Uncertainty in regulatory laws bad for mining industry

By Cliff Otega

Kenya: The typical mining investor (local or foreign) in a frontier destination like Kenya, is likely to be a junior. Junior refers to the size of the company – typically a small company relying on private capital to advance exploration activity or a recently listed company looking to advance a development project.

Occasionally, established large companies or their subsidiaries may make an early entry into a new zone, as is the case with Africa Barrick Gold in Kenya.

To gain an insight into an investor’s mind, look no further than global consulting firm Ernst & Young’s (EY) recent report, Business risks facing mining and metals 2013–2014. A key insight of the report is the fickle nature of the industry.  A year ago, the top consideration for investors was fast-tracking production in a time of high commodity prices and abundant capital. Now that price pendulum has decisively swung the negative way, 2014’s top consideration is capital allocation and access. It doesn’t get much more volatile than this!

Assessment

How do EY’s top risks relate to Kenya’s mining sector?  Capital access, particularly for juniors, is always a worry. The report is stark in its assessment that investors globally are pulling back from riskier investments, creating a “capital desert” not seen in a decade. Risk here refers to a cocktail of geological, geopolitical and technical risk.  Regulatory uncertainty is often cited as a key risk factor that drives the allocation of capital. Since Kenya is largely an unproven mining destination, the industry needs to pay attention to the signals it emits in this space.

Any hint of animosity between key industry players is a surefire way of driving away investment capital. The second relevant risk identified by EY is resource nationalism.

The report broadly defines this as rising taxes and royalties, mandated value addition, government ownership and the restriction of exports. The outcome of resource nationalism is as unpredictable as it is emotional and there is no silver bullet in addressing this issue.   While it is true that unscrupulous investors in many jurisdictions have taken governments and local populations for a ride, it is equally true that predatory governments have also stifled genuine progressive investment. 

The primary solution, especially in the African and Kenyan context is to foster a greater understanding, based on facts and figures, of the value a project brings to the host government, country and community and make holistic decisions based on this.Third is the industry’s social license to operate (SLTO). SLTO describes the broad ongoing acceptance of mining activity. Challenges in this area usually relate to competition for resources such as water, grazing land, artisanal mining rights, relocation and potentially damaging environmental effects. As has been seen recently with the budding oil industry in Turkana County and the coal mining saga in Kitui County, this can be a ticking time bomb.

Intimidation

The onus to address these issues is threefold. Mining companies must strive to connect early with host communities and avoid dealing exclusively with self-styled community leaders.

Local communities should also take ownership of their situation, ensuring that they have genuine representatives to voice their concerns and negotiate on their behalf. Violence and intimidation is never an answer — the investor always has a choice to invest elsewhere. A strong impartial regulator is also key. Corruption is the bane of the mining industry around Africa, where decisions are made according to the whims of the highest bidder – this should never be allowed to cloud Kenya’s mining sector.

 Closely related to the previous two concerns is the sharing of benefits. This, in my opinion, is currently Kenya’s biggest mining risk and encompasses the debate and uncertainty around royalties, jobs, revenue sharing, mining law and so on. This is not unique to Kenya – countries as diverse as Australia and Mongolia are grappling with the issue. Key stakeholders are communities, governments, shareholders, suppliers and employees. They need education on how the industry works and a mechanism for the free flow of information.

For example, how does a farmer in Kwale or a hardware dealer in Migori benefit from a mining project? Who does he contact to sell his wares? What does the company really need? How does a young graduate apply for a position with a new exploration project?  How do we really know what the correct revenue figure is and where the money goes? We also need robust extractive industry reporting. The Extractive Industries Transparency Initiative (EITI) standard is one such framework. 

It is a voluntary global coalition of governments, companies and civil society working together to improve accountability in the management of revenues. Tanzania, Zambia and Ghana are EITI-compliant countries.

The writer is a Nairobi-based mining consultant.