in 2012, the current Mining Act leaves some key areas unaddressed, while enforcement of its provisions has been criticised as irregular. This was brought into focus in August 2013, when the MoM made the surprise decision to suspend over 40 prospecting and mining licences awarded between January and May that year, on the grounds that they were not in compliance with regulations when issued. The MoM suspended a further 65 licences in May 2015.

While the Mining Act and the Kenyan constitution both guarantee the protection of private prospecting, making prospecting and mining titles secure in both form and tenure, the act provides that licences can be revoked if their terms, conditions and work programmes are not fulfilled or if fees are not paid on time. The clause is not unique to Kenya and a common policy tool to reduce speculation and ensure sustainable investment, although uncertainty over the decision-making processes for determining revocation – which is at the discretion of the CMG – has prompted a push by the private sector to clarify the issue. Indeed, in its 2014 annual report on global mining and exploration, Canada’s Fraser Institute reported that Kenya had fallen from 79th to 121st place globally, out of 122 countries surveyed, in terms of its Investment Attractiveness Index, which measures both policy and mineral potential.

Key Reforms

As a result, the government has moved to address these issues and a new Mining Act was approved by the National Assembly in November 2014. It has been passed by the Senate, and the bill is now with the Lower House for final review before going to the president. For potential future investors, a key component of the act is a plan for an aerial geological survey. The survey represents a critical next step for the industry, although it has already been delayed for several years, and could face more setbacks as a result of financial shortfalls.

The MoM has been in talks with the Export-Import Bank of China since 2013 for a $67m loan to help fund the study. Bloomberg reported in June 2015 that the government was expected to end negotiations within the following month, as the bank is already funding a number of major infrastructure and development projects in the country. However, at the time of press no announcement had been made as to the progress of the loan talks.

China’s Geological Exploration Technical Institute was set to conduct the survey, although Najib Balala, the Cabinet secretary for mining, told Bloomberg that those negotiations had also stalled.

Royalty Changes

In August 2013, following the establishment of a stand-alone MoM, the government introduced new royalty rates ranging from 1% of gross sales of industrial minerals, including gypsum and limestone, to 10% for coal, titanium ores, niobium and rare earth elements, and 12% for diamonds, up from between 2.5% and 3%.

While royalty rates are rising around the world, including in a number of other African producers such as Gabon and Ghana, Kenya’s changes have prompted concerns from operators. Sector players told OBG that royalties should be appropriately benchmarked as well as reflect the significant infrastructure investment required by private companies in order to move forward on new projects.

“The ministry has hiked royalties to levels well beyond global norms, in the case of titanium oxide 10%, whereas the global range is between 2% and 5%, and the median royalty rate is 3.6%,” Simon Wall, external affairs manager at Base Titanium, said. “Within Africa, royalties are 2% in Madagascar, where infrastructure is more limited than in Kenya, and 3% on average on the rest of the continent.”

According to Wall, Base built $60m worth of supporting infrastructure, including a $30m port facility in Mombasa. “This will ultimately become legacy infrastructure, and yet there is no accounting for that in the new royalty regime,” he told OBG.

The new Mining Act was originally expected to be enacted by the end of June 2015, but was only passed by the Senate in September. The act had not yet come into legal force as of October. Under current plans, 70% of mining royalties will be allocated to the national government, 20% to the county government and 10% to local communities.

Outlook

The sector is facing serious challenges that are expected to impact investor sentiment in the short term. The sharp decline in commodities prices has prompted action on the part of major miners and is likely to limit their expansion plans, while legislative challenges including stability and security of tenure and changes to the royalty regime may threaten financial guidance for future projects. Still, the country is steadily putting into place key infrastructure to support mining efforts and the nation’s substantial natural resources place it in a strong position over the longer term. With Kenya’s mining industry perceived to be in something of an adolescent stage at present, it is to be expected that challenges faced in the near term will help engender a stronger and more capable sector down the road.