Questions still linger on royalties Kenya will get in titanium export

Questions are still lingering on whether the government got what it bargained for even as Base Titanium started exporting minerals from Kenya on Thursday. How much royalty Base Titanium should pay remains unclear.

The Special Mining Lease (SML) issued to the company in 2004 notes that Base Titanium is to pay 2.5 per cent of the gross revenue of the minerals sold to the market.

The government, in a letter to the company, contested an earlier agreement in what appeared to be a contravention of a contract signed nearly 10 years ago, paving the way for development of the Kwale mineral sands project. The Australian miner has so far invested Sh30 billion in the project.

In the letter seen by the Nation, the Mining ministry told Base Titanium that it is now a requirement that all mining deals should get Parliament nod before being executed.

The letter also noted that the constitutional requirement of equitable share of returns between the national and county governments and the local communities necessitated raising of royalty payable by Base to at least 5 per cent.

“It is against this backdrop that the government feels obliged to raise the rate of royalty from the minimum rate prescribed in the SML in order to allow for the said sharing,” the letter stated in part.

The government was apparently trying to enforce this requirement before awarding an export licence to Base Titanium to ship 25,000 tonnes of Ilmenite to a client in China.

Mining cabinet secretary Najib Balala met Base Titanium officials in Cape Town, South Africa on February 5 for export permit talks.

The company anticipated being given the licence without having to agree on the increase in royalty fees. The government’s stand was that the royalty should be raised to 10 per cent from 2.5 per cent before the award of an export licence. Base contested this.

“I reiterated the legal position that the 2.5 per cent royalties are a legally binding commitment and that disregarding this would set an unfortunate precedent with significant implications for both Base and the government,” Base Titanium CEO Tim Carstens told Mr Balala in a letter dated February 7, 2014.

The 2.5 per cent royalty as set out in the SML only applies for the first five years of business, after which the company and the government can review the rate.

Going by the current mineral prices, 2.5 per cent royalty translates to about Sh340 million in revenue per year. The firm had indicated that it would spend a similar amount on community projects in the mineral-rich area.

“I requested that this community development spend be considered by you as an effective additional 2.5 per cent voluntary royalty when you are considering your position in relation to granting our export permit,” Mr Carstens wrote to Mr Balala.

If the royalty had been set at 5 per cent, Kenya would get Sh680 million annually and Sh1.36 billion per year if set at 10 per cent.

Demurrage fees

The company was, however, awarded an export licence a day before the scheduled loading of Ilmenite on MV African Eagle on Thursday, February 13. Any delay would have meant payment of Sh1.3 million ($15,000) daily in demurrage fees according to a senior official.

For the first 25,000 tonnes exported, Base Titanium will pay 2.5 per cent royalty. A copy of the invoice indicates that each tonne of Ilmenite will go for Sh15,910 ($185). A total of 25,000 tonnes would be shipped out, bringing the total sales to Sh397.8 million. Royalties will be paid within 90 days of export.