Opinion and Analysis
By CLIFF OTEGA
As representatives from Kenya’s two Houses of
Parliament come together in a mediation committee to finalise the Mining
Bill 2014, it is prudent 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 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 insight 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 in
Kenya 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 recognised the need for a different approach.
The work the government is doing on infrastructure –
notably on the railway, improving efficiencies at 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
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 very
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.
Kenya’s opportunity and challenges can be summarised as follows. We need to find the minerals through sustained exploration.
We need to mine what we find through investment in
infrastructure and job skills then we need to sell what we mine
profitably, by striving to be a low cost jurisdiction.
Finally, we need to share the benefits along the value chain between host communities, government and investors.
The balance between attracting investment and
getting a fair return from our resources is not stagnant, and changes as
commodity markets change and a country’s mining sector develops.
The goal for policy makers is to ensure they are nimble and flexible enough to respond to changing market circumstances.
The new mining regulations will need to consider
these important issues to kick start the growth of a vibrant sustainable
mining sector.
The writer is the managing director and head of energy and natural resources at Standard & Mutual Limited.
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