Tiomin caught between a rock and hard place

by John Njiraini

It has been a conceded truth for many years. But now the lid has finally been lifted that Tiomin Resources Inc was incapable of developing the Kwale titanium mining project.

This comes after the Canadian entity relinquished control of the multi billion project to a Chinese company, Jinchuan Company Ltd, on its own admission that it was experiencing "capital shortage".

It also comes after the Government had consistently piled pressure on Tiomin Kenya Ltd (TKL), which is a wholly owned subsidiary of Tiomin Resources Inc, to commence mining or loose the license.

The Financial Journal has established that the Department of Mines and Geology recently extended the period originally granted to TKL in 2004 to finance and build the project from five to 10 years on the understanding that development would commence as soon as possible.

The department had been reluctant to extend the period after the first five-years expired last year because the company had not embarked on developing the project that is believed to be home to 15 per cent of the world’s titanium deposits.

This was because Tiomin Resources, which owns the rights to about 3.2 billion titanium deposits in Kwale, lacked the financial muscle to undertake such a capital-intensive investment. But the company, whose only other known mining project is a 49 per cent stake in the Pukaqaqa copper and gold project in Peru and a 33.4 per cent stake in Kivu Gold Corporation, has always disputed this fact until recently.

Weak balance sheet

"The true long-term value to Tiomin is owning a 30 per cent carried interest in a project to be financed, constructed and operated by one of the world's largest mining companies in a time of capital shortage," said Robert Jackson, President and CEO of Tiomin in a statement.

The admission did not come as a surprise to many because of the company’s weak balance sheet going by its audited results for the year ended December 31, last year. The company posted a loss of Sh675 million compared to Sh580 million recorded the same period in 2007. Tiomin also closed the year with a cash position of Sh1.4 billion and working capital of Sh1.5 billion.

The paltry working capital is a drop in the ocean considering that a whooping Sh15 billion is required as capital expenditure to get the project off the ground according to an evaluation carried out by the company in 2006.

Due to the company’s weak financial position, the Government has made known its frustrations with the continued delays in developing the project and has been exploring the possibility of repossessing the license issued in 2005.

"The Government has been demanding a detailed plan from Tiomin on how it plans to develop the project but this has not been forthcoming," said a top official at the Ministry of Environment and Natural Resources.

He added that the Government has pondered on the possibility of canceling the license held by Tiomin, it has been unable to move because the contract stipulates the company must fully be compensated and the amount could run into billions of shillings.

According to the contract, Tiomin owns the lease for the 5,000 hectares mining site for 21 years and must be fully compensated if the lease is revoked. The contract gives the company the full, sole and exclusive right to mine and process the titanium deposits.

Unable to cancel the license because the Government is also technically broke and in desperate need of funds to finance immediate programmes, the Finance Minister has been unwilling to extend the period for Tiomin so that it could secure funding for the project.

Legal battles

Though the strategy meant the project would continue being in limbo for at least the next five years, it also made it impossible for Tiomin to approach financial institutions for funds.

Indeed, this explains why the company has been unable to approach any financers since a syndicated loan facility arranged by the African Development Bank to raise Sh11.6 billion collapsed.

Caught between a rock and a hard place, Tiomin finally let go of the project in which it has invested in the excess of Sh1.8 billion on exploration and engineering activities, compensating displaced farmers, fighting unending legal battles and environmental issues since discovering the minerals in 1995.

Last week the company, which is listed in the Toronto Stock Exchange, signed a project development agreement with Jinchuan that ultimately gave the Chinese company total control of the titanium deposits. According to the investment agreement, Jinchuan would increase its stake in TKL from 20 per cent to 70 per cent and would be responsible for financing, developing and operating the Kwale project.

The two companies had last year signed a memorandum of understanding in which Jinchuan had acquired the 20 per cent at a cost of Sh825 million. The state-owned Chinese company, is expected to pump an initial investment of Sh2 billion to kick start the project as soon as all regulatory approvals are granted.

When the deal is finally closed, Tiomin would retain a 30 per cent stake in TKL and would cease pumping funds into the project.

"Closing this flagship deal, which has had such a long and painful gestation period, will be a key event for Tiomin," said Jackson.

By relinquishing control of the Kenyan operation, the Kwale project has become a replica of Tiomin’s other interest in Peru.

-jnjiraini@standardmedia.