Minerals exploitation and processing remains a key economic contributor

Occupying ninth place in the global ranking of gold producers, Ghana relies on the precious metal to attract investment, generate jobs and make a major contribution to the economy. Though a fall in the price of gold put a dampener on the sector, and indeed Ghana’s broader economy, in 2013 and 2014, the country’s fundamentals are excellent: it has a long track record, a stable security situation, and a government that welcomes private and foreign investment. Mining and quarrying contributed 9.8% of Ghana’s GDP in 2013, up from 9.5% in 2012, according to the Ghana Chamber of Mines (GCM), the main industry association.

Sector Performance

The mining sector had a subdued year in 2013 and was affected by a range of factors that hit the industry globally. So important is mining to Ghana’s economy that its slower performance fed through to lower GDP growth. Total revenue from minerals slid 12% to $4.79bn in 2013 from $5.45bn in 2012, led by the biggest slump in the price of Ghanaian gold in 30 years, according to the GCM. Even though revenues from the bulk minerals rose by 15% for bauxite ($28.5m) and 37% for manganese ($135.48m), they were not enough to offset the fall in gold revenues. Gold revenues in 2013 dropped from 97.5% in 2012 to 96.3% of the total mineral revenue. Diamond revenues slid from $11.16m to $8.03m in 2012. Gold output in 2013 rose 2.1% to 97.8 tonnes, making Ghana the world’s ninth-largest producer, with a 3% share of global production, though it dropped from eighth place in 2012.

Major Earner

The minerals sector accounted for 37.6% of Ghana’s merchandise exports, down from 43% in 2012. As the global gold price fell – the average realised price of the metal dropped 10% in 2013 – gold export earnings sank 12% to $4.2bn. “The role of this inflow in propping up the value of the currency cannot be underestimated,” said the GCM’s 2013 report on the sector. “Without doubt, the downswing in mineral export revenue was a major causal factor for the steep depreciation of the local currency in 2013.” The mining and quarrying sector is also a major generator of public revenues, particularly through a 35% corporate tax and 5% royalty on revenues (see analysis).

Mining earned the Ghana Revenue Authority (GRA) around GHS1.1bn ($419.3m) in 2013, amounting to 18.7% of the GRA’s direct tax and 14.3% of its total domestic revenue that year. Pay as you earn (PAYE) taxes on employee incomes totalled GHS220m ($83.86m), company tax GHS518m ($197.46m) and royalties GHS364m ($138.76m), with the two largest company tax contributors being Newmont Ghana Gold and Gold Fields Ghana. The minerals industry employed 17,103 people as of end-2013, of which 16,819 were Ghanaians and 284 were expatriates (1.6% of the total). The total bill for wages and other compensation for the large-scale mining sector reached $670m.

Minerals Commission

The Minerals Commission, a state body, oversees the sector with the two-fold role of regulating and promoting the industry. It is also responsible for implementing government policy regarding the sector, including attracting investment. Its regulatory approach combines “carrot and stick”, said Amponsiah Tawiah, the commission’s manager of monitoring and evaluation. Mining companies submit detailed monthly operational information, including ore output, waste material and chemical usage, so that the commission can monitor efficiency and environmental impact. If a mine is found to be operating below par, the commission works with it to improve processes and can use sanctions in cases of abuse.

The commission oversees the industry’s workforce as well, including the nationality of workers. When commencing operations, companies are allowed to employ expatriates for up to 10% of the senior staff, but must reduce this over time to 4%. Here, too, the commission provides support in helping Ghanaians assume management responsibilities. It has developed a localisation plan whereby an expat staff member with, say, a two-year contract must identify and train a Ghanaian to take over within two years. It also aims to boost local content in the industry, identifying inputs that are, or could be, produced in the country and encouraging the sector to use them. “The potential socio-economic benefits of a strong local content supply chain is felt in the areas of job creation, increased revenue and improved balance of payments. More importantly, it boosts tax receipts and royalty re-distribution to communities to support infrastructure creation and sustainable development projects,” Johan Ferreira, regional senior vice-president and head, Newmont Africa, and president, Ghana Chamber of Mines, told OBG.

Tawiah cites the example of Belgian-based Carmeuse, which produces lime for West Africa at its plant in Takoradi. The Minerals Commission’s long-term strategy is to move Ghana from “resource rent” to “resource programming” – that is, shift towards generating greater in-country value from the sector and using it to develop the broader economy, rather than viewing it merely as a source of export earnings and public revenue.

One way to build in-country value would be to expand gold refining capacity, which is currently limited to the private gold refinery, ASAP VASA, which buys the metal from small-scale miners. In 2013 ASAP VASA tripled its gold purchases, but still accounted for only 4% of Ghana’s licensed gold output. Increasing refining capacity would involve large capital investments. With sector margins low, there is little immediate private sector enthusiasm for such a development.

Meanwhile, competition from major refiners elsewhere, most notably South Africa’s Rand Refinery, is intense. Rand, which has the capital and client base to hold its own, would probably look to head off a competitive challenge from a major new Ghanaian refinery. However, once sector profitability begins to rise again, the scope for investing in refinery development should grow. Some suggest that, rather than heavy investments in downstream capacity, a better way to add in-country value would be to boost services ancillary to mining, such as chemicals and equipment.

Regulation

The underlying legislation for the industry is the 2006 Minerals and Mining Act. On a yearly basis, however, most of the regulation and fiscal policy that affects the sector comes from the Ministry of Finance, particularly in its annual budget. The government, through the president and the minister of lands and natural resources, has extensive powers over the sector – indeed, the mining act states that “every mineral in its natural state in, under or upon land in Ghana is the property of the republic… vested in the president.” The minister can classify or declassify land for mining, and can “negotiate, grant, revoke, suspend or renew mineral rights”. Nevertheless, this is not a state-dominated sector: the government actively courts international and private investment in mining.

The licensing regime’s first tier, a reconnaissance licence, has a maximum period of one year, renewable once, and allows surveys (but not drilling) in an area of up to 5000 blocks of 21.4 ha each. Typically a successful reconnaissance period would be followed by application for a prospecting licence that allows drilling and excavation for a specific mineral in an area of up to 750 blocks. These licences last for three years and are renewable, though after the first term the licensee is required to surrender half of its blocks.

The next stage is a mining lease, which can be awarded to any company that can demonstrate the existence of commercially viable mineral deposits. A lease applies for specific commodities in an area of up to 300 contiguous blocks and runs up to 30 years, renewable once. Before starting work, miners must obtain permission from official environmental bodies. These long-term contracts give the sort of stability and certainty that investors seek, particularly in such a capital-intensive and politically sensitive sector.

Gold Segment Players

The country’s gold production is divided between industrial miners and small-scale miners, which account for more than a third of overall output (see analysis). The single biggest producer in the market in 2013 was Gold Fields Ghana group, with its Tarkwa and Damang mines. The company saw an 11% fall in output in 2013, with Tarkwa’s dropping 12% to 632,244 ounces and Damang’s (also known as Abosso Goldfields) falling to 153,177 ounces from 166,488 ounces in 2012. This drop was due to a range of factors: illegal strikes, disruptions of operations at the Damang mine due to safety issues, the closure of Tarkwa’s South Heap Leach and poor ore grade.

In 2013 the single most productive mine in Ghana was Newmont Ghana Gold’s Ahafo resource, which accounted for 18% of GCM members’ output, the chamber reported. Ahafo’s output that year rose to 570,155 ounces, from 561,155 ounces in 2012. Newmont also poured its first gold at its Akyem mine, producing 129,211 ounces and taking the company’s total share of production to 22%, the second largest.

Ranking third was former market leader AngloGold Ashanti, with 14% of production, down from 15% in 2012 and totalling 459,710 ounces. Output at its Obuasi mine – which the company is planning to close by the end of 2014 – fell 16% in 2013, to 239,052 ounces from 280,084 ounces in 2012, but rose 22% at its Iduapriem mine, from 180,238 ounces to 220,658 ounces. Golden Star Resources ranked fourth in 2013, with output totalling 330,806 ounces, up 4% on the previous year and with a market share of 11%. Production at its Bogoso/Prestea mine fell 16% to 145,000 ounces, while its Wassa mine’s output surged 27% to 185,807 ounces.

Golden Star was followed by Chirano Gold Mines, the country’s fifth largest producer with a 9% share. Chirano’s production fell 6% to 274,683 ounces, partly due to the challenges associated with a shift from contract mining to owner mining – that is, from outsourcing its operations to taking on more of the activities itself.

Perseus Mining ranked sixth with a 6% production share, having started production in 2012. Its output rose 7% from 185,740 ounces to 198,608 ounces. Adamus Gold Resources produced 105,215 ounces, 3% of the total. Two other players account for most of the remainder of official, legal production: the ASAP VASA refinery and the Precious Metals Marketing Company (PMMC), both of which buy gold from small-scale miners for export. The PMMC, a state organisation responsible for marketing gold and diamonds produced by small-scale miners, purchased 216,381 ounces of gold in 2013, or 7% of production, down 32% from 316,699 ounces in 2012. The firm attributed this to a government crackdown on illegal miners, lower prices and lower recovery rates. ASAP VASA, however, saw its exports triple from 40,794 ounces to 122,518 ounces due in part to extra liquidity from its financing partners.

Competition is not regarded as intense. Each company’s concession and clients are secure, so that once contracts are awarded, they are not vying for resources or markets. Indeed, as other countries in the region develop their more prospective mining sectors, it is Ghana that is competing to attract miners’ investments. Existing players see more scope for collaboration than competition, as they face similar constraints in regulation, taxation and labour regulations.

Costs

While gold prices dropped in 2013, sector costs continued to rise – the cost of producing an ounce of gold rose by 18%, according to the GCM (see analysis). As a result, thousands of employees were made redundant and some miners closed down parts of their mines no longer seen as commercially viable with gold at $1300 an ounce. “All miners in Ghana have laid off staff,” Desmond Tamaklo, company secretary of Perseus Mining, told OBG. His own firm made redundant 90 exploration workers and another 120 from its mining division, though the latter are mainly security staff whose jobs can be outsourced. He added that, while trade unions continue to be influential in wage negotiations, it is mining firms that decide how many workers they are able to employ at a given wage.

Some in the sector feel that, were the unions to put less upward pressure on wages, the industry could hire more people and reduce unemployment, estimated at 25.6% for the 15-24 age group in 2012. The downturn in Ghanaian mining has nudged investors towards other, more prospective markets in the region, where the security risk may be greater but other costs are lower. “One key challenge to mining in Ghana is that mining areas often overlap with farmland,” said Tamaklo. “In Côte d’Ivoire by comparison, mining deposits are located in unpopulated areas, making it much easier. The Ivoirian power supply is also more plentiful and cheaper.”

Market Leader

Gold Fields, a Johannesburg-based firm listed on both the Johannesburg Stock Exchange and the New York Stock Exchange, has been active in Ghana since 1993. The country currently accounts for some 30-35% of the company’s output. Gold Fields has adopted a new strategy since 2012, when rising costs started to squeeze margins, even when prices were relatively high at $1700-1900 an ounce.

To deliver better returns to shareholders, it switched its focus from volumes to margins. Meeting shareholder expectations, which were raised during the good years, became central to strategy, ahead of producing more gold. This has had a significant impact on Gold Fields’ operations in Ghana, where the firm feels it is particularly squeezed by government fees. As a result, some production units at Tarkwa were closed and workers were laid off, and the company has stopped its heap leaching operation to instead focus on carbon leaching. The former is considerably more expensive, but the recovery ratios are better – 95-96% compared to around 50% – David Johnson, vice-president and head of stakeholder relations at Gold Fields Ghana, told OBG.

PMMC: The PMMC’s profitability declined in 2013 for the same reasons affecting other firms: falling prices and high costs. Competition in the sector is intense, particularly as foreign players are coming in to buy gold from miners, Jacob Essel, a senior manager at the PMMC, told OBG. He says that Indian buyers, for example, will typically pay 5% more than the global market price.

In January 2012 the PMMC launched a jewellery “buyback” programme whereby the company purchases old jewellery from Ghanaians and either resells, remoulds or otherwise reworks it for sale at 10-15% below the global price. The programme has proved successful, generating GHS574,339 ($218,938) for the PMMC in 2013, and the organisation now plans to expand the project by opening several more offices around the region for both buyback and marketing.

Increasing the value added in-country is a central goal of the PMMC. To that end, the organisation is seeking an international investment partner to develop its jewellery production division. The partner would ideally bring capital, expertise and equipment to help develop downstream gold production and ensure that the output meets international standards. There is no current time-frame for forming the partnership.

Fields that the PMMC would like to see developed include smaller pieces of jewellery that would be more affordable and accessible for the international market, as well as diamond cutting and polishing to reduce dependence on uncut diamond exports. This last area in particular would require investment in technology and training. “The prospects are very good, and the field is very broad if we get a partner,” Essel told OBG. “We need a partner who knows the market very well and will take a stake in the firm. These are early days, but we are sure we can find someone who is interested.”

Diamonds

Ghana’s rough diamonds are marketed through the PMMC, which also operates a cutting and polishing plant. In 2013 steep price drops and poor yield reduced exports and purchases of diamonds attributable to the PMMC by 26%, from 215,118 carats in 2012 to 159,074 carats. Production is dominated by industrial diamonds – 80-85% of the total – and the rest come from gem-grade diamonds, according to the Minerals Commission. These are found in alluvial deposits rather than mined industrially, and the original sub-surface source is unknown. Some experts think Ghana may lie on a belt of Kimbelite running from West Africa through the Atlantic to South Africa, one of the world’s biggest diamond producers, but there has been little definitive research, Tawiah of the Minerals Commission told OBG. Ghana’s huge gold resources, which are well mapped and easy to exploit, have taken priority. But for the longer term, the commission hopes that an investor will come and more fully map Ghana’s diamond resources.

Manganese

Manganese production is in the hands of the Ghana Manganese Company (GMC), 90% owned by Consmin, based in Jersey. It owns a 175-sq-km concession 63 km outside Takoradi, Ghana’s second port. Manganese is used in several alloys, including steel and aluminium, and most global demand for manganese comes from the steel industry. The GMC saw production surge in 2013 following its various investments, with exports increasing 35% from 1.49m tonnes in 2012 to around 2m tonnes. Its revenues rose 37% from $98.60m in 2012 to $135.48m, as per the GCM.

Bauxite

Ghana’s bauxite reserves, the third largest in Africa, are mined exclusively by the Ghana Bauxite Company (GBC). Company ownership is split between Bosai Minerals Group of China (80%) and the Ghanaian government (20%). The GBC shipped 826,994 tonnes of bauxite in 2013, up from 752,771 tonnes in 2012, which drove its earnings up 16% from $28.50m to $32.92m, according to GCM figures, as the average realised price of bauxite rose by 5.2% in 2013. The segment has “huge potential”, the Minerals Commission’s Tawiah told OBG. Press reports suggest that there are some 700m tonnes of bauxite reserves at Kyebi, north of Accra, in addition to the deposits GBC mines at Awaso. Bauxite production is linked to the establishment of the Tema-based Volta Aluminium Company (Valco) in 1964. Currently, Ghana exports its bauxite and then re-imports the processed alumina to feed Valco. As President John Dramani Mahama said at the World Economic Forum’s annual meeting in Davos in 2014, “It just doesn’t make sense.” The government’s strategy for bauxite development is to vertically integrate bauxite with alumina and aluminium manufacturing.

Industry Challenges

The GCM’s 2013 report highlights five main areas that presented challenges to the industry that year: lack of rail infrastructure; illegal mining; the need for labour force rationalisation; the cost environment; and slow value-added tax (VAT) rebates, which exacerbate cash flow constraints.

Ghana’s patchy rail infrastructure is an issue mainly for the bulk miners, GMC and GBC. There is only “limited rail haulage” between Nsuta and the port of Takoradi, the GCM notes, meaning the two companies must rely on road haulage. This is more expensive than rail and the increased traffic erodes the surface of Ghana’s already-overstretched road system. Lack of rail access is less of a problem for the gold mining segment, for which shortages of electricity are far more pressing. Though plans to rehabilitate and expand Ghana’s decaying rail system have been in the pipeline for years, progress has recently slowed due to political changes and an economic slowdown. Nonetheless, in January 2014 President Mahama pledged to push forward with the reconstruction of two rail lines. In its 2014 statement on the budget and the economy, the government outlined plans to ringfence a 2.5% increase in VAT for an infrastructure fund. The GCM has asked the government to deploy funds to develop the rail network.

Tax Rebates

According to the GCM, Ghanaian miners “perennially… [have] an inordinately large amount of surplus VAT” they are owed by the authorities. This causes severe cash flow constraints, exacerbating the effect of the recent dip in gold prices and pushing up the cost of business. This hinders investment and growth, holding back a revenue-generating industry.

The government has pledged to tackle this problem by allowing miners to offset their tax liabilities to the exchequer against their surplus VAT, but legislation to effect this has been slow in coming.

Community Relations

While around the world relations with local people in the communities near mines can be sensitive, Ghana’s mining industry is less politicised than most, and interaction with mining communities is generally good. The sector is such an important contributor to – and employer for – the economy of Ghana that the government and general public are sympathetic towards miners. Nonetheless, mining companies do sometimes encounter opposition, and a regular complaint about the industry is that not enough of the revenues it generates for the public purse is channelled back to mining communities.

“There is a lingering misconception about the mining industry – that foreign companies are exploiting the country – and this has led to mistrust in the communities surrounding mining activity,” Tamaklo of Perseus Mining told OBG. “There have been delays in the release of mining royalties to mining communities by central government, but these communities direct their anger at miner operators. This anger sometimes gets physical and the government fails to support mine in restoring peace to the communities.”

Besides the royalty money that is fed back to the communities, mine operators also run their own corporate social responsibility programmes. In 2013 members of the GCM invested $12m in social projects, mainly aimed at improving the standard of living in mining communities, such as schools and water utilities.

Looking Forward

The GCM’s 2014 forecasts are cautious at best, projecting a “less buoyant” mining sector. Among the reasons the report cited for this is the US Federal Reserve’s tapering of its quantitative easing programme, which was expected to begin pushing up global interest rates. The effect of this on Ghana’s gold sector would be twofold: first, it will make the dollar a more attractive investment asset vis-à-vis gold due to rising returns on time deposits, and second, it will curtail investments into emerging markets. The GCM also identified domestic cost pressures, including higher utility costs. The 2013 trend of cost rationalisation, it said, is expected to continue.

Outlook

The industry had a tough time in 2013, as prices fell while costs were high. Prices levelled off in 2014 and many mining firms are leaner and more efficient. A rise in the price of gold would allow the sector to grow strongly once again and enable miners to boost investment. Although Ghana faces increasing competition from other countries in the region, its long history of mining, abundant resources, and security and stability remain significant competitive advantages.