Country Report Kenya October 2012

Update Country Report Kenya 09 Oct 2012

Country’s largest mining project is one year from completion

Event

To facilitate the ongoing development of a major mineral sands project, Base Resources (Australia) launched a new capital-raising exercise in early October, seeking US$40m. Production is slated to start in the third quarter of 2013.

Analysis

The long-gestating titanium project at Kwale, Coast province, will be Kenya's largest-ever mining development and could lift mining's share of GDP to 1.5%, from 0.5%. The world-scale deposit will sustain production of about 450,000 tonnes/year of rutile, ilmenite and zircon over 13 years, while adding approximately 10% to current global output. Base Resources has already secured customers for about 75% of planned production and is now engaged in preparatory construction.

The new capital-raising exercise on the Australian Securities Exchange-which has been oversubscribed, according to initial reports-stems partly from a 14% increase in capital costs, to US$298m (including a US$23m contingency). This reflects design modifications and a rise in the labour cost of construction.

The sum includes construction of an access road, power lines, a dam and dedicated port facilities. The new cash injection will add to the US$332m raised by Base in 2011, comprised of US$162m in equity and a US$170m syndicated bank loan, which will be drawn down from the final quarter of 2012.

To facilitate development, the government in July cut Base's corporate tax rate to 15% (from a standard rate of 30%) for 10 years after start-up: the state will also earn a 3% royalty. However, royalty rates for several minerals will rise sharply if the government adopts new draft mining legislation-the Geology and Minerals Bill 2012-that is currently before the cabinet.

Instead of a standard 3% rate for all minerals, the bill proposes to increase royalties for diamonds to 10% and gold to 5%. In addition, exports would attract additional royalties of 4% for raw minerals and 1% for processed materials. On the plus side, the bill may clarify regulations covering land acquisition and resettlement obligations, which have bedevilled mining development to date.

Despite the prospect of higher royalties, mining in Kenya is set to boom, based on reserves of mineral sands, gold, coal and rare earths.

Impact on the forecast

The completion of the Kwale project supports our forecast for rising exports from 2014 onwards, potentially generating sales of about US$300m a year (depending on commodity prices), equivalent to about 5% of total current exports.

© 2012 The Economist lntelligence Unit Ltd. All rights reserved
Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information
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