Visit to Base Titanium, Kwale

Last weekend, I took a trip to Mombasa and the Mineral Sands site that Base Resources is mining in Kwale County. Through Base Titanium, the firm has been keen to engage with media, in the complexities of the mining industry that has many components – legal, taxation, land, financing, community, procurement environmental, jobs, fairness/equity, value addition etc. To compound this, it is very capital-intensive with very long payback periods that are a challenge for most investors.

Base mountain

Base Titanium Tailings site

Parent Base Resources is a company that’s listed in Australia and the United Kingdom exchanges, and that requires that they share volumnious financial information with investors and the public periodically. The company has also signed up for the Extractive Industries Transparency Initiative (EITI) in which companies commit to share information to show their impact – and, to date, Base, has paid  $51 million to the Kenya government including $27 million in value added taxes (VAT), $18 million  in utilities, and $3 million in royalties.

Base  have three sites within their 4,000 acre Kwale lease and turned over 9 million tons this year of earth, of which 8% was subjected to further extraction. This resulted in 751,000 tons, comprising three minerals products – 472,000 tons of ilmenite 472k tons, 71,000 tons of rutile, and 22,000 tons of zircon. The minerals are then trucked 30 kilometers to a $30 million dock they built in Likoni that faces the entrance to Kilindini harbor where they have a loader capable of getting 1,000 tons per hour onto a docked ship.

Base Likoni loader

Base ship loader at Likoni

Base has been challenged by the current Kenya Mining Cabinet Secretary (CS) on their impact in the country, and to which they have publicly responded to claims he’s made, mainly about their tax payments, investment and licensing.

The CS has also tried to raise their royalty rate from the 2.5% in their mining agreement to 10% of revenue, a figure which the firm terms as unrealistic given that even advanced mining markets like Australia peg it at 5%. Here in  Kenya, they have borne additional costs of investment like having to build their own  infrastructure like roads, dam, electricity lines and, dock.

Base mkurumudzi dam

Mukurumudzi Dam

The increase in mining royalty is one that has made Kenya rather unfavourable for mining investors at a time when global prices for all commodities have dropped. There is also a Mining Bill that’s almost been completed after a prolonged session between both houses of Kenya’s parliament. The bill sets out a path for investing in the mining sector. Base is happy with the bill but concerned about some clauses such as a requirement to list in 3 years at the Nairobi Securities Exchange and a requirement that old depreciated mining equipment be transferred to counties. The uncertainty about Kenya as a mining investment destination has been reflected in the latest Fraser Report  which saw the country drastically near the bottom of Africa and the world rankings.

Their main counter to the Minister’s charge is that the impact of mining to the economy in Kenya  is much greater than that of the mining royalty, and if the government tries to extract too much  revenue, they will lose investments – and indeed that exploration activities have severely reduced now.

Base central fieldThey try to employ as many locals from the mining area, then Kwale (60% of residents are form the county), and the greater Mombasa, and then the rest of Kenya. They commissioned a study that found that the 600 site jobs had a multiplier effect through support industries for a total of 3,200 jobs. During construction when they spent Ksh 26 billion, of which 1/3 went to Kenyan companies and that Kshs 3.2 billion goes to Kenyan suppliers every year. Some of the large suppliers include Kenya Power ($9 million a year) and Multiple Hauliers who competitively won an international tender to truck the base produce to the Likoni dock.

Base Likoni truck

Base storage at Likoni

Base, who pay royalties of Kshs 240 million  now account for between 1/2 and 2/3 of Kenya mining sector of royalty revenue and have enabled mining to overtake coffee as 4th largest export. The 444,000 tons of minerals sold earned Kshs 12.3 billion in sales. In addition the $60 million worth of infrastructure the company has invested will remain here after a mining lease in exhausted.

Base borehole

Base community borehole at a school

The company has also undertaken dozen of projects in the community area of the mine. These include agricultural projects to get commercial farming going, vehicles, rehabilitation of schools, water projects and construction of health facilities to meet the needs of  area residents.

It was an interesting visit and it was nice to see that the company has largely accomplished what it set out to do when it took over a project that had stalled for many years. The global market for oil, goal, and commodities has also declined sharply since they started, mainly driven by slowing demand from China and that has not altered their plans.

Base ad

Base newspaper advertisement

For now, here are few Kenyan shareholders in the foreign-listed company as mining is still not considered a prime investment, compared to real estate where local insurance and pensions companies can easily double their money in a few years. Still, Base continues to engage with these large investors with a view to to building up a local shareholding.

Kenya has ambitious plans for the oil, mining and extractives sector as seen in the mining bill that should soon become law (but which does not include oil).  Base  is internationally viable with its pricing structure and it may attract similar investors and projects to Kenya.

Farewell Dubai Bank

Kenya’s smallest bank Dubai Bank was placed into receivership about two weeks ago. It took control and suspended all operations of the bank except to ask borrowers to continue servicing their loans.

A few days after taking charge, the Kenya Deposit Insurance Corporation  (KDIC) as receiver revised its role and announced that Dubai bank would be liquidated, with each depositor paid a statutory maximum of Kshs 100,000 (~$1,000) once they file a claim that’s proven, and any larger deposit customers  would share in the proceeds of the liquidation equitably.

In the past, banks that have been put into receivership rarely ever come back. From Euro Bank, Daima Bank, and even a (strong) Charterhouse Bank never reopened their doors after receivership. This is because banking relies on trust and confidence, and if the public have no faith in an institution, it’s difficult for it to operate, attracting deposits from customers, and entering into settlement transactions with other banks.

Points to Consider before Switching Bank Accounts

This was inspired by a query from ‏@KaranjaJ on if there Is there a .Ke bank that delivers on its promise or is their verbal communication a load of B.S

1. Find a bank you’re comfortable with. You should not be unhappy with your bank.

2. If you outgrow the bank you’re with, move on. You may have been a customer for years, but your needs have changed, and these days it may not be as smooth as it once was. Maybe the bank ownership changed or the relationship managers you had moved on leaving you with without the friendly familiar service you enjoyed.

3. Don’t believe all promises advertised by a new bank product in a brochure. They are only telling you the good side.

4. Keep your old bank account for a while and only close it when you’re happy with the new one. Some customers find that the new bank is charging them for services they were getting for free at their previous one.

5. Negotiate with your current bank. They may waive some charges or make some changes, if you ask.

6 No one and no bank is perfect. Each bank has some positive’s, and also some negative’s.

7. The people who sell the product, are not the ones who will service it. When shopping for a new bank or product be wary if the person selling it is an agent on commission, not an employee of the bank. What they promise may not be delivered as you understand it.

8. Ask about all charges for the new service – Joining fees, admin/maintenance fees e.g. there may be an upfront 5% on your investment which is taken out before you account is event credited, and if that happened every year, you will not grow your investment much.

9. This is the era of mobile & internet. You should be able to view and query your accounts online – and this should be at no cost (it’s always cheaper for the bank to give you some account access, than you having to go to the branch to ask for a statement)

10. Read the fine print before you sign. You may be desperate, but take a few minutes to query some clauses, and it it’s a loan or investor agreement, ask to read it overnight, and get some legal advice.

Understanding the KQ & KLM Partnership

 The IFC-led privatization of Kenya Airways (KQ) in which KLM became a strategic partner, and shareholder, in the airline,  purchasing 26% of the Kenya government’s shares in the airline for US$26 million, and after which the shares of the company were listed in an IPO, was celebrated as one of the most significant privatization deals for a decade, until Kengen and Safaricom.

But that’s all in question with the recent loss announced by Kenya Airways with quite a bit of blame being directed at KLM for the position in which the KQ finds itself in. What does this entail?

A master cooperation agreement and shareholders agreement were signed between KLM and KQ in 1995, and a codeshare agreement and joint venture agreement followed in 1997.

KLM has seats on the board of Kenya Airways and some of the tenets of master cooperation agreement give any KLM director veto power over KQ decisions on:

IFC celebrates KLM's investment in KQ

IFC celebrates KLM’s investment in KQ

  • The appointment or dismissal of the Managing Director or Finance Director of KQ
  • The acquisition or disposal of any aircraft and any other variation in the size and composition of  KQ’s fleet. (KQ’s 2012 rights issue IM notes that following the approval of a 10 year business plan in July 2011,  KQ’s management embarked on implementing the strategic initiatives for the first five-year period. In particular, the Business Plan envisaged that KQ will acquire 46 aircraft over the period to March, 2016.) 
  • The allotment and issue of any shares
  • Entering into of any co-operation agreement with an airline that is a major competitor of KLM.
  • Material alteration KQ’s existing route network or material increase or reduction in the capacity on its routes
  • Material commitment or expenditure on sales and marketing or distribution of KQ’s products and services
  • Any sale of shares by the Government of Kenya to a major international airline.

Other notes from the IM and media

Global ticketing: In 2010, Kenya Airways became a full global airline partner of the SkyTeam global airline alliance, alongside KLM, having been an associate partner since 2007. KQ is currently the only SkyTeam member with significant operations in Africa.  With 14 SkyTeam member airlines, KQ’s passengers can take up to approximately 14,000 daily flights to 926 destinations in 173 countries. (So KLM helped KQ join? Will a break from KLM mean a break from Skyteam?).

Freight: In support of KQ’s expansion into freighter operations through the launch of a dedicated freighter business, the Board of Directors approved the acquisition of 12 freighter aircraft. In February, 2012, KQ introduced its first dedicated cargo aircraft, a Boeing 747-400F, to be operated in association with KLM and which was expected to fly twice weekly between Guangzhou, Nairobi and Lagos.

Passengers: This translated article hails Kenya Airways as being a jewel in the crown of KLM:  “The investment by KLM Kenya Airways is one that works out well for both parties.  Both companies fly each day between Amsterdam and Nairobi which there is a double daily connection..collectively the route has about one million passengers transported per year..

The cooperation agreement was expanded in November 2013: ..the collaboration was extended with the new routes London-Nairobi, Amsterdam-Entebbe / Kigali, Amsterdam-Lusaka-Harare and Amsterdam, and the Amsterdam-Kilimanjaro / Dar es Salaam. Kenya Airways and KLM jointly total around 44 weekly flights with a total turnover of over US$500 million.

However, this week, the KQ CEO said that the “In the context of the revenues and the costs on the routes in the joint agreement venture which we share 50-50, over the last three years, the route has been loss making,” ..and he said the Dutch Airline had since paid them a settlement transaction. 

KQ & Fuel Hedging

Last week, Kenya Airways (KQ), announced a pre-tax loss of Kshs 29.7 billion (about $297 million) for the year 2015. This was a shocker as it was the largest announced loss in corporate Kenya’s history and  the airline’s management have given various reasons of the loss.

The summarized results released show that the airline had unrealized losses on fuel derivatives of Kshs 5.7 billon ($57 million) for the year and realized losses of Kshs 1.6 billion ($16 million) .  After their last big loss of 2009 many thought, they would shy away from fuel hedging, but that practice is quite common and is very useful for airlines.

  • A 2014 Bloomberg piece notes that Air France-KLM hedged 63% of its estimated $2.4 billion fuel bill for the third quarter, compared with 74% of its $2.5 billion consumption a year earlier. Also that, Ryanair Holdings Plc, Europe’s biggest discount carrier, kept its coverage unchanged for this financial year at 90%.
  • Kenya Airways fuel bill was about $400m in 2014. The KQ 2012 rights issue Information Memorandum noted that, in December 2009, the KQ Board approved a fuel hedging policy of hedging for up to 80% of the Group’s fuel requirements for the upcoming 12 months and for up to 50% of its fuel requirements for the upcoming 24 months, on a rolling basis.
  • Fuel hedging in Africa:   Two of KQ’s main rivals are Ethiopian airlines (ET) and South Africa Airways (SAA). ET recognizes that jet fuel is a major expenditure of the airline (about $791 million in 2012) and they manage this risk using various hedging strategies for a maximum period of two years on a rolling basis; and the maximum to be hedged is 75%. At SAA, where fuel is also their biggest cost (35% or $754 million in 2012), their policy is to hedge a maximum of 60% of  the fuel exposure on a 12-month rolling basis.
  • The hedges have actually worked well in Kenya Airways favor except for the spike years of 2009 and 2015. There was no loss in 2012 and 2013,a slight gain in 2014 and now a larger loss in 2015.
  • So fuel hedges are not a factor in KQ’s record loss.

Traffic Apps in Kenya: Ma3Route vs Waze

Today Safaricom partnered with Google to launch  Waze, an interactive phone app that provides motorists with real-time traffic information crowd-sourced data from other road users.

Waze, which originated in Israel, was bought by Google for $1.3 billion in 2013. But while Waze has 3 million global users, its maps are sparsely used in Nairobi. There’s been a bit of discussion about why Safaricom is partnering with Waze when they have Ma3Route on Safari com

In Kenya, another platform, Ma3Route, has become the de-facto central point for traffic information which many people check before they start their car engines, both to see how clear the roads are and which routes are best. Ma3Route’s 300,000 daily users largely tweet or read about traffic conditions  and shares stories and traffic frustrations across its mobile apps, website, facebook and twitter.

Data Direction: Authoritative local tech blog TechMoran links the Safaricom-Waze partnership to Google using Safaricom to increase downloads and uptake of Waze. big data means a lot to both Google and Safaricom.

In contrast, Ma3Route bills itself as the twitter for traffic, taking simple text and placing it on maps with one of their objectives being to be light on battery and data bundle consumption.

Mining Moment: Base Titanium June 2015

Base Resources released their quarterly report for the period ending June 30 2015 about Kwale Mineral Sands Operations (commonly known as Base Titanium)

Managing Director Tim Carstens gave updates on various aspects during the quarter including:

  • It’s been an excellent performance over 20 months with operations on target and with a very good safety record.
  • They shipped 100,000 tons from their Likoni port to customers during the quarter. However, for their rutile, ilmenite, and zircon, prices are now 1/3 of what they were two years ago. They export all over, but  with Ilmenite, of which China is the largest market, 60% of companies shipping there are losing money.
  • Carstens said the proposed Kenyan mining bill is a good thing, and soon there will be a  new mining act but they want things to be addressed that meet global best practices. They pay royalties of 2.5% of sale value as per their agreement. The Cabinet Secretary wants this to be much higher, and they have offered 5%  which is the highest in the world. Note: the senate passed the mining bill on July 29. Also there have been no more invoices from Kwale county who sent one in June 2014, a move that they fought, along with the attorney general.
  • Of the $25 million of VAT owed to the company by the Kenya Revenue Authority, they received a payment of $2 million in July and are grateful that KRA has commenced payments
  • Kenyans still don’t invest in mining. The shareholding of Kenyans is still 1%, and that’s not going to change for a few more years when Kenyans get more comfortable taking on mining risk. They hope to turn base titanium into a more Kenyan company with more local shareholders and board members.
  • In June, they made a first principal repayment of US$11 million on their $258 million. In July, they got a loan from one shareholder, Taurus Funds and are seeking to refinance other loans to smooth their cash flows as debt repayments are eating most of the current operating profit. While they had an operating surplus of $20 million in the quarter,  $11 million went to the principal debt, and $8 million went to interest payments. They expect to complete the debt rescheduling in the next quarter.
  • Staff: 92% of the 600 employees are Kenyan, and they plan to go to 97% through training. 25% of the manager are Kenyans and 62% of staff are from Kwale, with 16% of the staff being female which is high for the mining sector.
  • They are involved in CSR  work with over 100 projects in the community  20 of these are  educational, and 200 students are getting scholarships from the company.  The company planted 9,000 indigenous tree seedlings  in the quarter and is working with local farmers on cotton, chicken, and potato projects to help them graduate to industrial-scale farming.

Pivot East 2015

Last week saw the winners of Pivot East announced and they were Arifu, Duma Works, Makarao, Safemotos, and Shield.

The day after, the finalists got to take part in a speed dating game, and some of the creators spoke about their entries including:

  • Duma Works:  a recruitment platform that uses mobile tech to make the process faster & smoother
  • Eko Biashara is a tool for small business owners to track their money through invoices, clients and customers. It’s fully online and the creators are developing an android app (they are looking for android & windows developers)
  • Safe Motos (Rwanda) – an uber for motor bikes using and taxis smart phones and taxis. They are looking for a next round of capital funding.
  • Guumzo share twitter-like conversations using voice. They are looking to raise $150K and for partners in Kenya
  • Soka is a  mobile app that gives football fans access to news, video, stats, on soccer across Africa.
  • African Fashion seeks to connect local fashion designers with followers, fans, and fashion lovers. They are looking for partners and investors.
  • Moview enables  fans of movies to get info, locations and schedules, and local & foreign features in Tanzania. They are looking for $50K, to build windows & iOS apps and for partners on Kenyan movies.
  • Yanguwa from Uganda which has poor transport system and aggregates different service providers.
  • V-Money is a scratch card voucher that tops your mobile money wallet.
  • Feedback R/T from Uganda is a simple game that teachers people how to avoid HIV, and get help if affected. They are looking for mentors & fundraisers.
  • Tenderpreneur.net tries to manage the chaotic Kenyan tendering process through automating it and make easier connections in the supply chain. (They are looking for partners to help them do this across East Africa)
  • SoftBallot runs polls referendums for universities and union halls. They are looking for funding partners sponsor for $50K.
  • SpotMe connects old friends without using their phone numbers, but using their background like school.
  • BOOKEX helps facilitate exchange of books to school kids from others who used books in previous years.
  •  SaniCMS is church management software, and a learning platform for church members. They are looking for $30K
  • Makarao TV is an online animation TV channel that showcases Kenyan animation for local audience in which they tackle social issues in fun manner using police characters. They are looking for a $150K investment

The winners of Pivot East 2015 were Arifu, Duma Works, Makarao, Safemotos, and Shield.

 

Barclays Africa Supply Chain Challenge

Today saw the launch of the Barclays Africa Supply Chain Challenge  at the Capital Club in Nairobi. It’s a contest for in which the winner will get a $10,000 prize for using block chains (wikipedia definition: a block chain (database), is sequential transaction database found in cryptocurrencies derived from bitcoin) to help solve friction in supply chains in any industry.

Barclays was one of the first UK banks to work with bitcoin companies and continues to partner with startups by being their customer and in helping them scale and engage with governments on regulation.

At the event, it was surreal to see bankers showcasing the power of block payments and bitcoin, and at a panel, Elizabeth of Bitpesa spoke of bitcoin as enabling international money transfers, unlike mobile money that’s only within the country. She said the process of licensing in different countries is moving well with many leaning towards licensing of such payments, but Africa is still a grey area with bank regulators yet to decide on bitcoin.

At the launch, Kenyan Information Cabinet Secretary Fred Matiangi said that the government would in October launch an Enterprise Kenya challenge to fund innovators from $1,000 to $10,000 and to get more assistance such as support with intellectual property and market linkage to grow.

Also businessman Chris Kirubi spoke about  a medical innovation he came up with ten years ago which was a medical smart card that has since saved Kenyan corporations like Barclays millions of shillings in medical fraud, and he wants them to now help him expand the product into other African countries as well.

Medical Investments in East Africa Redux

It’s been 5 years since reviewing the annual results of Nairobi hospital, and since then it’s almost doubled in size.
  • The hospital has revenue of Kshs Kshs 7.5 billion (~$75 million)  up from Kshs 6.9 billion in 2013.
  • It had a surplus of Kshs 1.58 billion (~15.8 million) up from 1 billion in 2013.
  • Assets were  Kshs 9 billion up from 7.5 billion in 2013
  • The hospital invested Kshs 1.2 billion in the last year, including 621 million on building, and 547 million on equipment.
  • Their doctor efficiency target is 4 patients per hour per doctor, an improve from the current 17 minutes (it’s also 21 minutes per patient with ambulance cases)
  • Other revenue sources were the pharmacy with sales of Kshs 2.15b from 327,000 prescription and the laboratory which did 630,000 lab test generating 1.2 billion. It also made 1.1 billion from bed fees.  They had 277 beds available (up from 269 the year before) and admitted 17,558 patients
  • They spent 1.5 billion on medicine, and 1.2 billion on staff towards a total of 4.4 billion in direct expenses.