Legal and regulatory changes in Ghana address challenges facing mining

The mining sector in Ghana, in particular gold mining, is one of Africa’s oldest, but growth has been hampered in recent years by external factors such as lower metal prices and internal ones like the rising cost of electricity and illegal mining. These difficulties have combined to boost costs and lower profit margins in the sector, and legal and regulatory changes are in the works. For now, exploration activity is minimal, but authorities hope that when global conditions for mining improve a boost in activity will follow. Ghana, once known as the Gold Coast, is a key player in the international gold market, as the country is Africa’s second-largest producer. In 2013, 86.6% of export revenue from the mining sector came from gold, making the metal the top export and source of foreign currency. Gold generated $4.2bn in 2013, compared with $3.2bn from oil and $1.3bn from cocoa.

Recent Trade

While some years have seen drops, particularly over the first part of the 2000s, the long-term trend in Ghana shows a steady rise in gold output since 1980, according to data from the Minerals Commission, the mining sector regulator. Other minerals or gems produced on a large scale include manganese, diamonds and bauxite. Output of all three has slowed in the past decade, although in 2013 manganese output rose close to the levels seen before the 2007 global financial crisis, according to statistics from the regulator.

There may be commercial-scale quantities of other minerals as well – the Minerals Commission is currently planning a bidding round to encourage exploration, as much of the country’s territory is relatively unsurveyed. The potential for commercial deposits includes kaolin, mica, iron ore, limestone and salt, which is mined on a small scale but not fully monitored, according to the Ghana Statistical Service (GSS). In 2013 mining and quarrying contributed 9.8% to GDP, as per figures from the Ghana Chamber of Mines (GCM), up from 9.5% in 2012. The mining sector paid GHS1.1bn ($305.25m) in taxes in 2013, according to the Ghana Revenue Authority, down from GHS1.5bn ($416.25m) in 2012. Total mineral revenues slipped from $5.45bn in 2012 to $4.79bn in 2013, GCM figures state.

History

The modern era of mining in Ghana began with legal reforms implemented in 1986, in part on advice from international organisations such as the World Bank and the IMF, which advised countries in that period to lower taxes in order to attract foreign investment. Previously mining was state controlled and output was low, but more favourable fiscal terms attracted new participants. Between 1986 and 1989 more than 55 gold prospecting licences were issued, according to the World Bank, and mining flourished similarly elsewhere in Africa thanks to attractive tax regimes.

Outsiders rehabilitated state-owned mines and explored new ground, and as a result three new mines were opened in the early 1990s. By 2004 the sector had achieved seven-fold increases in gold and bauxite production; however, around the same time a stronger push for local content and community engagement emerged, sparked in part by a feeling that the exploitation of domestic resources was not benefitting local populations or economies. In recent years, that sentiment appears to have taken hold, with both the World Bank and IMF having reversed their previous positions, advising Ghana that it should be getting a greater share of revenue from the sector.

Sector Organisation

Mining in Ghana is controlled by the Minerals and Mining Act of 2006 and regulated by the Minerals Commission, which is part of the Ministry of Lands and Natural Resources (MLNR). Another state-owned company, the Precious Minerals Marketing Company (PMMC), acts as a buyer of gold and diamonds mined by artisanal miners, known as galamsey. These small-scale producers can sell their output directly to the company or to traders who act as a go-between. Miners in Ghana are a diverse group, ranging from global leaders in the industry to one-person operations. In between are mid-sized and junior miners, indigenous miners, both licensed and unlicensed, and illegal operations. The difference between legal and illegal at the small-scale level of activity is nationality, as indigenous peoples are considered to have a natural claim on the gold in their ancestral lands. While foreign investment is welcome, it is only at the large-scale commercial level that foreign expertise and capital is needed.

One of the main challenges for the government is the size of the galamsey sector. It accounted for 34% of gold production in 2013 but does not currently pay taxes. It is not clear how more effective taxation policies can be implemented, but finding a way to get some revenue from these miners is a primary goal. According to George Abradu-Otoo, managing director of the PMMC, this could generate up to GHS500m ($138.75m) in revenue per year (see analysis). The rise in small-scale mining echoes a global trend, according to sector studies, with estimates of the number of small-scale miners having jumped from 13m worldwide in 1999 to 25m as of 2011, according to the Toronto-based Alliance for Responsible Mining. Another 150m-170m people are indirect beneficiaries. In Ghana the group accounted for 15.2% of gold output in 2008, according to a study by the GCM, and based on the 2013 statistics, the most recent full-year numbers available, their share of the sector has more than doubled in five years.

Laws & Regulations

Ghana’s legal regime has been evolving, with a number of major reforms in recent years – a trend that is expected to continue. In addition to new tax and accounting rules announced in recent years that are expected to help generate more revenue, Ghana has also introduced local content rules through an amendment to the Minerals and Mining Act of 2006. Since April 2014 parliamentarians have been deliberating a draft revision to the law that would make it easier to punish individuals involved in illegal mining, including both foreigners and the locals who enable them (see analysis). Abradu-Otoo told OBG, “Illegal mining continues to be a problem, and even though there have been major improvements in prevention, there is still more to be done.”

In April 2015 Tony Aubynn, the head of the Minerals Commission, told local press, “We have proposed some amendments and they are in parliament now, so that those who are caught in offence of the law will receive much bigger punishments and serve as a deterrent. The idea is really not the punishment itself, but rather to deter people from doing illegal things.”

The proposed amendments include a possible fine of GHS60,000 ($16,650) or a three-year jail term, with foreign offenders expected to face stiffer penalties. Aubynn suggested that any punishment should also be accompanied by improved educational initiatives so that miners are informed about their rights and what processes to follow.

Local Focus

The 2012 addition of local content rules has codified and further developed a system that was already in place and designed to build domestic capacity. Ghana has always had restrictions on the number of foreign workers that mining companies can employ, but the additional rules makes expectations clearer for non-Ghanaian miners both in terms of the employment of locals and procurement in the domestic market. With regards to their workforce, mining companies can import up to 10% of senior staff, but must reduce the total to 6% after three years. In terms of procurement the Minerals Commission maintains a list of inputs that must be sourced locally, which it updates annually. It currently includes items such as lubricants, explosives, electric cables and cement. In general companies are expected to procure as much as possible locally, and when goods or services are awarded through a bidding process the bid with the highest amount of local content must be selected if it is no more than 2% higher than the preferred bid. Companies must submit local content plans for labour, goods and services at the time of application for a licence, as well as update plans annually. Abradu-Otoo told OBG, “More support for the industry as a whole will help improve development in mining communities and, most importantly, improve the lives of the locals.”

Another legal reform that could open up new areas for development is a review of existing licences and a move to digitise and organise the cadastre. In the past, the first-come, first-serve approach did not provide for procedures that preclude speculators or prevent those without actual exploration capacity from claiming mineral rights. At the Mining Indaba Conference in Cape Town in February 2015, Nii Osah Mill, the head of the MLNR, said that work was ongoing to strip speculators of concessions they are not actively exploring.

Gold

In addition to being the second-largest gold producer on the continent, behind South Africa, Ghana consistently ranks among the 10 largest producers globally on a year-to-year basis. The country’s share of global output is typically at about 3%, according to data from the GCM. A 2013 estimate of reserves from the US Geological Survey pegged the total at 1600 tonnes. However, gold production did fall 5.2% from 124.74m grams in 2013 to 118.2m grams in 2014, according to provisional data from the GSS.

Gold miners in Ghana are a diverse lot, ranging from US-based Newmont Mining and AngloGold Ashanti of South Africa to the smallest of informal galamsey miners. Three firms provide 10% of overall production or more. The largest is Gold Fields of Johannesburg, which accounted for 19% of output in 2013. It was followed by Newmont, with about 16% of the total, and AngloGold Ashanti at 11%. The latter two are the only miners in the country that have stability agreements which insulate them from any potential changes in fiscal terms introduced after the mining agreements were signed. The Minerals and Mining Act of 2006 permits stability agreements of up to 15 years from the time of licensing and gives the government discretion to offer them to miners or not to.

Gold Fields has been the state’s biggest contributor to tax revenue since 2010, according to the company. The mines of which it owns a majority and operates include one at Tarkwa that counts as the country’s largest, having produced 17.9m grams in 2013, according to data from the Extractive Industries Transparency Initiative (EITI), of which Ghana is a member. Membership in the EITI commits the country to a reconciliation process in which an outside auditor certifies financial flows between miners and government.

Stability Agreement

Newmont operates two main fields: Ahafo, where output was 16.16m grams in 2013, according to the EITI report, and Akyem, which began commercial production in 2013 and had an output of 3.66m grams for the year. Newmont signed its stability agreement in 2003 and has stated that for the life of the company’s projects its corporate tax rate would not exceed 32.5%, lower than the current rate of 35%. The agreement also entitles Newmont to pay royalties at a rate of 3-3.6%, instead of the current flat rate of 5%. The stability agreement provides the state with 10% of net cash flow after Newmont has recovered its investment costs, and the right to buy as much as 20% of a project’s equity at fair market value after 15 years of production.

AngloGold is currently assessing its long-term strategy in Ghana. The company has already re-evaluated its mine at Obuasi. Mining at this site north-west of Accra has been ongoing for more than a century, and production has been falling in recent years as the mine matures. In November 2014 the firm said it was seeking a joint venture partner for the property, and in September 2015 it announced it had concluded an investment deal with London-listed Randgold Resources. Randgold will lead and fund a feasibility study for the mine, which will focus on the establishment of mechanised, high-grade operations. The project is expected to take four months, after which both companies can assess if the investment meets their criteria and form a joint venture.

Four other large-scale mining companies own gold-producing assets in Ghana, each of them accounting for less than 10% of total production. Canadian Golden Star Resources’ primary assets are the Bogoso and Wassa mines, which together accounted for 7% of 2013 production, according to EITI data. Chirano Mines, which is 90% owned by Kinross Gold, also of Canada, accounted for 6% of the total. Perseus Mining of Australia owns 90% of Edikan gold mine, which began production in 2012, and contributed 4% of the overall total in 2013. Endeavour Mining of Canada is now the owner of the Nzema mine after merging with previous holder Adamus Resources of Australia, with Endeavour pledging in the deal to commit to $160m in spending on the mine.

Looking To Buy

In addition to AngloGold and Randgold’s new agreement at Obuasi, Pinecrest Resources recently acquired the Enchi gold project from Edgewater Exploration in late 2014. It contains resources of about 21.26m grams, according to EITI’s report. Mining companies that have recently announced plans to buy assets include Randgold Resources, with its main asset being a gold mine in Mali; Newmont; Newcrest Mining of Australia; and Acacia Mining, formerly known as African Barrick Gold. Gold Fields could also be a candidate to acquire, as it has previously announced a target of boosting production to 1m ounces per quarter. According to Toronto-based Clarus Securities, there were six asset sales in the 16 months to March 2015. While exploration activity is limited now, assets changing hands in Ghana could signal an increase in exploration activity, despite low metal prices.

In the downstream sector domestic opportunities to add value through processing are limited, in part thanks to well-established competition abroad. Currently gold processing within Ghana boosts gold content in ore to about 92%, according to the GCM, but getting an investment in facilities to bring that level higher could be a challenge. “The excess global refinery capacity will potentially make future local refineries uncompetitive,” according to GCM’s website.

Beyond Bullion

Bauxite, the main input in aluminium, has been mined in Ghana since the 1940s. Currently, the Ghana Bauxite Company’s Awaso mine accounts for all production. China’s Bosai Minerals Group owns 80% of the company, with the government of Ghana holding a 20% minority stake. Bauxite production in Ghana jumped 5.8% in 2014, rising from 908,586 tonnes in 2013 to 961,157 tonnes in 2014, according to the GSS. There is also potential for bauxite on a commercial scale at Kyebi, north of Accra.

A Second Chance

Bauxite mining is closely linked with one of the more notable foreign investments in the post-independence era. In the early days after Ghana gained independence in 1957, then-President Kwame Nkrumah spearheaded a plan to create the 1000-MW Akosombo Dam, now the country’s signature piece of infrastructure, as well as an aluminium smelter, for which local bauxite reserves were intended to provide a competitive advantage. The dam and the Volta Aluminium Company (Valco), built in the industrial town of Tema, were conceived of as complementary because at the time Ghanaian electricity demand would not have justified the construction of the dam on its own, and a large industrial off-taker was needed to make it worthwhile. Kaiser Aluminium and Chemical Corporation, a now-defunct US company, agreed to build the dam, as well as build and operate the smelter in exchange for a package of tax breaks and steady electricity supply at a price fixed in 1962 for 35 years.

The length of this agreement is longer than what is typical today, but the agreement contains many of the basic building blocks of modern public-private partnership agreements and electricity sector independent power producer arrangements, such as the joint venture structure involving a government and a private investor, multilateral and bilateral agencies providing various incentives, investment guarantees, export credits and other risk-mitigation tools. As time passed, however, the terms of the deal became less and less favourable for Ghana. The agreement mandated that it pay for half of the dam’s cost and that Valco would be the priority customer for the electricity it produces – in the early years that meant the bulk of supply went to Valco, slowing the state’s efforts to use the electricity supply to promote development.

Dwindling Return

As a result the domestic supply chain for aluminium did not last for much longer, and by the 2000s the plant was operating at a low capacity. Kaiser and other minority foreign investors began divesting their stakes to the Ghanaian government, which currently is the sole owner of Valco. The plant continues to operate far below capacity and has been occasionally shuttered, at times for years. The government’s stated policy is to try to re-establish a domestic value chain for aluminium in which Ghanaian bauxite is once again relied on as a key input.

However, the decrepit state of Ghana’s railroads presents one clear obstacle to the production and transport of bauxite and manganese. While rail could provide a lower-cost means of transport, rail service is currently unavailable, meaning miners have to use trucks to move their output to the port at Takoradi for export, increasing costs. This is also a disincentive to investment in mining some of the other bulk minerals Ghana would like to extract as part of its policy of diversifying its minerals production. In January 2014 President John Dramani Mahama said that two new rail lines would be built, and the 2014 budget introduced a 2.5% increase to the value-added tax to build up an infrastructure fund to pay for such projects.

Manganese

Production of manganese, an input for steel and alloys, slipped in 2014 to 1.53m tonnes, down from 1.72m tonnes in 2013, according to the GSS. As with bauxite, all production comes from one mine, in this case at Nsuta, which is 63 km from the port at Takoradi by rail and 92 km by road, according to EITI. The state owns a 10% stake in the operator, the Ghana Manganese Company. The balance is owned by Consolidated Minerals, a Jersey-based company that also mines manganese in Australia. Though the mine has been active since 1917, there is plenty of ore left; Consolidated Minerals has estimated that just 3% of its concession has been extracted. The EITI report put reserves at 21.8m tonnes, with a manganese content of 29%. The total resource is pegged at 41.8m tonnes. The manganese-to-iron ratio at Nsuta is one of the highest concentrations globally, making Ghana’s manganese a premium product.

Diamonds

There are no current large-scale diamond miners in Ghana – all activity comes from artisanal miners, who sell their output to the PMMC or to traders who resell it. Production reached 241,235 carats in 2014, according to the GSS, up from 160,780 carats in 2013. The drop in 2013 was partly attributed to Ghana’s attempts to combat illegal mining and coax legal artisans to register their operations, as in the past five years production has been higher than 200,000 carats per year. Diamond production peaked from 1964 to 1974, when about 2.4m carats were produced annually at a mine in the eastern part of Akwatia State which has been closed since 2007.

Hard-rock mining of diamonds has never taken place in Ghana – all recoveries are from alluvial deposits near riverbeds. Most of the existing output is aimed at the industrial market, with just 15-20% of it considered gem grade. Local company Great Consolidated Diamonds Ghana (GCDG) hopes to revive commercial production, with the first step being exploration of concessions along the Birim River in south-central Ghana. GCDG, in which the government holds a 10% stake, has five blocks that contain both diamonds and gold.

Akwatia has also attracted renewed interest, as the South African junior miner Limoz Resources said in March 2015 that it would reopen the mine in partnership with GCDG. The firms have already lined up contract buyers that are willing to enter into long-term agreements. GCDG has also signed a memorandum of understanding with Modular Process Technologies to supply technical and other forms of support for operations. The partnership hopes to produce 2m carats per year, approaching the peak-era output of the 1960s and 1970s.

New Terrain

Most of the current mining activity in Ghana is in its western and central regions; however, the state considers the eastern portion of the country – specifically a thin strip of it running north-south adjacent to the border with Togo – to hold considerable potential for minerals and gems, as well as hydrocarbons. It hopes that exploration will ramp up in the area in the future. This strip of land is called the Voltaian Basin, and the last geological studies were conducted by Russian scientists in the 1960s and form the basis for current expectations and plans to explore further.

The Minerals Commission intends to hold a bidding round by the end of 2015. While in the past mining concessions have been offered on an open-window basis, the regulator has said that the Minerals and Mining Act of 2006 allows for bidding rounds and that it would like to use this method in the future. Although numbers are not available, stakeholders in Ghana’s mining sector agree that exploration spending across all mineral categories has dropped significantly in recent years, tracking commodities prices due to the slowdown in economic growth in China, the world’s largest consumer of natural resources. With a commodities super-cycle having come and gone, a bidding round in 2015 that attracts new investment would be a positive signal for the sector.

Fiscal Terms

When exploration activity does rise again, miners are likely to pick spots worldwide that offer the best mix of profitability and potential, and that means evaluating changes in fiscal terms. Countries as disparate as Australia, Gabon, South Africa and Canada have overhauled their regulatory frameworks, often increasing fiscal burdens on operators. In late 2012 and early 2013, when Ghana was considering final implementation of the tax changes it introduced, market research from US investment bank Goldman Sachs found that taxes on mining were increasing globally. The average royalty rate across the top 20 mining jurisdictions, Ghana included, had climbed from 3% to 4%. The investment bank’s research determined the global average tax take – defined as the sum total of payments to government from mining profits – was 39%. The Ghanaian average was slightly below 50%, leaving it with the second-highest tax take among African countries in the study, behind only Zambia at about 50%.

Ghana has introduced several new tax terms since 2010, as well as some restrictions on accounting policies designed to reduce write-offs and increase state revenue, most of them introduced in 2012 but not enforced until a year later. These include changing the royalty rate from a range of 3% to 6% to a flat 5%, boosting corporate income tax from 25% to 35%, and introducing restrictions on tax accounting, including on capital write-downs and ring-fence mines, so that taxes are paid on a mine-by-mine basis rather than for the miner as an entity. A windfall tax was also proposed but not implemented.

Another tax issue for miners is the delay of refunds for value-added taxes, which can take as much as six months, according to the GCM. It has proposed offsetting these arrears from royalties. Revenue from miners is currently shared by several public entities, with 10% going to the Mineral Development Fund, which supports the sector with spending in areas such as capacity building and environmental rehabilitation, and 4.95% to district assemblies. Stools, or traditional leaders, and traditional councils get 2.25% and 1.8%, respectively, and the Office of the Administrator of Stool Lands receives 1%. The balance of 80% is retained by the national government’s budget.

Competitiveness

Political factors are considered important in determining a fair tax rate, as miners operating in less developed countries take on more risk and therefore expect a higher return. Ghana remains one of the safest destinations in Africa for political risk. According to the 2014 Survey of Mining Companies, a global study by Canadian think tank Fraser Institute, only Botswana and Namibia are considered better environments in sub-Saharan Africa for a miner to invest in. The George Soros-funded Resource Governance Index, which is published every other year and most recently in 2013, ranked Ghana 15th out of 58 countries in the survey, the top in its region.

Where Ghana may compare poorly is domestic costs, in particular for electricity. The country’s struggle to meet demand for power means that running a mine requires a diesel-powered generator to ensure a steady flow of power, increasing costs. Currently, power can range from 20-30% of costs at a mine, and as a result gold cost $951 per ounce to mine in 2013, according to the GCM. That represented an 18% rise from 2012 and a 66% rise over $573 in 2009. The London-based gold consultancy Gold Fields Minerals Services estimated costs on an all-in basis, including all ongoing capital and operational costs, and its calculations put the price per ounce in Ghana at $1473 in 2013, 9.1% above the global average of $1350. With the country’s new domestic gas infrastructure now in place, those cost pressures should start to ease, although they may remain high in the near term.

Outlook

Ghana’s offering of relative stability has not been enough to keep the country from feeling the impact of the global drop in exploration activity, but external indicators suggest that could change. One important indicator is fundraising on major global stock exchanges focused on mining, which include those of Australia, South Africa and Canada. According to data from Quintana Resources Capital, a Canada-based mining and natural resources management company, a total of $3.5bn was raised on global stock markets by junior mining companies from October 2014 to February 2015, with about two-thirds of it coming from Canadian offerings. “In spite of all the complaining about moribund financial markets, a truly enormous amount of new money is coming into the junior mining industry,” Lawrence Roulston, president of Quintana, told the press in February 2015. The combination of low metal prices and miners with varied degrees of capital and cash flow could also mean a pick-up in the pace of mergers.

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The Report: Ghana 2016

Mining chapter from The Report: Ghana 2016

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