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INDABA PREVIEW

Kwale proves Base camp


for Kenya
W

hile there is a host of international resources companies now


considering entering Kenyas nascent
but rapidly evolving mining sector,
Australian company Base Resources
Ltd made the decision years ago.
The companys Kwale mineral
sands project, near the coastal city of
Mombasa, represents the first direct
major foreign investment in Kenyas
modern mining sector and is seen as
a test case for its future growth.
Kenya offers promising mineral
potential, which includes rare earths,
gold, copper, iron ore and coal.
The Kenyan Government is in the
process of replacing its 74-year old
colonial mining act to attract other international mining companies; many
of which have been eager to invest
in the largely unexplored region, but
unwilling to enter a market with uncertain regulations.
Base entered the market in 2010,
taking over the Kwale project from
Canadas Tiomin Resources, which
was languishing due to land disputes
and financing issues.
Mining at the operation, with a total
project capital cost of $US350 million
and an estimated 13-year mine life, began last
October and achieved first production later in
the year.
The companys local subsidiary, Base Titanium Ltd, exported its first shipments of ilmenite, rutile and zircon early this year and
achieved a maiden cash flow-positive quarter
in June.
Base Titaniums general manager of external affairs and development,
Joe Schwarz, who was born
in Kenya before migrating to
Australia, has overseen the
projects development.
Our experience has not
been straight forward, in the
sense that we represent a
pioneering project in the minerals sector, he said.
It is true to say, that because theres been little experience of this
scale of project in the countrys mining sector,
the Government has really been learning as
much as we have.
Kenya is East Africas largest economy, but
its resources sector has been left relatively
undeveloped compared to its neighbour Tanzania.
Before the Kwale project, mining in Kenya
accounted for only around 0.7% of the nations GDP. The project aims to more than
double that figure.

After finding export permits difficult to come by, Base is now ramping up delivery of its mineral
sands product to shipping facilities in Mombasa

The project is expected to contribute an estimated $US225 million in tax revenues to the
Government over its mine life.
Base is also investing heavily in community
and social infrastructure in Kwale County.
Mining, alongside the nations emerging oil
and gas sector, has now been recognised as
a key future wealth creator for Kenya.
However, expectations of a burgeoning

35% of mining companies be held by local


shareholders; a move which was subsequently abandoned.
Only months after completing its first exports, Base received an invoice from the
Kwale County Government demanding a
$US57/t levy on exports, an extra cost which
would weigh heavily on the projects financial
viability.
Base is confident the demand is unlawful and will
eventually be dropped.
Its unconstitutional. The
constitution
very
clearly
places the administration and
ownership of minerals with
the National Government and
it is not a function devolved to
the counties at all, Schwarz
said.
We are totally confident in our position that
it cant be applied. Thats been confirmed by
the relevant National Government authorities
responsible for devolution and legal affairs.
Its this regulatory uncertainty that Kenyas
new Mining Bill is attempting to address.
The Bill stipulates a clear 70%-20%-10%
royalty split between the National Government, county governments and the local
community; while also offering more stable
and transparent mineral rights and licensing
provisions.

It is true to say, that because


theres been little experience of
this scale of project in the countrys
mining sector, the Government has really
been learning as much as we have.
extractives sector have sparked disputes between Kenyas national and county governments, as well as community stakeholders; all
eager to lock in their share of future revenues.
The issue is made more complicated by the
fact the nation is still thrashing out the working
details of its new 2010 constitution, which led
to the devolution of certain national government powers to county governments.
Bases share price temporarily tumbled
in 2012 after the National Government announced it was introducing laws requiring that

PAGE 90 DECEMBER 2014 - JANUARY 2015 AUSTRALIAS PAYDIRT

The 35% local equity requirement has also been replaced with
a new provision enabling the National Government to acquire a 10%
free-carried interest in new mining
operations.
Despite the new regulatory
framework,
Schwarz
expects
Bases existing rights and licenses
to remain unchanged.
The major feature of any change
in legislation, particularly in a longterm investment environment like
minerals, is that it must provide
stability. It needs to provide continuity of pre-existing rights for current
licenses and leases going forward
and that really has been the main
focus of concern in this mining bill
for us. It looks like this will occur.
However, Schwarz believes the
new regulations will help prevent
complications for future projects.
The radically new system of
government will take a bit of time to
bed down. The counties do need
to see benefit from their own natural resources. This is going to take
time to evolve properly, but the new
Mining Bill provides for a sharing of
mineral royalties to the counties and a portion
to the communities as well. That will go a long
way to redressing the view that the counties
are being deprived of any benefit from their
mineral resources.
While the new regulations are more certain,
the politics surrounding them are anything
but.
The Bill, which was passed by parliament in
late October and at the time of print is awaiting
President Uhuru Kenyattas assent, has reignited a power struggle between the County
Senate and the National Assembly.
Senate members, who
want a greater percentage of royalties directed
to counties and local communities, said they werent
adequately consulted during
the parliamentary process
and demanded the Bill be
sent back to parliament for
further review.
Investment banker, Amish
Gupta of Standard Investment Bank in East Africa,
said while there was strong
global interest in Kenyas
mineral sector, political and community instability puts it at risk.
He believes if mining companies chose to
make local community members direct shareholders it could help avoid damaging disputes.
The co-operative society movement is
very strong in Kenya. There are many ways in
structuring, in how you can get the community
involved in shareholding, Gupta said.
A lot of the sentiments around politics with
the community can be managed well, in other
words we can de-politicise community issues, he said.
The community can act as lobbyist with

The Kwale mineral sands mine near Mombasa in Kenya. The mine is the countrys first
commercial-scale minerals operation

county governments to ensure they dont restrict the growth of their own company.
Despite many of the inevitable challenges,
Gladys Kianji chair of mineral exploration industry group, the Geological Society of Kenya
is confident about the sectors future.
I see minerals and mining as being one of
the top income earners for this country. I believe that in five years well begin to see the
change and in 10 years it will be clear that
this country has become a mineral economy
country like several other countries around
the world, she said.

first of many large-scale projects in the nation.


Being the first large mining project in the
country, it has brought mining into the limelight and Kenyans have realised we have resources.
There have been some teething problems,
but again I attribute this to unclear legislation.
With clear rules and regulations, such issues
can be avoided.
As for Bases Kwale project, Schwarz said
the operation is in good shape.
We are on schedule against our ramp up
projections and in some areas ahead of target. We are confident of
meeting or beating our key
performance parameters.
Despite the past challenges hes also confident about
the future of Kenyas mining
sector.
The potential is there,
purely because of the lack of
historical exploration in this
country. Minerals have really been ignored historically;
the focus has traditionally
been on agriculture and latterly tourism, but I think our
project has spurred interest in the potential of
minerals.
And his advice for prospective miners considering entering the sector: Its not easy,
you need determination, constant, open and
transparent dialogue with government and
communities and if you get that formula right,
then you are on the way to a successful project.

A lot of the sentiments around


politics with the community can
be managed well, in other words we
can de-politicise community issues.
The community can act as lobbyist with
county governments to ensure they dont
restrict the growth of their own company.
Kianji believes the National Governments
initiative to conduct a national airborne geophysical survey will encourage further exploration, adding to the healthy level of current
activity.
There are companies like Acacia Mining
exploring for gold.
There is exploration in rare earths, copper,
iron ore, limestone, gemstones, as well as in
other prospective areas for mineral sands,
she said.
Thats combined with exploration in oil and
gas.
She believes the Kwale project will be the

Andrew Thompson, Nairobi

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