Agyapa Royalties deal: Can Ghana tolerate this risk?

Introduction

1. Ghana like many countries is struggling to cope with the economic hit of Covid-19 and to withstand public spending under the weight of THE debt that is expected to equal almost 70% of GDP this year (2020).

2. The Government of Ghana is of the view that that the Agyapa deal (where the Government of Ghana is investing Ghana’s future gold earnings into a company and trying to sell half of that company for cash upfront today through an Initial Public Offering on the London Stock Exchange) will raise between $500 million and $750 million for Ghana on the London Stock Exchange in order for Government to invest in developmental projects.

3. The deal has the advantage of delivering cash without adding to public debt. Yet it is also causing controversy, with critics ranging from Civil Society Groups to Economists stating that the deal could be better structured for Ghana’s long term benefit. Questions have also been raised over the its terms and rushed process which appears to lack the necessary transparency one would expect for such a monumental transaction involving Ghana’s gold long-term. Furthermore, Ghana has already received and spent much of the money we hope to get in future from pumping oil, mining bauxite or selling electricity. Not all has been spent wisely.

4. Now the Agyapa deal is likely to float on the London Stock Exchange any time from this month to the end of the year despite Government of Ghana stating that it will further consult with all stakeholders.

Background

5. On the 3rd December, 2018 parliament passed the Minerals Income Investment Fund Act 2018 which establishes the Fund to manage the equity interests of Ghana in mining companies and receive royalties on behalf of the government. The fund is to manage and invest these royalties and revenue from equities for higher returns for the benefit of the country. The government then, through the Minerals Income Investment Fund (MIIF), set up Agyapa Royalties Limited to monetize Ghana’s gold royalties.

6. This was after Parliament on August 14 2020, approved 5 agreements including the Agyapa Mineral Royalty Limited agreement with the government of Ghana despite the walkout by the Minority. In exchange, the company plans to raise between $500 million and $750 million for the Government of Ghana on the London Stock exchange and this money will be invested in developmental projects within Ghana.

7. As such Agyapa Royalties is a government-backed fund that holds equity interests including mining royalties in the state’s gold assets. This fund has hired Bank of America BAC.N and JPMorgan JPM.N to pursue an initial public offering (IPO) on the London Stock Exchange.

8. Royalties are payments that give the owner the right to receive a percentage of production from a mining operation, or retain a stake in them.

9. Ghana wants to take advantage of gold’s strong performance this year to raise at least US$400M-US$500M from the Initial Public Offering (IPO). The fund’s shares will also be listed on the Ghanaian Stock Exchange.

World Price of Gold is increasing rapidly:

10. At the time of writing this article, the price of gold in terms of world market rate, has shot up to just about US$60,000 a kilo gram.

11. As a transactional lawyer based in Ghana and the U.K who has of late been receiving more and more requests from international clients wanting to buy and export gold from Ghana, it is not difficult to see why the requests for gold are increasing. The primary factor that affects gold rates is the demand and supply equation. No more so than during a pandemic.

12. World gold price is on track for record highs as investors brace themselves for more job cuts, economic turmoil and rock-bottom interest rates globally. The price of gold is set to surge to record highs this year analysts have said as investors flock to 'safer' assets amid the coronavirus pandemic

13. As the billionaire investor Ray Dalio said to CNBC in July of 2020, gold will be a top investment during the upcoming ‘paradigm shift’ for global markets. Ray Dalio is quoted as saying: “In paradigm shifts, most people get caught overextended doing something overly popular [in terms of familiar investments] and get really hurt,” he wrote. “On the other hand, if you’re astute enough to understand these shifts, you can navigate them well or at least protect yourself against them [by investing in commodities such as gold].”

14. Investing is gold is almost as safe as houses- even if countries throughout the world haven’t turned back to the Gold standard (that is, having a monetary system where a country's currency or paper money has a value directly linked to gold).

15. Gold can be a good investment asset to have as part of a balanced portfolio. Gold boasts some of the highest liquidity in the commodity markets and has more often than not increased in value over time.

16. Government of Ghana therefore can negotiate the Agyapa deal better for our ultimate advantage long term in order to derive maximum benefit for the country.

So why is Ghana rushing the Agyapa Deal?

17. As has been stated at the beginning of this article, Ghana is struggling to cope with the economic hit of Covid-19 and to withstand public spending under the weight of debt that is expected to equal almost 70% of GDP this year. Government is therefore hoping that the Agyapa deal will raise between $500 million and $750 million for the Government of Ghana on the London Stock Exchange to invest in developmental projects.

18. Following numerous opposition on the implementation of the Agyapa Royalties deal, some quarters have declared their intentions to report the Agyapa Royalties deal to the London Stock Exchange ahead of it being formally listed.

19. Civil society groups, The Economist Magazine and others groups bring up issues with transparency, hinting on practices surrounding the deal that raises conflict of interest concerns. From an objective point of view, as a transactional lawyer, it does appear that on the face of it, that this Agyapa deal does not meet the required due diligence and transparency required for a deal that involves the government investing Ghana’s future gold earnings into a company.

20. Furthermore, a worrying level of conflict of interest runs through the structuring of the agreement which in the long term is unfavourable to the Republic of Ghana’s interest, particularly as government is investing Ghana’s future gold earnings into a company. It is ultimately trying to sell half of that company for cash upfront today through an Initial Public Offering (IPO). Documents leaked to The Economist suggest the government has put a valuation of $1bn on Agyapa. But calculations by Yakubu Abdul-Salam, a resource economist at Aberdeen University, suggest it is worth at least $2.5bn (and perhaps far more) even given uncertainties over how much gold will be mined and its price. There must therefore be an initial valuation of how much exactly Ghana is investing before we talk about anything else. Only then can the returns, upfront cash and shares that entitle Ghana to future dividends, be valued.

Solutions

21. The best option at this juncture is to review the Relationship Agreement and other accompanying approvals as it stands now, ahead of flotation of shares on the London Stock Exchange. This is due to the following (main) reasons:-

A. To allow Ghana to truly derive maximum value from its mineral resources and monetize its mineral income.

B. To ensure an independent probe of the valuations of royalty rights in the Agyapa Royalties deal so that the Agyapa deal’s terms may be honoured in the future.

C. There must be an initial valuation of how much exactly Ghana is investing before we talk about anything else. Only then can the returns, that is, upfront cash and shares that entitle Ghana to future dividends, be valued. This is because as stated above, documents leaked to The Economist suggest the government has put a valuation of $1bn on Agyapa. But calculations by Yakubu Abdul-Salam, a resource economist at Aberdeen University, suggest it is worth at least $2.5bn (and perhaps far more) even given uncertainties over how much gold will be mined and its price.

D. The asset has been undervalued: The Government of Ghana has arrived at the valuation of the deal by assuming that the average annual production volume of gold across the 48 lease areas shall be 2.9 million ounces during the term of the agreement. This is despite the fact that since 1990, gold production in Ghana has grown at an average of about 7% per year and keeps rising,

E. The asset has been undervalued: In 2018 Ghana shipped almost $6 billion dollars’ worth of gold, our single biggest export. Now Government of Ghana wants to roll up the rights to 75% of the royalties from 16 big mines (including four under development) in a Jersey-incorporated company called Agyapa. We then plans to sell as much as 49%, with shares being floated on the London and Ghana stock exchanges, for about $500m. We can price this deal higher with better terms.

F. The terms could be better drafted: Although Government of Ghana states that the deal has the advantage of delivering cash without adding to public debt; the reality of the matter is that Ghana has already received and spent much of the money we hope to get in future from pumping oil, mining bauxite or selling electricity. Not all has been spent wisely. Furthermore, with the way the deal is structured in its current form, “the government is basically selling off its ability to repay its existing normal loan portfolio,” says David Mihalyi of the Natural Resource Governance Institute (nrgi), an international think-tank.

G. The current terms of the agreement as it stands will keep rolling continuously: Although Government of Ghana states that the agreement will terminate when the last of the 48 mining leases expires, mining agreements in Ghana are drafted to enable continuous renewal so long as gold is being discovered and commercially mined, therefore no end in sight for the agreement in its current form.

H. We are giving away our right to decide who to have future royalty deals with: Agyapa has right of first refusal to any future royalties deal Ghana enters into. Ghana gave away this powerful bargaining chip for free, by not pricing this valuable option in the package.

I. The minority shareholder is being given too much advantage in the current agreement as it stands: Because Government of Ghana has agreed to hand over effective control of the company to the minority shareholders and their appointed independent directors; it cannot dictate a dividend policy or push the company to even invest in Ghana. We are therefore in essence not going to be listed as a “sovereign controlled commercial company” on the London Stock Exchange and we do not retain significant control in some of the clauses which matter in the agreement

J. Ghana should not incorporate in Jersey: Currently, our government is planning that the listed vehicle (Agyapa Royalties) is to be incorporated in the tax haven of Jersey. However, investors who profit from buying shares should be known and taxed and not hide behind trusts which are impossible to unveil. Ghana should incorporate the company in a country that has a Double Taxation Treaty with Ghana. A double tax treaty (DTT) is essentially an agreement between two countries that determines which country has the right to tax you in specified situations. The purpose behind this is to avoid double taxation. A lot of other jurisdictions with far better transparency standards would be better including the list of 11 countries we have signed a double taxation treaty with: United Kingdom, France, Belgium, The Netherlands, Germany, South Africa, Italy, Switzerland, Denmark and very recently, with Mauritius, and the Czech Republic. We should therefore choose one of these countries, whichever is deemed favourable to us in the long term whilst ensuring the country we incorporate in is transparent in terms of investors. By incorporating in Jersey, it is easy for underwriters to underprice the vehicle (therefore Ghana’s gold royalties), allot the shares to investors hiding behind trusts, with these investors secretly pocketing hundreds of millions of dollars.

Conclusion

22. Transparency and accountability make for better governance; therefore if the Agyapa deal can be restructured in a manner that takes into consideration some, if not all, the points raised in this paper, Ghana will derive maximum benefit for our gold in the short and long term.