In January, advisory services company africapractice released its risk and opportunity snapshot entitled ‘Ghana: Mining dilemma’, which states that the mining sector’s performance will remain strong in the short to medium term, increasing the likeli- hood that government will seek increased revenues from mining activities.
This has also been suggested by recently elected Ghana President John Dramani Mahama in several postelection speeches.
However, the africapractice synopsis warns that many mining companies argue that they continue to face operating challenges. “A compromise on this issue remains viable and, indeed, the continued delay in implementing the proposed windfall tax under the last administration demonstrates government’s willingness to take into account private-sector concerns before reaching a final decision,” the company notes.

The synopsis states that risks taken by government, such as the prolonging of a decision on the proposed windfall tax, will cost government political capital in the face of growing domestic pressure to extract greater benefits for Ghanaians from mineral resources.
“Government will have to weigh up how to respond to the domestic needs of its people without jeopardising potential investors in the long term,” africapractice says.

Meanwhile, professional services company PwC released a study in June 2012, which showed that, for 2010, the total taxes borne by mining companies in Ghana amounted to $301-million, of which $121-million comprised profit taxes and $113-million mining-specific taxes, such as royalties.

The study, entitled ‘The Total Tax Contribution of Mining Companies in Ghana’, involved nine mining companies, which were asked to provide data on their taxes and other contributions paid to government for the 2009 and 2010 calendar years.
Further, the study indicated that the total tax contributions for the companies that parti- cipated in the study amounted to $394.1-mil- lion. It must be noted that some of these taxes came before the profit line and all the taxes borne and contributed by the entities made up an average of 31% of profit before all taxes. The total tax rate for the survey participants was 31%, thus indicating the importance of the mining industry to Ghana from a fiscal perspective.

Mining-Sector Performance

The performance of Ghana’s mining sector has remained strong over the past three years and, in 2010, the sector was valued at about $1.21-billion. This figure is expected to rise to $1.81-billion by 2016, states africapractice.

“Increased levels of investment of about $2.5-billion between 2009 and 2011 have resulted in output growing steadily over the last three years, with many big mining companies expecting positive results this year,” the company states.
It notes that the trend is set to continue, although gold production will mainly account for the growth.
In 2011, output in the gold sector rose to 3.6-million ounces, which is the highest level recorded in Ghana’s history, surpassing the 3.1-million-ounce record achieved in 2009.
Africapractice cautions that, for the country to maintain these high levels of output in the medium term, government would need to reduce operational risks in the sector.
“The output for other minerals, such as bauxite and manganese, is expected to be more moderate, with the possibilty of stagnation in the levels of production,” it adds.
Increased bauxite production is being hampered by the poor state of the county’s Western region’s Western Railway lines, which are viewed as the most efficient way of moving ore from its production base at Awaso, in the Western region, to Takarodi port, which is 218 km away. Managanese production is less affected, owing to producing mines’ closer proximity of about 63 km by rail or 92 km by road to the Takarodi port.

Challenges

If government reopens discussions concerning tax increases and royalty payments in the mining sector, companies are likely to be in a strong negotiating position, given the existing operational challenges, states africapractice.
Another challenge is the high electricty costs in the country. The demand for power has risen faster than the ability of the power sector to increase generation. Indications are, however, that government is discussing the generation capacity of the grid with investors, says africapractice.
“This will take time to materialise, so mining companies will have to find strategies to cope in the short to medium term,” it notes.

One of the biggest challenges facing the industry is illegal mining, known locally in Ghana as galamsey. A galamsey is a local artisanal gold miner in West Africa, also known as orpailleurs in neighbouring Francophone nations.
Criminal syndicates are widespread and poorly regulated. They extract minerals using dangerous methods, which are the source of serious health and safety concerns, states africapractice.

Last month, local Ghanaian media reported that, according to Obuasi Small Scale Miners Association secretary Rufus Borry, “some of our colleagues were buried alive by the national security operation”.

At least 27 illegal miners were buried alive in their pits at Obuasi, in the Ashanti mine region, during a joint operation by national security forces and the Ghana Armed Forces, who were tasked with destroying and sealing off illegal mining pits in the area.

Fortunately, the miners were rescued by some of their colleagues after being trapped underground for more than 48 hours.
The operation angered many small-scale miners, who took to the streets in protest. The protests later escalated and police shot four protestors.
“The security agencies had told the local miners earlier that the operation was meant to target only illegal foreign miners – mostly Chinese,” Borry told the local media.

The problem of illegal mining operations threatens to undermine security in affected areas, as illegal miners are increasingly retaliating using violent means in response to heavy-handed crackdowns.
The continuation of the problem gives min- ing firms a credible counterargument to government’s proposed additional fiscal burdens, africapractice says.

“The government cannot ignore domestic demands for greater benefits for the people from the mineral sector; it must rethink ways of channelling the revenues it receives from the mining sector into society.”
The advisory company says that, in the short term, government should increase tax across all sectors, and not simply focus on the extrac- tive sector, as this will bolster the viability and attractiveness of undertaking mining explor- ation projects in the country.