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Business News Sat, 20 Jul 2013

The vanishing profits of Ghana’s mining industry

With gold prices falling from a high of over US$1,600 an ounce to barely US$1,200 an ounce over the past couple of weeks, mining companies find themselves caught between a rock and a hard place.

The 25 per cent fall in the gold price has affected their revenues, and is squeezing their profits, even measured by the optimistic standards of cash cost per ounce which does not calculate all their total costs.

To a large extent the dilemma Ghana’s gold mining industry finds itself in is the result of severe stiffening over the past two years of the fiscal regime in which it operates. Since 2010, the Government of Ghana, its agencies, and even local and traditional authorities have been introducing a plethora of new taxes and levies on mining companies, thus increasing their overall costs significantly.

Mineral royalties have been increased from a range of three per cent to six per cent (obviously most mining firms were paying the lower end of the range) to a flat five per cent. Capital allowance has been changed from 80 per cent in the first year and 50 per cent thereafter annually on a declining balance basis, to a straight line amortisation over five years at 20 per cent each year, further increasing their tax liabilities.

Corporate tax payable by mining companies has been increased to 35 per cent, whereas that paid by companies in other sectors has remained at 25 per cent, until the recent reintroduction of a five per cent national stabilisation levy.

Now mining assets are ring-fenced for the purposes of determining tax payable which means a company can no longer pass losses made on an operation in one place against taxes on profits made in an operation elsewhere.

Add to all these, a 900 per cent increase in Exploration Permit Fees charged by the Environmental Protection Agency, and 1,800 per cent increases in both stool fees per 50 square kilometers of mining licence, and stool fees per 100 square kilometers exploration license.

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The stability agreements between the government and the biggest gold producers in the country are being reviewed too, with tighter fiscal terms being insisted on by the government.

Next on the government’s wish list has been a windfall profit tax on mining companies which it has been trying to introduce for more than a year now.

Indeed, in 2012, a windfall profit tax bill which would impose a further 10 per cent tax on mining companies was tabled before Parliament but was subsequently withdrawn for what the government itself described at the time as technical deficiencies which needed to be corrected before being presented again.

In March, this year, while presenting the 2013 Budget, Seth Terkper, Minister for Finance, promised that the government would re-introduce the bill in Parliament, “in the coming weeks” after due consultation with all stakeholders.

This will, however, not be an easy thing to do under the current circumstances in the gold industry. Simply put, not only are mining companies in Ghana not making windfall profits anymore; they are hardly making any profits at all.

The Ghana Chamber of Mines computed the average operating cost of gold mines in the country at US$751 per ounce, as of August, last year. Ostensibly, therefore, this will still leave mining companies with a healthy US$450 per ounce profit, even at the current reduced gold price.

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The snag, however, is that while US$751 measures the average cash cost per ounce, it does not take into consideration a host of other expenses which mining companies incur, such as exploration costs, capital expenditure on mine upgrade and expansion, on vehicles, and the likes, and the cost of meeting already existing tax obligations, levies and licence and permit fees.

This is captured in what the mining industry calls notional cash expenditure (NCE), which measures mining companies overall expenditure per ounce of gold produced. About a year ago, when gold price was still about US$1,600 the Ghana Chamber of Mines released its computations of the average NCE in Ghana and came up with US$1,200 per ounce.

This means that in the wake of the gold price crash, mining companies in Ghana are barely covering their overall costs and any further increases in their fiscal obligations could send them into losses.

Indeed, Ghana’s mining companies, sitting on the brink between profits and losses are already considering downsizing their operations, which could result in up to 3,510 job cuts by mining firms themselves and companies that provide them with support services. Job cuts will arise from cut-backs in exploration programmes and mine upgrade and expansion as well as administrative cost cutting.

Actually, the government itself is aware of the problems that will arise if it raises taxes of mining companies any further. It is instructive that mining companies have been excluded from the newly re-introduced five per cent Notional Stabilisation Levy, which is being charged on sectors seen by government to be very profitable, such as banking and telecommunications, although mining support service providers have been included in the new levy.

Thus, while the government continues to talk tough about getting the mining companies to contribute more to the public treasury, reality seems to be setting in.

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To be sure, the tough talk is politically expedient; mining companies are easy to point at as villains because of the inevitable occasional environment infractions and the fact that they are seen as huge, rich multinationals exploiting the resources of small, impoverished indigenous communities. Thus the government can direct the blame on those communities’ lack of amenities to the mining companies, rather than at itself which has the actual social contract to provide those amenities and infrastructure.

Consequently, mining companies’ contributions to the local economy tend to be measured only by their direct corporate social responsibility, rather than their taxes and levies. Again, these are not matched by any other sector of the economy.

According to statistics from the Ghana Chamber of Mines, the mining industry paid GH¢893.77 million in corporate taxes in 2012, representing 36.98 per cent of the total company tax collected by the Ghana Revenue Authority last year.

Furthermore, last year, the mining companies repatriated about US$3.2 billion, or about 73 per cent of their revenue, through the Bank of Ghana and the commercial banks. This is in addition to corporate social responsibility for their host communities and the general public amounting to another GH¢26 million in 2012 alone.

Now there are worries that Ghana’s mining industry could become uncompetitive internationally again, and stop attracting direly needed new investment into the sector.

Already cash costs per ounce in Ghana, at US$751 are higher than in several other neighbouring countries which are competing to attract international mining firms, such as Liberia (US$553 per ounce) and Sierra Leone (US439 per ounce) and Cote d’Ivoire (US$509 per ounce).

Instructively such countries already have lower corporate tax rate for the mining sector too. Even more instructively, Ghana’s royalties rates is among the highest in Africa, with South Africa’s being as low as 1.5 per cent and countries such as Cote d’Ivoire, Liberia, Egypt, Tanzania and Senegal, set at three per cent. Also, some African countries, such as South Africa, Sudan, Tanzania and Egypt do not insist on government enjoying a free 10 per cent equity interest in their mines, like Ghana does.

Of course, being Africa’s second largest gold producer, Ghana has the advantage of proven resources, track record of production and requisite skills and support services.

However, with Ghana’s mining companies having seen their once enviable profits whittled away, there is no room left for a further tightening of the fiscal regime in which they operate.

Source: Graphic.com.gh