Mining speculators “rear their ugly heads”

Kenya recently cancelled mining licences due to irregularities in the awarding process. I wrote this piece in December 2012; however, it wasn’t published. I’ve decided to share it.

You may have probably watched the Bank Of Uganda Governor Emmanuel Tumusiime-Mutebile in video clips saying “I have the capacity to burn their fingers.” He was referring to speculators who were betting on the Uganda Shilling making it volatile and making money out of it. However, speculation and currency trading cannot be separated, so maybe Mutebile’s words just remain threats. In yet another government department, The Department of Geological Survey and Mines (DGSM), there are indications they want to crack the whip on speculators holding exploration and mining licences, but doing no work.

Uganda’s mineral sector is already experiencing letdowns even before it takes off significantly to the level of Tanzania – East Africa’s largest Gold Producer. Such is the case that in 2012, a little known company East Africa Gold Sniffing acquired a limestone exploration licence after the previous holder – Hima Cement a Subsidiary of the Lafarge group – did not apply to renew the licence in the provided time. Even if someone at Hima Cement was incompetent enough not to notice that the 21 year old license was expiring, analysts note that it could have at least lost out to a reputable and known limestone mining company.  Hima Cement which says it contributes about Ushs45bn in revenues to the government instead lost the license to East Africa Gold Sniffing a company, with little – if not no experience in mining at all.

East Africa Gold Sniffing is categorized as one such speculator that exploited the loopholes within the legal framework to acquire a license. To begin with, records from the DGSM (July 2012) indicate that there are 582 licence holders around the country, of those 5 are for Kilembe Mines, 4 to Hima Cement, 6 to Steel Rolling Mills and 6 to Tororo Cement. The rest, are held by individuals and various companies – both genuine and obscure. For instance, there a host of about seven companies, which in total hold about 26 licenses of which the contact person for all the companies is one Pravin Ghelani. The companies registered are registered as Fergie Minerals and Metals Mining Company, Esimo Industries Uganda Limited, Esta Industries, Nelvo International, Hard Rock Engineering and Doher Industries Limited. Notably though, none of these companies have filled returns for their mining activities.

When Ghelani was contacted by The CEO Magazine, he declined to comment.

There are other companies holding licenses, that have not submitted any returns. Notably, some of them are represented by one Law Firm which has a link to East Africa Gold Sniffing. Kusaasira Dennis is an oil, gas and minerals attorney with Kusaasira and Co. Advocates and Consultants – a law firm mainly handling oil, gas and mining ventures. His law firm represents five companies, of which there is one active one. The companies held a total of 61 licenses and by June 2012, none had submitted returns, an indication of speculative tendencies.

According to Edwards Katto the assistant commissioner at DGSM, the country is losing out on much needed revenues because some license holders are holding back, “waiting for the highest bidder.” Uganda accrued fiscal revenues of $14.6m in 2011 from the mining sector. However Katto notes that the country could have earned more if other licence holders were in production. The bulk of the mining revenues come from Hima Cement, Tororo Cement, and Kasese Cobalt Company.

Katto further notes that the speculators make Uganda’s mining sector expensive for investment. “If speculator holds a licence, they will lookout for the highest bidder to buy their stake,” he says. “The country here will lose out because either the big companies would rather wait for a new licencing regime, rather than acquire a speculative company at a higher price,” he adds.

Why speculate?
The legal framework currently allows anyone who has the money to hold a license, which makes it easy for the speculators to pounce. According to DGSM, a one year prospective license costs about Ushs150,000, acquiring an exploration license will costs about Ushs650,000 with Ushs10,000 paid annually for the three years. A retention license for two year costs about Ushs450,000 and a mining lease – held for 15 years – will cost Ushs2million and annual fees per hectare of Ushs10,000. According Johnny Sassirwe the Chairperson of the National Artisanal and Small-Scale Miners Association, this allows Ugandans based in the mining communities to participate in mining activities and attract international investors.

“There is an opportunity for local small-scale miners to benefit if the cost of acquiring a licence is low. This encourages local participation. Also, if a big mining company approaches us with a good offer, then we can easily sale,” Sasirwe points out.

Furthermore, Kusaasira – of Kusaasira and Co. Advocates – uses the section thirty of the Mineral Act of 2003 to emphasize that they are working within the required legal framework.

“ The Mining Act allows farm-downs or total transfer of interests or share in mineral rights, with the consent of the Commissioner, and consent only to be withheld only if the proposed transferee does not quality to acquire the mineral right in question,” Kusaasira adds.

The current licencing regime has been “first come, first served,” is easy to maneuver if you have prior information on the status of particular mining area. Once an individual has this information, they can apply for a licence and get it if they are first ones to do so. The Hima Cement and East Africa Gold Sniffing case is yet to be resolved as the latter has dragged the government to court for “suspending” the licence. The challenge is, the government may be required to compensate – heavily – if the licence is to be cancelled because the policy was clear, “first come, first served.” The Brandenburg Energy Group – a Canadian Mining Company – had written a Letter Of Intent (LOI) to East Africa Gold Sniffing to acquire 100% stake in the company. Brandenburg expressed interest after East Africa Gold Sniffing had just been given the limestone exploration licence.

“EA Gold has appealed the decision of the Minister, and EA Gold has stated that it is confident that the Exploration License will revert to EA Gold; in which case, EA Gold will be in position to complete the transaction with Brandenburg,” reads a statement from the Brandenburg Group.

Kusaasira does point out that the end result is for licence holder is to make money and that if prices of the minerals on the global market are too low, then “why produce?”
For instance, Gulf Resources which holds the lucrative Vermiculite mining rights in Manafwa district had to suspend mining operations earlier this year becomes of declining global prices. Gulf Resources was producing about 22,000tonnes vermiculite per annum but was forced to scale back to 18,000tonns by Dupre Minerals Limited, a UK based company which was purchasing 100% of the produce. According to the company website, this was a result of the economic woes in Europe.

“Gulf Industrials Limited (ASX: GLF) wishes to advise that on an interim basis it has stopped production at its Namekara Vermiculite Project in Uganda until stock levels are reduced to a manageable level. Dupré Minerals Limited (“Dupré”), a leading UK based vermiculite distributor and the exclusive distributor of the production at Namekara Vermiculite Project continues to purchase the company’s vermiculite at reduced levels until the vermiculite markets pick up,” reads a statement from Gulf Industrial Limited.

On the other hand, the mining act doesn’t make it clear when it comes to the offences and mentions that anyone who submits false returns will be fined one hundred and fifty currency points – Ushs3million (Each currency point is Ushs20,000). However, the law makes it clear that a location license can be revoked by the commissioner if “within a period of six months from the date the licence was granted or renewed no mining operations have commenced under the licence.”

The location lease is one that is meant for small-scale miners who can spend a maximum of Ushs10m. The same licence differs from the mining licence in that it is meant for minerals that do not require specialized technology. Notably, the same revocation restrictions do not apply to the mining licence.
On this point DGSMs’ Katto agrees that there is a loophole but is quick to say that they begun issuing notices to non-complaint, inactive mining companies with licences.

“We are currently blacklisting these companies and serving them with a letter of notice.” However, there is a far greater challenge for DGSM – funding. “With limited funding,” Katto notes, “supervising and monitoring licence holders will remain a challenge.”

Licencing suspended
The Uganda government in early November placed a moratorium on issuing new licences as reported in The East African newspaper. The moratorium is partly a move to deal with speculators as the department moves into competitive bidding for the mining licences – a move they say would attract genuine mining companies into the business.

This however does not guarantee production also. For instance when Rio Tinto – a global mining and minerals company – held a mining licence for vermiculite in Manafwa between 2006 and 2009, but the only work documented was drilling of 64 wells for resource recognition, setting up of transportation infrastructure and market research. Sources within DGSM confirmed that no actual vermiculite was extracted for purposes of selling during the period Rio Tinto was holding the licence. This meant that the mining company held onto the licence until they sold their interests to Gulf Resources a subsidiary of Gulf Industrial – a listed company on the Australian Stock Exchange (ASX).

“Competitive bidding alone is not the solution if speculators are to be reduced in number. Remember, you cannot have a market without speculators because some will still beat the system. Broader reforms like increasing the minimum investment amount and punishments for deliberate failure to carryout mining activities are needed,” says Martin Drito, an MP for Madi-Okollo in Arua.

 He has wealth of experience in the minerals sector and an advisor to the president of Guinea on mineral policy between 1998 and 2004.

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