Heading Towards A Golden Future?
BMI View: Kenya's nascent mining sector is set for rapid growth as gold and rare earth projects transform the sector. Whilst Kenya will not join the league of significant African miners, rapid development will have a significant impact on the country's GDP. However, we note that political risk and high inflation could weigh on investor sentiment in the country.
We expect rapid growth in Kenya's gold output over the coming years that will revolutionise the country's mining sector. Indeed, 2013 should herald the commencement of operations at the country's first large scale mine, the Base Resources US$300mn Kwale Mineral Sands mine. The mine is expected to produce around a seventh of the world's rutile and generate over US$2.0bn over its 13 year life span. At present Kenya's mining sector is minimal, accounting for less than 1% of the country's GDP, but we expect a significant development of the sector from this low base as several projects come online, most notably in gold production. Aside from the country's mineral wealth, we expect Kenya's revision of its mining code to attract further investment as the government is seeking to reduce bureaucracy and red tape. Whilst we await clarity over the final version, early indications look promising.
There are currently no large-scale gold mines in Kenya with the majority of output accounted for by artisanal miners. Given elevated gold prices, which we expect to remain in place (See: 'Gold To Average US$1,650/oz in 2012' BMO Online, August 9), artisanal mining is likely to continue growing as it gives an income to many people on low wages or unemployed. However, given its informal nature it will not have a direct impact on the country's coffers as much of it is illegal and untaxed. Indeed, the mining sector does not have its own ministry, given its minimal contribution to the government.
There are several projects due to come online which will revolutionise Kenya's mining sector. Aviva Corporation's Bumbo mine has significant high grade reserves of zinc (11%) and copper (3.5%), as well as low grade deposits of gold (1g/tonne). These high-grade resources are particularly attractive at present as miners' margins have been squeezed by rising cost pressures, and, recently, falling metals prices. In addition, Goldplat will provide a substantial boost with development of its Kilimapesa and Lolgorien gold mines. As yet, however, no start date has been announced. The largest gold mine set to come online is Red Rock Resources' Migori mine which has indicated resources of 1.17moz.
Gold Mining To Drive Investment
Aside from gold, Pacific Wildcat Resources is developing the Mrima rare earth deposit in the east of the country. While we await details of the expected output, we expect this deposit to have important implications given the current focus on China's dominance on rare earth production. As China accounts for 97% of the world's rare earth output, Western companies and countries are seeking new non-Chinese sources of rare earths, and deposits in Kenya, and much of Africa are showing increasing promise of releasing China's stranglehold over the sector. All of these projects will have an important impact on Kenyan GDP. Indeed, output from the Kwale mine alone will surpass coffee as Kenya's fourth largest export earner, and double the mining sector value from US$200mn.
Political Risk To Concern Investors
The main risk to our positive view of Kenya's gold sector is the political situation. Whilst we do not envisage either of the main parties in the election to campaign on a nationalistic platform, as was the case in Zambia, the threat of a repetition of the violence seen in 2008 will worry investors. Indeed, much of the worse of the violence occurred in the west of the country, near Kisumu, where many of the gold projects are located. Indeed, whilst we do not anticipate a repeat of the violence in the election in March 2013, we expect most investors to wait until the election season has passed before committing further investment.
|Kenya - Map Of Gold Mines|