Listening to discussions and reading presentations on the Agyapa deal, it’s easy to state that the intended reinvestment targets development and mining, with a risk far distant from exploration (where capital mostly shies away).
This means exploration project sponsors will struggle to navigate through the risks in bringing exploration to a development stage before inviting any Agyapa-like investment. After more than a century of mining in the five different belts of gold deposits or the various geological formations (be it Birimian or Tarkwaian) in Ghana, a lot of exploration risks have been duly indicated and profiled through either licenced mineral exploration and geological mapping or during mining proper.
Decades of exploration, geological and mining activities in Ghana have reasonably signalled risks arising out of mineralisation (inferred, indicated or proven) and mineral associations (oxides or sulphides), types of geological formation and structural discontinuities. Given that Agyapa’s investment readiness targets post-exploration points (where financial and geological risks are less), it’s reasonable to state that policy innovations can be structured to invite other forms of capital – other than mining royalties – containing a well-designed financial product capable of mitigating risks at the various nodes of the mining value chain. What we see in Ghana, in terms of lack of derived value and little mining-related development from our mineral resources, has more to do with mineral resource governance challenges than lack of risk capital.
Ghana would be better-off if mining investment policies targetted projects that retain value – using a stylised knowledge of mining spending by stage of production and percentage cost breakdown by cost-type, knowing that over 50% of mine operational costs go to suppliers but taxes and royalties to the public purse only amount to less than 5% of these operational expenditures.
Three projects can therefore give Ghana a good slice of the mining resource value: detailed extractives value chain development for faster, visible, feasible, and cheaper upstream investment; and optimal local content programmes designed to dive deeper into the supply stretch of mining and cut a greater portion of the value on the mining chain. The other, and most important, project set is a fiscal diversification and industrialisation agenda configured to monetise resource revenue into non-resource built capital.
Given that the mining experience curve in Ghana is flatter, in our view, than perceived in all the various geological formations and types of mineral associations; and considering the country’s favourable geology, it is appropriate to state that we can structure more innovative, risk-indexed capital to finance and manage the different tipping points along the mining value chains – thus attracting more optimal local and international capital than anticipated:
- At the Exploration stage, the main risks are structural discontinuities, topographic difficulties, mineralisation and mineral associations. Policy support may include investments in road infrastructure, investments in geological and minerals mapping, innovations in exploration regulations, and tax exemptions to help in reducing transaction and exploration costs;
- At the Mine Development stage, the main risks are topographic challenges, likely shifts in geological structures (faults and folds) during deep drilling; and liquidity, operational and market risks. Investments in infrastructure, supply chain and receivables financing hold the key;
- Liquidity, supply chain, credit, operational and market risks at the Mining Production stage can be managed using supplier development strategies, supply chain finance, asset backed financing and guarantees.
- At the Processing and Smelting stage, the operational, liquidity and market risk exposures can be managed using asset backed loans, supply chain finance, commodities finance, investments in logistics and infrastructure finance.
A tactical conflation of policy innovation, mineral resource governance and optimal extractives financing techniques premised on quality risk management has the key to attracting local and international capital into value retaining mining in Ghana.
Golden Star’s investment of over US$15million in exploration alone to develop the Wassa underground is a testimony and typical case of investor’s confidence and readiness to inject capital into upstream mining – if risks are well documented and visible along the extractives value chain.
It is for this reason that the innovators of investment policies must run a simple options valuation exercise to develop a pecking order of valuable investments targetting industries other than gold – design a diversification strategy that doesn’t only target the minerals-linkages but also the broader economy by using natural resource revenues as the basis to spawn the industrial development and diversification drive. This will free-up the mining royalties to serve as a liquidity catalyst to finance the much-needed diversification for more sustainable trade, industrial and economic development.