Higher commodity prices boost Ghana's mining sector

For more than 150 years the mining industry has been one of the key pillars of the Ghanaian economy. While it contributes a modest and – as a result of rising oil, gas and agricultural production – declining proportion of GDP, it remains a major source of government revenue, through taxation and royalty payments, and an indispensable driver of employment and infrastructure development.

Following several years of weak commodities prices, the rebound in global prices resulted in bigger profit margins for miners while upgrades in key projects helped boost production. However, the lack of greenfield exploration work in recent times means there is only a thin pipeline of future projects, and despite the tough stance set by the current government, illegal mining remains prevalent, taking a serious toll on government revenues and the environment.

Performance

The sector’s contribution to GDP has varied over the last decade, according to data from the Ghana Statistical Service (GSS). In 2008 the mining and quarrying sector was responsible for 2.4% of economic output, increasing to 9.4% in 2013 – the same year the country’s nascent oil industry was responsible for 8.2% of GDP. In 2016 mining and quarrying accounted for 4.2% of GDP.

A number of factors have affected the sector’s performance in recent years. Fluctuations in global commodities prices – especially gold – led to a worldwide decline in mining activities. The price of gold per oz peaked at $1896.50 in September 2011, but by November 2017 it dropped to $1294.85, according to the London Bullion Market Association. In addition, Ghana’s mining sector and its related industries have experienced difficulties, such as rising utility tariffs, limited access to energy supplies and frequent changes to the tax environment.

However, in 2016, backed by record gold production, the industry surpassed the financial sector to become the country’s largest taxpayer, contributing GHS1.6bn ($383m) to the Ghana Revenue Authority. This represented 15.8% of all direct taxes and 5% of total government revenue. Of the total contribution, GHS400m ($95.8m) came from pay-as-you-earn tax, GHS697m ($166.9m) from corporate income tax and GHS551m ($131.9m) was earned from royalty payments, according to the Ghana Chamber of Mines (GCM). Continuing this trend, the second quarter of 2017 saw the sector experience year-on-year (y-o-y) growth of 75% of total GDP, contributing significantly to the industrial sector’s leading performance with an overall growth rate of 19.3%.

Mining is also the leading sector in exports, and as such a key source of foreign exchange. In 2016 exports of minerals, including those from small-scale mining, increased to $5.1bn, up from $3.3bn in 2015. The 2016 figure represents 45.5% of Ghana’s gross export earnings, twice as much as that of cocoa, the country’s second-largest export earner.

Gold Production

Gold accounts for the vast majority of Ghanaian mining and quarrying output. In 2016 the country produced its highest output in more than 40 years, with total production reaching 4.1m oz, up 46% on 2.8m oz the previous year. A sizeable portion of this increase came from artisanal miners and represents a major success for the government’s policies of both supporting small-scale mining and cracking down on illegal gold exports.

Elsewhere, national gold output was boosted by ramp ups at a number of existing mines. In the third quarter of 2017 AngloGold Ashanti’s Iduapriem mine saw an increase in production of 997,000 oz with a y-o-y growth of 11%. Meanwhile in the same period, output at Newmont’s Ahafo mine expanded by 7% y-o-y reaching output of 1.3m oz.

The most significant increase in formal gold production in 2016 came courtesy of the Asanko gold mine. In 2014 Asanko Gold acquired two firms – Keegan Resources and PMI Gold – with neighbouring mining concessions, developing them as a single project and overseeing its entry into commercial production in April 2016. By December that year it had produced 162,802 oz, and in 2017 output from the mine was expected to rise by as much as 47%, to between 230,000 and 240,000 oz. An expansion plan is scheduled to double throughput capacity at the mine to 5m tonnes per annum, with a production target of 450,000 oz a year by 2020.

The Asanko gold mine expansion project has benefitted from good timing. “We entered the sector at a time when many mining firms were struggling to finance their projects,” Frederick Attakumah, executive of corporate affairs at Asanko Gold Ghana, told OBG. “We were able to take advantage of the downturn at the time to negotiate competitive rates with service and construction companies. The Asanko mine is the first new gold mine in Ghana in the past six years, and it will play an important role in maintaining production as other mines go into decline.” In September 2017 Asanko reached an agreement with AngloGold Ashanti and acquired ownership of the latter’s prospective Miradani Exploration Project located close to the Asanko mine.

Declining Output

The Asanko acquisition and expansion is in contrast with the broader slump in production for most of the country’s gold projects. Of the 12 mines reporting data to the GCM, nine submitted weaker figures for 2016 than for the previous year. Aside from the Iduapriem mine, Ghana has five mines producing 100,000 to 200,000 oz a year. Most of these mature mines showed modest production declines of between 3% and 12%. However, many of these sites have the potential to expand their resources and mine life through additional brownfield and step-out exploration work. Cost-cutting measures introduced during the gold price downturn have limited such work in recent years, but there is scope for reversing that in light of commodities prices rising again.

The general downturn in commodities prices also nudged miners toward prioritising the highest-grade areas of their pits during the period of low gold prices, with the consequence that what remains is lower-grade material. Production at Ghana’s largest mine Tarkwa fell to 568,036 oz in 2016 from 586,051 in 2015, primarily because mining moved from high-grade areas like the village of Teberebie to new areas, resulting in the average grade of ore mined falling from 1.35 g per tonne in 2015 to 1.30 g per tonne in 2016. “The Tarkwa mine is one of the five largest gold mines in the world and is our flagship project,” Alfred Baku, executive vice-president and head of the West Africa Region at Gold Fields Ghana, told OBG. “It has another 13 or 14 years of future production at a range of between 500,000 and 550,000 oz a year. It is a low-grade project, so we have to selectively mine the resource and invest in exploration to increase our resources and extend the mine’s life.”

Possible Revival

The sharpest production decline came from the Obuasi mine in the Ashanti region, a mammoth underground facility that began operations in 1897, where just 3072 oz were produced in 2016 compared to 52,648 in 2015. However, it should be noted that Obuasi is something of a special case and the headline figures do not quite tell the whole story. Activity at the mine, which reached a peak production of 533,000 oz in 1973, has been all but suspended while its owner, AngloGold Ashanti, determines how to steer its future development. The South African firm tried to offer the mine as a joint venture to Randgold Resources but the latter turned down the option in December 2015 before a major invasion of illegal miners forced the facility to shut down completely.

However, in August 2017 there were positive signals from AngloGold Ashanti that the mine could be brought back to production should the firm gain the necessary approvals from the government. Speaking in Johannesburg on the occasion of the firm’s first half-year results, Graham Ehm, executive vice-president of group planning and technical division at AngloGold Ashanti, told attendees that it would take a year and up to $1bn in capital to bring the mine online. This investment is expected to result in output of 200,000 oz by the second year. Production could hit as high as 400,000 oz with the development of new ore zones, with potential mine life stretching for a further 20 years. Should that happen, Obuasi would have a huge impact on national gold production.

Investing In Expansion

With gold prices rising in 2016 and 2017, a number of Ghanaian gold miners have invested in expansion projects. In September 2017 Canadian firm Golden Star Resources began stoping activities at its Prestea underground mine in the Ashanti belt, having poured its first gold in the first half of the year. Commercial production from the Prestea mine, at a rate of 90,000 oz per year, was scheduled to begin before the end of 2017. The operating cost of $468 per oz is competitive, and Golden Star Resources hopes to build on its 792, 000-oz resource estimate through further exploration.

In addition to extending exploration operations at its Tarkwa mine, South African firm Gold Fields also has a $1.4bn investment plan for its Damang mine, which extracted 147,720 oz in 2016. “In recent years, extraction at the Damang mine has focused on the main pit, which has the best grades, but now it has become depleted, leaving only lower-grade areas and satellite pits,” Baku told OBG. “In 2016 we completed a study that aimed to recapitalise the whole mine and we began to implement it in 2017.”

The Damang Reinvestment Project (DRP) aims to extend its life of mine by eight years beyond its current 2024 expiration date, which will involve a $340m intensive waste-strip programme to remove unproductive earth to expose the high-grade ore body beneath. The project’s independent energy generation plant will be optimised for constant delivery, and a new tailings storage facility for unusable mineral run-off is due to be built. Rather than employ their own staff and vehicles at the mine, Gold Fields will hire a mining contractor. “The DRP has a huge capital requirement, and by hiring a contract miner, we can avoid spending further capital on upgrading the fleet,” Baku said. “We’re still not back to the boom years of 2009 to 2012, and with our Life of Mine Plan and other cost considerations, contractor mining is certainly the more feasible model or option.”

In addition, the firm will invest on exploration around the site and, according to Baku, there is a potential case for moving the mine’s tailings pit, which currently lies 50 metres from the crest of the pit, preventing its expansion. “The dam was built 10 years ago at a time when the gold price was $270 per oz,” Baku told OBG. “We have undertaken another study to assess the impact of moving the dam, and it could give us an additional 10 years life of mine, as long as exploration proceeds as expected.”

Development Projects

Compared to its neighbours Burkina Faso and Mali – whose previously undeveloped mining industries attracted a wave of investment between 2010 and 2013 – Ghana has relatively few greenfield mine projects set to enter production in the coming years. The exploration and development projects under way include those of Australian mining firm Cardinal Resources. In September 2017 the company updated its resource estimate for its Namdini gold project in the country’s north. Using a cut-off grade of 0.5 g per tonne, the project registered 4.3m oz of indicated gold and a further 3.1m oz of indicated resources. The success of the firm’s 11-rig drilling campaign has been reflected in the stock price, with shares rising from A$0.14 ($0.11) at the start of 2016 to A$0.71 ($0.53) by early October 2017.

A preliminary economic assessment of the Namdini project was expected in the fourth quarter of 2017, after which development of a mine plan could begin. “We are going to the market with a potential large-scale, low-opex mine development, on a multimillion-ounce resource base with exploration potential outside the initial project footprint,” Archie Koimtsidis, CEO and managing director of Cardinal Resources, told industry press in September 2017. “Ghana has been among the best places in Africa to finance and build a mine for the past 10-15 years.”

Exploration

After over a century’s worth of gold production, Ghana still holds opportunities for junior mining firms intent on finding and developing greenfield projects. The country has a relatively straight-forward, first-come-first-served mining title licensing system, with a number of foreign junior companies already holding acreage in Ghana.

For example, Pelangio Exploration, which is listed on the Toronto Stock Exchange, owns three exploration projects in the south of the country. The most advanced is Manfo, which was acquired as a grassroots project in 2016 and has a resource estimate of 195,000 oz indicated and 298,000 oz of inferred gold. “There is still plenty of exploration potential in Ghana,” Baku told OBG. “Looking at the geological data, it is clear that gold mineralisation in the established gold belts does not truncate suddenly. There are still opportunities in these well-trodden areas, as well as in the north of the country.”

A continental comparison also suggests there is room to encourage further greenfield projects. A February 2017 report by S&P Global Market Intelligence identified 19 mining firms in Ghana engaged in exploration activities. However, the total exploration expenditure of these firms was $65.3m in 2016, putting the country sixth out of the top-15 mining sectors on the continent, one spot lower than in 2015. This means that Ghana remained behind Burkina Faso and was overtaken by Mali, which are both places where gold dominates mining in terms of exploration activity. Burkina Faso saw 29 companies active in exploration and a total of $72.9m in total exploration spending in 2016. In the same year Mali recorded 20 active mining firms and total expenditure of $70.3.

Furthermore, Burkina Faso and Mali devoted 26% and 21% of their budgets to greenfield exploration in 2016, whereas the figure in Ghana stood at 12%. Of the $65.3m total expenditure in Ghana, $39m took place on existing mines and $18.2m on late-stage development projects, leaving just $8.1m for grassroots exploration. While across Africa one in every four exploration dollars went towards greenfield exploration, in Ghana this figure was one in eight. This has prompted a discussion by sector players over investment attractiveness. It has been suggested that in neighbouring countries the fiscal conditions are more attractive, and permitting and licensing processes are generally quicker. Greenfield exploration in Ghana is decreasing at a time when a pipeline of new projects is required (see analysis).

However, David Ebo Johnson, vice president and head of stakeholder relations at West Africa Gold Fields Ghana, believes that the country needs to look beyond greenfield explorations. “Local content in the mining sector is needed and it should go beyond core exploration and extractive operations. The supply chain should be structured in such a way that maximises and develops local capabilities,” Johnson told OBG.

Northern Exposure

A number of junior firms have placed their bets on the prospects in the north of the country. In addition to its Namdini project, located in the Bolgatanga region, Cardinal Resources has an exploration project named after the region. Meanwhile, also in the north, but further to the west near the border with Côte d’Ivoire, Perth-based Azumah Resources has accumulated over 2400 sq km of mining licences. The most advanced target is the Wa Gold project, which hosts 2.1m oz of gold at a 1.5 gram-per-tonne cut-off. In September 2017 the company raised a further $2.3m from the capital markets to advance the project.

At The Vanguard

While large-scale miners develop and expand their projects at a rate that just about exceeds the rate of decline from mature projects, the major boost to Ghana’s 2016 gold production figures came from the Precious Minerals Marketing Company (PMMC), a state-owned firm that purchases gold and diamonds from small-scale miners for export. In 2016 PMMC’s gold exports increased to 1.57m oz from 267,662 oz the previous year. In 2015 the Bank of Ghana issued a directive demanding that all gold sales from small-scale miners be certified by and exported via PMMC. In 2016 the successful enforcement of this ruling led to the surge in PMMC figures, but the revenues from these sales were not repatriated to Ghana, according to Kojo Hammond, CEO of PMMC. He told local press in late September 2017 that $2.3bn worth of gold was shipped through PMCC in 2016; however, the money was never returned to the country.

The current government has also taken a tough stance towards illegal mining, commonly referred to as galamsey in Ghana. Since the rapid rise in gold prices in 2009, a large number of illegal mining operations – many of them backed by Chinese funds and personnel – have established themselves, particularly in the north of the country. The task of formalising licensed miners and eradicating galamsey is at the top of President Nana Akufo-Addo’s political agenda. In April 2017 the government introduced a moratorium on new licences for small-scale mining as a first step towards bringing order to the industry. Then, in August 2017 squads of Operation Vanguard, an anti-galamsey 400-member task force made up of the Ghanaian armed forces and the police service, were sent out to the mining areas of Ashanti and the Eastern and Western Regions with the mission of eradicating illegal mining and destroying pits.

By the end of September 2017 local media reported the force had arrested 392 suspected illegal miners – including Chinese nationals – and captured numerous items of heavy-duty mining machinery. According to officials, the troops will remain in these regions until rivers have been restored and reforestation programmes implemented, and further task forces could be sent to other regions before the end of 2017. Furthermore, the moratorium on new titles, initially intended to last six months, was set to be extended for another three months in October 2017, with the government announcing plans to procure $3m worth of drones to monitor areas at risk of galamsey.

However, the government’s tough direct action, while effective, has drawn criticism as there is often a blurred line between traditional artisanal miners and illegal mining operations. In September 2017 the expected continuation of the small-scale mining moratorium drew protests from traditional miners who say their livelihoods are put at risk by the ban. In addition, the crackdown on galamsey is expected to hit 2017 national gold production figures hard. In September 2017 Sulemanu Koney, CEO of GCM, said that PMMC indicated their purchases had fallen around 70% on the figure from the previous year.

Regulations

Nevertheless, for medium- and large-scale miners, the sector remains one of the most stable and inviting in Africa. Under the 2006 Minerals and Mining Act, foreign firms are prohibited from engaging in small-scale mining operations and must acquire titles of no less than 10 ha, with a proposed investment of more than $10m. Those mining firms with investment projections in excess of $500m can sign stability agreements with the government, freezing in their financial terms for a duration of 15 years.

In the Fraser Institute’s Survey of Mining Companies 2016 Ghana ranked 22nd out of 104 jurisdictions surveyed in terms of attractiveness of investment, behind only Botswana and Côte d’Ivoire in Africa. Its score of 75.56 was the highest the country has achieved in the annual survey. Ghana was also second in the continent in terms of miners’ perception of the country’s policy framework, with very few investors citing political instability, judicial issues or uncertainty regarding the interpretation or enforcement of regulations as being a deterrent to investment.

This favourable view was echoed by a February 2017 report published by the Africa Centre for Economic Transformation after nearly two years of research on the effectiveness of governance and investment in the Ghanaian mining sector. Funded by the World Bank, the report highlighted the need for better enforcement of environmental regulations, particularly in the small-scale mining segment. However, the overall message of the document was positive, despite the caveat that investor protection contracts could be more transparent. The mining code was seen as fit for purpose, with strong performance in the management of licensing and permitting processes.

Cadastre Registry

In July 2016 the Minerals Commission, the government agency charged with regulating and monitoring mineral resources, launched the Minerals Cadastre Administration System (MCAS), its online cadastre registry, with funding from the Australian High Commission. Traditionally the commission has had to rely on hard copy documents to administer licences, and thus the new web-based portal is expected to boost both the efficiency and the transparency of the licensing and permitting process, as well as help weed out illegal miners. By September 2017 MCAS was upgraded to allow companies to acquire licences online. “When complete, the Minerals Commission’s online cadastral system should make a big difference to the ease of doing business for mining firms,” Koney told OBG. “By adding a transparent permit-tracking function that allows miners to see the progress of their permit applications at the Environmental Protection Agency, the system will be a feather in the cap for the Ghanaian mining industry.”

Manganese

An uptick in steel demand in 2015 and 2016 saw a dramatic reversal in the fortunes and successes of Ghana Manganese Company (GMC), the country’s only producer of steel alloy. Headquartered in the Channel Island of Jersey, Consolidated Minerals (Consmin) owns 90% of GMC, which operates the Nsuta mine in the Western Region, with the remaining 10% belonging to the government.

A reorganisation of key processes and the addition of a third production stream resulted in an increase in manganese production from 1.29m tonnes in 2015 to 2.02m tonnes in 2016. In 2014 the mine had shipped just 1.17m tonnes, meaning production nearly doubled in two years. That figure is likely to rise further on the back of transport upgrades. In recent years, the manganese freight capacity of the Nsuta-Tarkwa railroad has fallen from 80,000 to 30,000 tonnes during the rainy season in the middle of the year. Manganese needs to be transported by road during this period, which pushes up costs and damages local road infrastructure. In August 2017, however, GMC and the Ghana Railway Company signed an agreement whereby the former will pay a $10m freight advance to the latter for important upgrades to the line. Of the total sum, some $5.1m will be put towards capital expenditure, with the remainder earmarked for operational expenditure, and the government matching the funds invested. Oleg Sheyko, CEO of Consmin, told local media in August 2017 that the upgrade would play an important role in boosting manganese production to its targeted 3m-tonnes-per-annum rate.

Other Minerals

In addition to an existing bauxite segment that is set for a major overhaul with the help of investment from China (see analysis), Ghana houses significant iron ore deposits. According to data from the Minerals Commission, the Sheini Hills deposit in the Northern Region holds more than 1.27bn tonnes of ore while the Oppon-Manso deposit in the Western Region contains 150m tonnes.

Meanwhile, after signing a partnership with local firm Emmaland Resources in 2011, Cardero Ghana, a subsidy of Canadian mining company Cardero Resource, holds the licence to explore the Sheini Hills on the back of a $7.5m investment in January 2013. The location recorded a resource estimate of 1.3bn tonnes of inferred iron ore at a grade of 33.8% iron.

Environmental and social concerns have delayed further development of the project, and Cardero has since exited. However, President Akufo-Addo stated his support for the development of the domestic iron and steel industry to assist industrialisation. Speaking at an event in Accra in August 2017, he said: “I think the time has come for Ghana to develop strategic industries out of its abundant natural resources of bauxite and iron ore… we’ve decided to exploit our substantial iron and manganese deposit situated in the northern and western regions of our country to build an integrated steel industry to serve the needs of our country and region.” Although plans for the development of iron ore projects are not as developed as those in bauxite, it is likely that they, too, could become the target of Chinese investment.

Outlook

The government’s push to encourage small-scale miners to export gold through PMMC gave a significant and welcomed boost to national production figures in 2016, but the moratorium on licences for small-scale mining, combined with the crackdown on illegal mining operations, means that this production increase is set to be a one-off. Having said that, expansion projects and continued exploration activities indicate that Ghana’s history of large-scale gold mining is set to continue for many years to come. The addition of major new iron ore and bauxite projects will ensure that the well-regulated mining sector remains a mainstay of the Ghanaian economy.