Sovereign risk is high for companies that do business in developing countries, as illustrated by the Mwakwere Rule, introduced in Kenya in September this year by Kenya’s environment minister Chirau Ali Mwakwere. According to the Mwakwere Rule, all foreign mining companies are required to transfer 35% of their shares to local investors and institutions. Base Titanium Limited, a subsidiary of Australian company Base Resources Limited, is significantly affected.
Base Titanium has been implementing the Kwale mineral sands project, Kenya’s first large-scale mining project. When the Mwakwere Rule was introduced, it was assumed that, in accordance with international norms, the new laws and regulations would apply only to future projects, not applying retroactively to pre-existing projects. However, the Ministry of Environment wrote to all mining companies including Base Titanium asking them for details on how they would transfer shares.
This places Base Titanium in an awkward position, as its financial resources are fully committed through a $170 million loan, and it is in no position to be handing over any shares. While many countries are seeking a greater share of the profits of mining companies, the most likely outcome of the Mwakwere Rule seems to be that the Kenyan political elite will be the ones snaffling the shares and pocketing the wealth.