Abolish ring-fence - mining companies

Mining companies want government to take a second look at the new policy of ring-fencing their operations, arguing it will be inimical to the interests of both the state and the industry.

The industry, which is witnessing a dip in prices this year, says the policy has a tendency to discourage investment -- and that it is uncommon in the major mining jurisdictions of the world.

In 2012, government took a decision to ring-fence mining concessions and projects, which will prevent companies from offsetting costs in one concession area or project against revenues from another.

Already, mining companies are mulling a downsizing of their operations as renewed pressure to cut down on cost heightens with falling gold prices.

There are indications that more than 3,500 permanent jobs could be lost in an industry that has enjoyed a decade-long boom, but which is now scarred by rising costs and a falling gold price.

Approximately 430 miners at AngloGold Ashanti’s Obuasi mine are expected to lose their jobs over the coming months, while Gold Fields Ghana Limited has cut about 20 percent of its expenditure and expansion programmes.

Last year, government enacted the Internal Revenue (Amendment) Act 2012 (Act 839), which introduced a provision requiring mining companies to match expenses from one mining area to revenue from the same mining area. The purpose was to safeguard taxes on profitable mines and optimise state revenues.

“It will aggravate the difficulty of attracting equity capital, both locally and overseas, and implementing it will be inconsistent with our business model,” said Saban Parimah, Tax Manager of AngloGold Ashanti Ghana Limited, who was making a presentation on behalf of the companies at a forum in Accra on the policy of ring-fencing.

The forum, which was organised by the Ghana Chamber of Mines, saw attendance by senior managers of mining multinationals, officials of the Minerals Commission and the Ghana Revenue Authority (GRA), as well as tax experts from audit firm PricewaterhouseCoopers (PwC).

The forum was to consider options that would ensure that ring-fencing, whose implementation has met with some challenges so far, benefits both government and companies.

Expatiating on the conflict between companies’ mode of operations and ring-fencing, Mr. Parimah said a mining area may overlap more than one lease area, with different pits or leases operated together as single business units or mines.

In addition, mineral ore from different pits or mining areas are processed in centralised processing or treatment plants together with other ancillary activities.

He added also that “mined material from different pits or different mining areas are mixed and treated in order to achieve a certain level of efficiency in the output, whereas many times investors are inclined to use existing operations as a basis to expand -- so they devote revenue from one mine to the development of another.”

The nature of mining operations therefore requires caution in pushing forward with ring-fencing as it could have a harmful impact on the industry’s viability, he said.

The mining industry, he observed, had a relatively stable tax regime until recently when a number of sweeping changes were made. Among them were the increase in the corporate tax rate from 25% to 35%, the increase in the minerals royalty rate to 5%, and a change in the capital allowance regime for assets.

Apart from these changes, there was also a proposal to introduce a windfall profit tax on mining companies. “These changes have had the effect of raising the cost of production, thereby raising the pay limit of ore bodies. It is in the light of these long lead times that mining companies have always sought to have a fixed and stable fiscal environment over a long time,” Mr. Parimah said.

“Any sudden change in the fiscal environment impacts the mining industry severely, and some investment decisions may be adversely impacted,” he added.