Digging deep: Mineral exports expected to rise as the sector looks to create a stable environment for investment

With revenues and production of a number of minerals on the rise, Ghana’s mining industry continues to be a prime contributor to export earnings and to state coffers. As the government completes the mapping and geological survey of the remaining unchartered seams, the prospects for continued growth and earnings from the sector look positive. However, if this growth is to be realised, questions about the investment environment must be resolved.

Mining and quarrying, excluding oil and gas, accounted for 2.7% of real GDP in 2011, growing at a rate of 19%, according to Ghana Statistical Services. The country has a fairly rich range of deposits, with everything from coltan to silica, but commercial output is limited to just a handful of minerals. Indeed, production in two of the country’s major minerals, gold and manganese, were up in 2011. According to the Minerals Commission, gold production grew by 6.3% to 3.6m oz, while manganese production increased by 9% to 1.7m tonnes.

The sector remains crucial to Ghana’s economic growth, with mineral exports accounting for 39.6% of total exports in 2011, down from 49.2% in 2010, according to the Minerals Commission, though it accounted for 28.35% of all government revenue collection, up from 23.74% in 2010. Furthermore, with investment in the mining industry increasing by 26% to $970.3m and overall by 91% among producing companies, prospects for growth look strong.

GROWTH TRENDS: These trends are certainly being supported by the high price of commodities, particularly gold. According to George Apostolopoulos, the regional general manager for West Africa at equipment manufacturer Atlas Copco, “This has been another great year for the gold sector thanks to high prices and, while we don’t know if this will continue, for now the industry is really benefitting from the external conditions.” Unsurprisingly for a country once named the Gold Coast, the precious metal has played a central role in the country’s growth and still dominates mining, accounting for 98% of mineral exports by value and 39% of total exports in 2011, according to Minerals Commission data.

PRODUCTION FIGURES: Although production among large-scale producers dipped slightly in 2011, the high price on international markets ensured revenue growth for Ghana’s leading operators. According to statistics from the Ghana Chamber of Mines, which represents the country’s large-scale producers, gold production among its members fell by 2% to 2.92m oz in 2011, though revenues increased by 28% to $4.6bn. The leading producers in the sector, Gold Fields Group (with a total production of 936,335 oz at Tarkwa and Damang), Newmont Ghana Gold (566,285 oz), Anglo Gold Group (with a combined production at mines in Obuasi and Iduapriem of 508,245 oz in 2011), and Golden Star Group (with production of 300,149 oz at Bogoso/Prestea and Wassa), have all benefitted from the strong gold price in international markets. Indeed, according to the Ghana Chamber of Mines, the average realised gold price increased by 30% to $1583 per oz in 2011.

ADVANTAGES OF GOLD: The gold mining industry has been one of the few beneficiaries of the global economic downturn, particularly given the increased prevalence of investor flight to gold – long seen as a safe haven in times of economic turbulence, political instability and inflationary pressures. This has larger implications for the region. “Ghana has the potential to serve emerging mining operations in neighbouring countries, such as Mali and Burkina Faso, because of its stable macroeconomic environment and advantageous location,” James Oosthuizen, country manager for Sandvik, told OBG. The most obvious impact locally has been on operator profits. The largest producer, South Africa’s Gold Fields Group, saw operating profit of $752m from its operations at the Tarkwa mine in Ghana’s Western Region in 2011, up 56.7% on 2010. Tarkwa, which is both Ghana’s and Africa’s biggest open pit gold mine by production levels, has large-scale reserves, with attributable mineral reserves of 9.31m oz and attributable mineral resources of 13.61m oz in 2011, according to Gold Fields. The company increased its interest in operations at Tarkwa and the smaller Damang mine in 2011 to 90% from 71%, with a $667m acquisition of IAMGOLD’s 18.9% indirect stake in the two mines. The government holds 10%.

Ghana’s second-largest producer, Newmont Ghana Gold, a subsidiary of Colorado’s Newmont Mining Corporation, had gross income of $465m in 2011 from the Ahafo mine 180 miles north-west of Accra, in which it has a 100% interest. This was an increase of 56% on income in 2010. While some of this was attributable to a 3.9% increase in production, to 566,285 oz in 2011, the bounce in sales revenue was the major contributor to Newmont’s performance.

The gold price has, therefore, made for happy reading for large-scale miners in the country. However, it is not just a simple equation of profitability. Much like the hydrocarbons sector, in which high oil prices have brought once seemingly impractical and unprofitable reserves into play, the mining industry has been able to contemplate extraction from gold deposits long considered financially untenable.

“What the gold price has done in Ghana is to allow operators to look at their plans and consider extracting from marginal resources,” Toni Aubynn, CEO of the Ghana Chamber of Mines, the industry representative for large-scale operators, told OBG. “Mining is very sensitive to cost. The gold price allows operators to look at other marginal grounds and critically consider bringing them to account.”

LOOKING TO THE FUTURE: Indeed, Aubynn said the slight dip in production in 2011 was the result of operators looking at further investments and concentrating on maintenance to bolster production from existing pits. In the first quarter of 2012, for example, Perseus Mining announced it had increased its measured and indicated gold resources at Esuajah North in the Edikan Gold Mine by 341,000 oz to 920,000 oz at a cut-off of 0.4 grams per tonne of gold as a result of deeper mining.

Perseus completed 27,986 metres of drilling at the mine in the first two months of 2012, including deeper drilling at Esuajah South. Given the higher cost of drilling at these depths (with Perseus’ gross cash costs for Edikan coming in at $975 per oz in the first quarter), the increased price of gold has played an important part in the further development of the country’s underground resources.

OTHER OPTIONS: Other operators are also looking at opportunities to reassess lower-grade or deeper deposits on their concessions. For example, AngloGold Ashanti has been weighing the potential to reassess the deposits at its Iduapriem mine, near Tarkwa in the south-western regions of the country.

“While the mine has limited growth prospects on the surface, the sustained increase in the gold price has led to new interest in evaluating the considerable low-grade resource in the Tarkwaian conglomerates beyond the economic limits of the existing pit,” the company remarked in a 2011 report. “Long-hole drilling is also planned to determine if there is an economic resource sufficient to support underground mining.” Iduapriem, wholly owned by AngloGold Ashanti, is an open-pit mine with a 2011 production of 199,000 oz, at a cash cost of $853/oz.

LOCATION, LOCATION: Large swathes of Ghana’s gold deposits are concentrated in the Tarkwaian conglomerates, which bears geological similarities to some of the rich rocks in South Africa. Spread out over three belts, the primary one stretches more than 200 km from the southern coast near Takoradi north-east. However, Ghana also benefits from alluvial deposits across the Jimi, Offin and Pra rivers, which has helped foster a sizeable sub-segment of small-scale miners (see analysis).

There are also a number of greenfield projects in the pipeline. Among the most prominent is Newmont Ghana’s Akyem mine 130 miles north-west of Accra. The project, which is expected to require capital expenditure of $700m to $1bn, according to a February 2011 Newmont estimate, is currently in the construction phase. It is expected to reach first production by late 2013 or early 2014, with a level of 350,000-450,000 oz per year. The life of the mine is expected to be some 16 years, based on the anticipated gold reserves of 7.4m oz located in the area.

These new investments bode well, especially considering Ghana’s mature status in comparison to much of the sub-region. “Let’s not forget that Ghana has been heavily explored,” Aubynn told OBG. “There are lots of other unexplored areas that are now coming to the fore, such as Burkina Faso and Cameroon.”

DRAWING INVESTMENT: However, with its established track record, Ghana still seems capable of drawing in investment. Indeed, according to statistics from the Minerals Commission, investments into the sector grew by 26% in 2011 to $970.3m, with a growth rate in investment of 91% among producing companies. The Chamber of Mines expects this to not only have long-term benefits for sustaining production levels, but to also produce a short-term bump as producers turn from operational maintenance back to ramping up production. In 2012 gold exports are expected to exceed $4bn, accounting for almost 50% of the country’s export earnings.

BAUXITE: Gold dominates Ghana’s mineral mix, particularly as far as exports and revenues are concerned. However, the country benefits from a fairly diverse array of other resources that offer extensive potential, both upstream and downstream.

Perhaps one of the most promising is bauxite, a primary component of aluminium and aluminium products, which has in many ways been intricately linked to the country’s broader development but in recent years has receded somewhat in importance.

As of 2012, Ghana Bauxite Company, a joint venture between the Ghanaian government and majority-owner China’s Bosai Minerals Group, was the only significant operator carrying out local commercial production of bauxite. However, Ghana’s aluminium industry was integral to economic growth in the immediate post-independence era. The Akosombo Dam, one of Ghana’s largest-ever single investments, was built in the 1960s in part to satisfy the energy needs of domestic aluminium manufacturing. The Valco aluminium smelter, once Africa’s largest, built by US-based Kaiser Aluminium, was offered extremely generous terms, including tax breaks, guaranteed power supply and discounted electricity prices for a 35-year-term, to ensure there was a ready customer for the excess power generated by Akosombo. However, the terms of the agreement that led to Valco’s establishment began to show signs of strain. As domestic electric consumption grew and supply tightened, the interests of Ghana and Valco’s commercial backers, particularly as far as access to power was concerned, began to diverge and the smelter fell into decline. Valco began importing aluminia and the smelter’s production levels dropped significantly. It still currently operates but only at extremely low levels and experienced periods of closure for 2003-06 and again in 2007. Ghana now exports most of its mined bauxite, although the substance accounts for less than 1% of the country’s total mineral exports.

However, although production fell in 2011 – with production dropping to 400,069 tonnes and export revenues declining to roughly $13.5m – due to infrastructure constraints, interest has begun picking up again in recent years. In 2010 the owners of Ghana Bauxite Company announced a four-year development plan to upgrade the capacity of its local facilities, including a potential $1.2bn investment in a new aluminia refinery plant. Similarly, the Netherlands-based Vimetco announced in 2011 it would begin prospecting for commercial bauxite deposits in the hopes of eventually processing it locally.

MANGANESE: Manganese is also available in limited quantities in Ghana, having been commercially mined since 1916. Export sales, which come from the single mine in Nsuta in the Western Region have grown by as much as 20% annually in recent years, bringing in $77m in revenues in 2010.

Volumes also rose by more than 150,000 tonnes to 1.2m tonnes in 2010, although as sales softened on the back of lower global prices in late 2011, and a year-on-year quarterly comparison in the first quarter of 2012 indicated a decline in production volumes at the start of the year. The mine is operated by Ghana Manganese Company, a 90:10 joint venture between UK-based Consmin and the Ghanaian government. The mine, which is expected to produce for at least another 15 to 20 years, has condensate reserves of roughly 24.4 tonnes.

DIAMONDS: Like a number of West African states, Ghana has sizeable deposits of industrial-grade diamonds, largely found in alluvial zones. There are an estimated 11m carats of reserves concentrated around the Birim River, north of Accra.

The country does boast one major commercial operator, the formerly state-owned Ghana Consolidated Diamonds (GCD), but throughout the 1990s and early 2000s the firm suffered from inefficient production, outdated technology and poor returns. GCD eventually halted output in 2007, and by 2011, the government had shortlisted three buyers to take over GCD’s assets. Great Consolidated Diamond Ghana, a locally owned firm, was chosen as the new owner in August 2011, announcing plans to invest up to $100m over five years in revamping operations.

As a result of GCD’s increasingly muted profile, a large portion of the diamond mining in years past has been from small-scale producers, which now are selling to the Precious Minerals and Marketing Corporation (PMMC), established in 1989 to encourage artisanal mining (see analysis). While GCD’s production in the immediate post-independence era reached as high as 2m carats annually, it has since steadily declined, with small-scale river miners often picking up the slack. In 2010, following a 13% annual fall, only 308,679 carats were purchased by PMMC.

EXPLORATION & LICENSING: Even if some of its neighbours are gaining interest from the international mining industry, Ghana is unlikely to be overlooked in the coming years. Although much of the south of the country has been fully explored and developed, the north remains largely virgin territory.

As such, the government, only too aware of the need to maintain revenues from the mining sector, has been working hard to create a platform for new investment within this area.

The Minerals Commission, through the Mining Sector Support Programme, completed an airborne geophysical survey and environmental impact assessment of the Volta Basin in 2011. The programme is a €40m EU-funded project that began in 2002, focusing on institutional development, the construction of a modern geological infrastructure, the mitigation of mining’s effects on local communities and feasibility studies to upgrade the western corridor.

This area, covering 98,000 sq km of the last remaining unmapped and unexplored mining land in the country, has rich potential for the industry. “We have done the full mapping and there are indications that there are minerals other than gold, including nickel, manganese and other base metals,” Joseph Yaw Aboagye, the director of policy, planning, monitoring and evaluation at the Minerals Commission, told OBG. “We’re going to put the area to tender very soon and make the data available to interested parties.”

There is an expectation that licences will also be granted for copper, lead, zinc, phosphate and cobalt, although precise data has yet to be released. With the country highly dependent on gold for mining exports – and, until the production of crude, its total exports – a diversification of minerals is a prudent move for a government that would be badly exposed to any downward shift happening in the gold price.

FULL OF PROMISE: The Minerals Commission is confident, after an initial assessment of the survey, that the Volta Basin will provide plenty of opportunities for investors. “We expect a lot of licences to be granted as the northern part of the country is yet to be explored,” said Aboagye. This should build on the general upswing in the issuance of licences. In 2011 the Minerals Commission granted 66 prospecting licences, a 53.5% increase on 2010 and the highest figure for the past 20 years. While the number of mining leases granted remained flat, at three for the year, the pick-up in prospecting and reconnaissance licences (which grew by 22.6% to 38 in 2011) suggest that over the coming years a number of leases and concessions should be granted.

BIDDING: The bidding system for mining concessions is being targeted for an overhaul in 2012 as well. Henry Ford, the deputy minister for lands and natural resources, announced in spring 2012 a new and more competitive system for license tenders to replace the existing framework, which currently awards production and prospecting rights on a first-come, first-serve basis. The new set-up, due to be introduced before the end of the year, would allow the ministry to take account of all the capabilities of any prospective participants – including their operational, technical and financial resources – along with their past performance when selecting bids. The overhaul of the bidding system is being seen as part of a much broader reform of the sector’s regulatory environment (see analysis).

COST OF PRODUCTION: Therefore, while Ghana is often perceived as a mature market, it is by no means exhausted. Investors and producers will hope that the northern prospects are as promising as the country’s southern belt. However, while this should give the industry cause for optimism, there are still many challenges, not least local cost escalations.

“With the increased revenues have come increased costs: labour wants more, the utilities want more, higher fuel prices until recently, and all manner of input costs are going up,” Kwame Addo-Kufuor, the vice-president in Ghana for AngloGold, told local media in April 2012. “Again, as you mine deeper, the cost of doing so increases, especially given that you have to mine safely and meet your environmental commitments. So it’s not as rosy as it appears to be for the industry.” The annual reports of all the big producers highlight rising costs as one of the major risk factors in the Ghanaian market.

According to information from the Ghana Chamber of Mines, using data taken from its members, the average aggregated cash cost rose by 9.8%, to $751 per oz in 2011. With an average realised gold price of $1583 per oz in the same year, this may suggest ample room for manoeuvre.

CONCERNS: However, the costs for Ghana’s three largest producers have all been increasing in the last few years, and with different accounting methods for estimating cash costs, the likelihood is that including amortisation, depreciation, and tax and royalty commitments, the actual cost of production is significantly higher. A 2009 study by the Gold Anti-Trust Action Committee, found that, factoring in all types of costs, four of the world’s biggest gold miners – Newmont, AngloGold Ashanti, Barrick and Gold Fields – actually made a loss from mining gold in the aggregate in 2007 and had rather smaller profit margins at the end of both 2006 and 2008.

HIGHER COSTS: Prices have increased significantly since 2007, when the average gold price was $695 per oz, but costs have also risen sharply, suggesting that mining companies will be remaining wary of any further cost pressures. “Ghana is still a good place to do business, although signs of increasing cost raises questions about continuous attractiveness,” Aubynn told OBG. For bauxite and manganese miners, whose produce is transported in bulk, the problems with rail and the cost of transport are also a major concern, Aubynn said. In statements to local media, Dan Owiredu, the president of the Ghana Chamber of Mines, attributed a 22% decline in bauxite shipment volumes between 2010 and 2011 to poor freight links to port facilities. The distance from Ghana Bauxite Company’s facilities in Awaso to the port of Takoradi is only 240 km, but poor maintenance, congestion and underinvestment on the Western Rail Lines has slowed outbound shipments. Gold Fields, Newmont and AngloGold Ashanti have also identified utility costs as an important factor in upward cost pressure. Roughly 8% of total mineral revenue was spent on power and utilities in 2010, according to the Chamber of Mines. Ghana’s electricity costs are already relatively high and have been subject to revision in recent years, but unusually, heavy industrial and commercial customers pay a higher rate than do residential customers. Last year, electricity tariffs per KWh for households were just over one-third that of the industrial customers, at 9 pesewas as opposed to 23 pesewas. As a result, the chamber began direct negotiations in 2011 with the country’s electricity provider to cap rates or lower tariff structures for future supply.

IN THE GAME: Despite these concerns, Ghana is still a highly competitive environment for multinational mining companies. According to Newmont’s 2011 annual report, its active Africa operation at the Ahafo mine in Ghana had the lowest direct mining and production costs, at $427 per oz, and the lowest costs applicable to sales, at $474 per oz, out of any of its global operations. The biggest concern for the industry at the moment, therefore, seems to be the government’s plans to change the tax regime. The 2012 budget, in which Kwabena Duffuor, the minister of finance and economic planning, announced plans for an increase in corporate tax from 25% to 35%, a new 10% windfall tax and a reduction in the capital allowance for mining companies, has caused some disquiet in the industry (see analysis).

Still, the move is in line with the global trend. With commodity prices having skyrocketed, countries around the world are looking to increasingly leverage their natural wealth by tightening royalty regimes and raising fiscal contributions. Australia has been among the most aggressive, with a mineral resources rent tax that is set to raise levies of up to 30% on producer super-profits, albeit with exceptions for capital investments and credits. Indonesia has introduced a 20% tax on unprocessed mineral exports. In South Africa, one of the world’s largest mineral producers, policy documents have reportedly proposed 50% taxes on mining right sales to prevent speculation, along with a 50% tax on super-profits.

Ghana’s royalty regime has already been overhauled. Until 2011, the legal framework outlined a royalty band that stretched between 3% and 6%, although most agreements negotiated with producers featured rates closer to the bottom end of the band. However, beginning in March 2011, the rate was changed to a flat 5% across the board. This will have an impact on new concessions and future bids, but it will have a limited effect on those contracts already signed. Newmont and AngloGold, for example, two of the four largest gold producers which between them account for 75% of total production, have stability agreements in their contracts that preserve royalty rates at the originally negotiated level, regardless of any future changes in law. The most recent agreement was inked in 2004, and will remain in force for a period of 15 years. “The best thing about Ghana is that there is stability and predictability, which helps you plan in advance.” Guillaume Larroque, the managing director of Total, told OBG.

LOCAL CONTENT: This is, of course, a thorny issue, as governments across the continent look to benefit more from their natural resources. The populist aspect of ad hoc changes to the fiscal regime governing the sector is causing producers to reassess the risk of future investments. Nonetheless, the debate is a real one for countries that feel their communities have not benefitted significantly from several decades of a liberalised mining sector.

In Ghana, the discussion on how the sector can best benefit national development and local communities is ongoing. For industry players, a change to the tax regime may not be the way forward. Aubynn said that rather than higher taxes and direct revenue generation, the government should be focusing on policies to help encourage local involvement along the entirety of the value chain.

“I think this is one area on which the state has failed to focus,” Aubynn remarked. “The strategy, which they took from the World Bank and the IMF, was to tax operators via rent-sharing. There has been no effort to get local involvement along the value chain. The focus should be on total life-cycle contribution, which is long-term and ensure local involvement. If we had done that, it would have been much better.”

The government suggests that steps have already been taken in this direction. Aboagye said that local mine support service companies are active in drilling, contract mining, consultancy, explosives manufacturing and equipment manufacturing, supported by “privileges similar to mining operators.”

However, Aboagye conceded, “In Ghana most of the mining inputs are sourced from outside and we are now encouraging these firms to set up here.”

Under the mining list of the Minerals and Mining Law of 1986, mining operators are exempted from import tariffs on plant, machinery and equipment, a clause that helped to encourage investors to return to the market in the late 1980s, but that now discourages the use of locally produced equipment.

LOCAL INVOLVEMENT: Nonetheless, mining operators are increasingly looking to involve local companies in serving their operations. According to Gold Fields’ annual report, 47.2% of its procurement budget was spent with Ghanaian suppliers in 2011. Indeed, procurement has been one of the major ways of generating local revenue from the mining operations of the multinationals.

According to a report by Public Agenda, a Ghanaian transparency initiative, Newmont Ghana has spent over four times more on local procurement since 2006 than on royalties. In 2007 the company spent $101m on procurement but less than $9m on royalties. While this does not take account of Newmont’s other tax commitments, it does demonstrate the potential importance of procurement as a means of boosting local revenue through mining.

For the industry as a whole, Aubynn estimated that about 18% of mining revenues are spent on local purchases. As such, there is a great deal of work to do to increase local involvement throughout the mining value chain.

COMING TO AN UNDERSTANDING: In August 2011 officials signed a memorandum of understanding with the International Finance Corporation, the private sector arm of the World Bank, to look at ways of bolstering local procurement in the industry. One of the first strategies has been to identify 29 products required by the mining industry, including yelomine pipe, rock bolts, caustic soda, ammonium sulphate, cement and bullion boxes, among others – items that can be produced in Ghana and assessed for import substitution.

“When the assessment is done, the government can remove incentives to import these manufactured products,” Aubynn said. “I think this will be enacted this year.” Other downstream opportunities for local companies could exist in the underserved refining sector. The largest indigenous operational refiner, Asap-Vasa, which began operations in 2008, saw its gold exports fall by more than 40% in 2011 to 10,173 oz. With such low output, there should be significant opportunities for other players.

OUTLOOK: The resolution of this local impact debate is perhaps the defining issue for the Ghanaian mining industry at this juncture. Government attempts to garner more revenue from the industry in the face of long-term agreements are making some investors wary. However, if a stable investment environment can be re-established, the prospects for the local industry moving forward are strong. While other neighbouring markets are opening up, Ghana still has much to offer. It remains a relatively inexpensive place to mine compared to many international markets. With the north set to be opened up to the industry, prospects for increased production and revenue, for investors and government, look strong.