Two-pronged challenge: Authorities confront the issues of illegal mining practices and weakening gold prices

Of all the trends mining analysts track, the two biggest factors affecting Ghana’s gold industry in 2013-14 will be enhanced regulation by the government on illegal mining and the shifting price of gold. The country recently made international headlines for arresting 166 Chinese citizens using heavy equipment to illegally mine for gold. After arguing for years that the practice was undermining legal operations, industry groups welcomed the crackdown, a signal of commitment to further eradication. On the macro-level, falling gold prices have slowed exploration and production around the globe, which has led to short-term adjustment locally.

The future of illegal mining and the downward trend of prices may inject some uncertainty into the industry in the near term. However, Ghana’s gold has proven to be a resilient and profitable long-term investment. The question mark is only about when – not if – the state will tackle illegal mining and prices will rebound.

BACKGROUND: The Ghana Chamber of Mines (GCM) estimates that informal production comprises about 34% of local gold output, but as with all informal business, verifiable statistics are difficult to come by. “It is impossible to quantify the size of the illegal mining market,” said Alhaji Abudulai, the managing director of exploration firm Canadian Mineral Exploration Ghana.

Regardless of exact figures, there is universal consensus that an increasing number of foreign nationals are using industrial equipment to extract minerals from unregulated tracts of land. These operations not only damage the legal industry, but they also often leave behind a degraded landscape and toxic chemicals. In addition, rivers have been polluted and cyanide found in community drinking water.

“A lot of our environment is degraded and if we do not protect the land our children’s children will not have land to farm, and this will further aggravate the poverty situation in the region,” Upper East regional minister, Mark Woyongo, said in a press release in mid-2012. As a result, tensions have increased between foreign miners and local communities. In the last year, fights between villagers and miners escalated to violence, leaving some miners dead.

HIGH COST: While community health is affected, “the economic implications are equally telling,” the GCM’s 2012 performance report noted. Indeed, illegal miners often operate at the expense of permitted companies. For example, AngloGold Ashanti has, in the past, faced conflict with 10,000 or so illegal miners in the Obuasi township. In addition to the human cost and soured community relationships, the pressure for improved security has raised the firm’s operating costs, Kwesi Enyan, managing director of Obuasi, told local media.

No mineral company is immune to the practice. “These days, you drill and you think you have a good place. Then the next minute you will see illegal miners,” Edward Mills, exploration supervisor for Castle Minerals, an Australia-headquartered group, told OBG. While incidences of illegal mining activity remain widespread, confronting the issue can ultimately help to accelerate the mining sector’s maturity and introduce an enhanced regulatory architecture.

CHALLENGES: The GCM has been advocating for greater monitoring of illegal mining for a number of years. The chamber noted in a 2012 report that, “Unfortunately, the GCM’s repeated advocacy for government to take a leadership role to deal decisively with the menace went unheeded. This was when the illicit activity occurred mainly on encroached concessions of member companies. Whilst their focus has not shifted entirely from member companies’ concessions, today, illegal miners mine every conceivable land or water body where they expect to find gold.”

Illegal mining is difficult to eradicate, in part, because it is challenging to distinguish it from legal small-scale mining. The government, through the Minerals Commission, provides licences for small-scale mining to Ghanaian citizens to ensure that the local population can benefit from the nation’s vast mineral resources. Through the Precious Metals and Minerals Company, Ghanaians have a formal channel to sell the output from this artisanal mining, called “galamsey” from the English phrase “gather them and sell”.

Traditionally, the galamsey used pickaxes and hand tools, but they are increasingly partnering with foreign nationals who have the capital to procure heavy mining equipment. To help dissuade these partnerships, the Minerals Commission’s taskforce on the issue is considering strategies to make it easier for Ghanaian miners to get loans, find investors and pool equipment, to achieve the original galamsey goal of keeping wealth within the community. “Most Ghanaian miners cannot raise money,” Abudulai noted. “They do not always produce bankable reports. And this is a problem.”

GOLD DIVE: The slowing price of gold is a more pressing development for Ghana’s gold miners. After the meteoric rise of gold prices, companies are now being forced to reconsider expansions and exploration plans. “For the first time in years there is some slowing down of the industry,” said Sulemanu Koney, the director of analysis, research and finance at the GCM. “Companies are now re-assessing projects and limiting development of greenfields,” he added.

While stock markets soured with the financial crisis, gold prices, thanks to the mineral’s value as a safe haven, skyrocketed and thus provided a platform for Ghana’s mining industry to grow. “A few years ago, many companies mined marginal ore and still made a profit. Even if they could get half a gram, they could make money,” Mills told OBG. “The sector was so busy and mining equipment was in short supply. You could not even find a drill rig,” he added.

In the first quarter of 2013, the average price of gold was down to $1632 an ounce, a 3% decline from a year earlier, and output in Ghana fell 3%, compared with the previous quarter. In April 2013, gold prices reached a two-year low of $1321.95 an oz.

HARD TIMES: “The dip in gold prices has adversely affected mining companies and particularly exploration projects. Some companies have surrendered their exploration licences to the government whilst some marginal ongoing projects have either been suspended or curtailed,” said Koney. The average cash cost of production in Ghana was $809 per ounce in 2012; hence a $1400 price keeps production going at most mines.

Exploration is also shifting to different, more accessible deposits. Gold Fields, for example, announced that, “Exploration activities are being focused on smaller, higher-grade and less capital-intensive targets, mainly in the regions where we already have a presence.” The South African firm plans to reduce near-mine exploration expenditure from the $65m spent in 2012 to $23m. Newmont was on schedule to begin production at its new Akyem mine, but the firm reduced spending on global operations by 13% in the first quarter of 2013.

Few analysts seem worried about Ghana’s long-term prospects. “It is always a good idea to hold on to gold, and the future looks very promising,” Abudulai said. “Because when it goes up, it goes up like a rocket.”