Ghana: Mining matters

With the elections now largely over, barring the final resolution of a handful of court cases contesting the results, Ghana’s government has a backlog of decisions to make, and one of the sectors that will be affected by this is mining.

Foreign investors, particularly in gold, account for the bulk of production in the sector, and while they saw increased revenues in 2012 thanks to higher international prices, there are concerns over the application of a new mining regime that looks set to increase their fiscal burden.

Ghana overhauled its regulatory regime and bidding system for its mining sector in the middle of last year, passing a number of reforms that impacted taxes, royalties and tenders. However, the law has yet to be enforced.

The four key measures in question are: boosting the corporate income tax rate for mining companies from 25% to 35%; increasing royalties on precious metals from a range of 3-6% to a flat rate of 5%; a windfall tax for which specifics have not been set; and increased restrictions on capital write-downs. The law passed in 2012 changed write-downs from being frontloaded to 20% in each of the first five years of a project. Individual mines are also to be ring-fenced for accounting purposes: losses at one can no longer offset profits at another.

One additional change, though without direct impact on financial terms, is a proposed reform to the licensing system from a first-come/first-serve approach to bidding rounds. Winners would be picked based on financial terms but also according to the government’s perception of companies’ operational and financial resources. The precious-metals royalty rate of 5%, if implemented, would become the second-highest rate in Africa, according to a 2012 PricewaterhouseCoopers survey of major mining companies. Niger is the highest, at 5.5%. Others at 5% include Botswana, Congo-Brazzaville, Guinea, Sierra Leone and Zambia.

Officials told media before the elections they do not want to scare off foreign investment and they do not want to impose changes on the sector without consulting it first. Ghana is Africa’s second-largest gold producer, and the new policies could have a significant impact on production.

For Ghana, getting more money from its mineral resources would address a long-standing grievance, as citizens and public officials alike have for years agreed that the country has not benefitted enough from its decision in the 1980s, with support from the World Bank, to open up mining opportunities for the private sector and offer low royalty rates to attract investment. Prior to the liberalisation of the industry, Ghana’s gold production had sunk and revenues were declining but the generous terms offered then have limited the amount the local economy has benefitted from output.

However, changes in the other direction are now being backed by international organisations. Both the World Bank and the IMF have in recent years advised the country to take a larger share. In a global context, Ghana is hardly the only country looking to get a better deal from its private-sector partners in extractive industries. Worldwide, the average royalty rate for mining companies is 3.9%, according to a recent report by Goldman Sachs. That figure is up around 1% in the past three years, the firm calculated.

Resource nationalism has flourished in both developed and developing countries: Australia’s minerals resource rent tax was introduced in July 2012, and in the same year, the South African government publicly contemplated nationalising the entire sector. In Mongolia, the massive mixed-minerals Oyu Tolgoi project has been the source of much discussion, as the government and lead developer Rio Tinto continue to negotiate over how to split the profits from future operations.

Counting royalties and corporate taxes, Goldman Sachs estimates the average tax revenue in mining countries is around 39%. Ghana’s new regime would place it at about 45%, more expensive than all in the survey, with the exception of India and Zambia, the investment firm calculated.

In Ghana officials have pledged to hear and heed the perspectives of mining companies, hence the delay in implementation of measures already-passed. Several mining companies operating in the country have stabilisation agreements that insulate them from the impacts of a new tax or royalty regime, including Newmont Mining and AngloGold Ashanti. However, those without stabilisation agreements would feel the impact, and those agreements may now be harder to secure and less likely to be renewed upon expiration.