Unearthing potential: Investors size up opportunities following sector growth and maturity

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Vast mineral resources have served as a primary driver of Ghanaian economic growth in recent decades, and 2012 was another banner year for the mining industry. Known in colonial times as “the Gold Coast”, Ghana was the world’s eighth-largest producer of gold in 2012. At the same time, production of bauxite, a key aluminium property, increased, while deposits of diamonds and manganese continued to attract international investment.

BY NUMBERS: Output from Ghana’s mining sector increased 23.5% in 2012, following an 18.8% rise in 2011, according to the 2012 performance report from the industry association Ghana Chamber of Mines (GCM). Among the GCM’s members, who together produce 90% of the country’s mineral output, revenue in 2012 topped $5.4bn, a 14% increase over the $4.7bn earned in 2011. Growth in revenue was largely attributable to a rise in production and the price of gold, the GCM report stated.

The volatile price of gold, illegal mining activities and poor transportation infrastructure will present short- to medium-term challenges to mining sector activities in 2013. However, in contrast to some of the continent’s other major mineral producers that are suffering from production stoppages, the nation’s natural endowments, along with a fairly stable regulatory framework and limited risk, continue to offer attractive investment opportunities in the upstream and downstream mining sector.

KEY DRIVER: The mining and quarrying sector comprised 8.8% of Ghana’s GDP in 2012, up from 8.4% in 2011. The sector’s production, exploration and support services attracted nearly $1bn in foreign direct investment in 2012, more than any other sector, according to the Minerals Commission.

“The multiplying effect of these investments in Ghana’s economy cannot be overestimated,” the GCM stated in its 2012 report. The GCM emphasises the key role of the mining sector in Ghana’s growth in an effort to advocate for pro-business policies from the state. The top issues on the chamber’s agenda include illegal mining, deteriorating transport infrastructure and the corporate tax structure.

The mining industry contributed 43% to Ghana’s total exports, as per Bank of Ghana data. Mining is the leading contributor to government revenue, paying GHS1.46bn ($750.6m) in taxes in 2012, or 27% of the country’s total tax collections for the year. Indeed, 72% of all members’ mineral revenue was returned to the country in 2012 in the form of taxes, royalties, salaries, local supplies and capital investments, according to GCM data.

The Minerals Commission, under the Ministry of Lands and Natural Resources (MLNR), is the government agency responsible for the regulation and promotion of mining in the country. Overseeing topics from licensing and transparency to environmental protection and community relations, the commission is the main body tackling the rise in illegal mining. The Ministry of Finance (MoF), Ghana’s tax body, regulates royalty and tax rates in the sector.

GOLD: In 2012 Ghana’s gold producers benefitted from an 8% increase in output along with a 6% appreciation in the price of gold, and total revenue from the precious metal rose 15% to $5.3bn, GCM’s data shows. With the price of gold averaging $1677 in 2012, companies experienced steadily rising profits. But the price of gold is now falling and averaged $1632 in the first quarter of 2013, the World Gold Council reported. Barclays Bank predicted it could average $1483 for the full year. As gold prices began to drop in early 2013, new investment slowed and miners reduced near-term development plans.

The GCM has warned that “the depressed mood will adversely affect planned projects in the early part of the life cycle,” but forecast additional output from advanced projects. Goldstar’s New Century Mine and Newmont’s Akyem mine are both projected to come on-line. Further, the chamber expected production of bauxite and manganese to rise in 2013. With prices still above Ghana’s average cash cost of $809, local production continues to increase steadily. The long-term outlook is still healthy given the sector’s robust long-term fundamentals (see analysis).

THE PLAYERS: Major global players dominate Ghana’s gold industry. South Africa’s Gold Fields Group, which is the country’s largest producer, contributed 885,326 oz, or 30%, to Ghana’s total 2012 gold exports, according to the company. The firm’s production, however, declined 5% from 2011 levels due to reduced output at the Damang mine. Gold Fields plans to invest some $8m in Damang in 2013 and is transitioning from production at the mature Damang pit to the development of the Huni and Juno pits over the next two years. According to the company’s 2012 regional report, Gold Fields expects output at the mine to rise from the 166,400 oz seen in 2012 to 200,000-250,000 oz annually.

Meanwhile, Gold Fields’ Ghana-Tarkwa mine, Africa’s top-producing gold mine, registered a marginal expansion in output to 718,878 oz in 2012. Combined, the Gold Fields mines offer nearly 13m oz in mineral reserves, although the firm had to resolve labour unrest in April 2013 when a strike shut down two mines for five days. “The issues at Gold Fields were really regarding a specific incident and are now resolved,” Sulemanu Koney, the director of analysis, research and finance at the GCM, told OBG.

Newmont Gold, a multinational headquartered in the US, has become Ghana’s second-biggest gold producer, with Newmont’s Ahafo mine, in operation since 2006, producing 561,365 oz in 2012, a 2% decrease from 2011 levels. The US firm is on track to begin production at a second site, Akyem, in late 2013 and forecasts that the mine has a 15-year lifespan. The two Ghanaian assets comprise 20% of Newmont’s global operations and a combined total of 8.2m oz in proven reserves.

AngloGold Ashanti (AGA), formed by the 2004 merger between South Africa’s AngloGold and Ghana’s Ashanti Goldfields Corporation, owns the Obuasi mine, one of the world’s top 10 largest gold deposits. Once Ghana’s biggest producer, Obuasi’s output has dropped in recent years: in 2012, production declined 10% to 280,084 oz.

“On top of technical issues, Obuasi has been a target of illegal mining,” Koney explained. Indeed, local press reports have claimed that tens of thousands of illegal production sites operate in the area. AGA took steps at the end of 2012 to rectify the challenges at its Obuasi mine and replaced its underground development contractor to boost production, according to the company’s operations report. AGA’s overall mineral reserves total more than 35m oz.

Other large mines in Ghana saw increased output, compensating for reduced production among the top-three firms. Chirano Gold Mines, 90% owned by Canada’s Kinross Gold Corporation, improved process recoveries and raised output by some 14% in 2012 to 292,534 oz, the GCM reported. Golden Star, a Canadian firm, increased processing rates at its Bogoso-Prestea mine to boost production by 4%.

NEWCOMERS: Meanwhile, newcomers Adamus Resources and Perseus Mining, both of which commenced operations in 2012, saw production reach 104,629 oz and 185,740 oz, respectively.

Two Canadian firms not yet active in production, Keegan Resources and PMI Gold, had announced plans for a merger in late 2012, however the deal was called off in early 2013 when it appeared PMI shareholders would not approve the transaction. Obotan Gold, one of PMI’s three pits, is scheduled to commence full production in 2014. Keegan has since changed names to Asanko Gold and forecasts production at its Esaase pit to commence in 2015.

Chinese gold companies have yet to secure a substantial stake in Ghana’s mining sector, perhaps in part to due to the regular incidences of illegal mining practices by Chinese miners in recent years (see analysis). In 2012, non-state-owned mining firm Zhongrun Resources Investment offered $85m to purchase Australia’s Noble Mineral Resources, which owns Ghana’s Bibiana mine. However, Noble’s shareholders opted to reject the offer and instead secured financing from Resolute Mining.

SMALL-SCALE MINING: The biggest gains in 2012 came from small-scale miners selling through the state-run Precious Minerals Marketing Company (PMMC) and Ghana’s lone gold refinery, Asap Vasa, which saw output rise 34% and 301%, respectively, to a combined total of 357,493 oz, according to the GCM’s report. Official data, however, is unlikely to capture the full production of artisanal miners, many of which operate illegally. The GCM estimates that at least 34% of national mining production is informal and small scale (see analysis).

BAUXITE: The bauxite industry had a promising year in 2012 as output increased 88% year-on-year following a decline in 2011. Ghana’s bauxite reserves, the third largest in Africa, are impressive enough to have convinced Kaiser Aluminium to establish the massive Volta Aluminium Company (VALCO) smelter in the country in 1964. Production at VALCO has since fallen, however, largely due to power-supply challenges in the last two decades, and, today, all of Ghana’s mined bauxite is exported.

The sector’s sole operator, Ghana Bauxite Company (GBC), is 80% owned by Bosai Minerals Group of China, with the remaining stake owned by the government. Rio Tinto sold its 80% stake in the firm in 2010, citing poor infrastructure. The decline of Ghana’s western railway has largely limited the transport and subsequent export of bauxite from the site of the deposits to Takoradi Port, which is some 240 km away. The mines operate under capacity, and production decreased by 21% in 2011, largely due to transportation constraints. Indeed, the increase in production in 2012 was attributed to GBC’s decision to transport its ore by truck rather than by rail. The shift, while profitable in the short term, is neither sustainable nor cost effective in the longer run.

MANGANESE: The Ghana Manganese Company (GMC), a 90% Australian-owned firm, holds a 175-sq-km concession just 63 km from Takoradi. Only 3% of the plot has been mined, according to GMC. Ghana’s manganese exports declined in 2012 due, in part, to a halt in mining activities in November and December for the purpose of new development. The GCM expects production will rise again in 2013, but notes that the lack of efficient rail service constrains the overall production potential.

DIAMONDS: Ghana earned limited revenue from the export of diamonds in 2012, as the country’s alluvial deposits attract small scale as opposed to industrial mining. PMMC’s diamond exports fell 24% to 215,000 karats, largely because the high price of gold attracted artisanal miners away from diamond production. In the post-colonial era, export of diamonds reached almost 2m karats, but under the government-owned commercial operator, Ghana Consolidated Diamonds (GCD), output decreased in the 1990s and 2000s. In mid-2011, Great Consolidated Diamond Ghana, a local company, purchased GCD’s assets and announced plans to invest up to $100m over five years, as well to provide jobs for 50,000 people directly or indirectly.

IRONING OUT INFRASTRUCTURE: While there have been discoveries of iron ore in northern Ghana, limited infrastructure has inhibited industrial mining. “The only way to get it out would be to truck it to the sea ports or through Togo,” said Alhaji Abudulai, the managing director at Canadian Mineral Exploration (CME) Ghana. “Not a viable solution,” he added. Transporting mineral production to ports is an infrastructure-intensive operation, with rail providing the most cost-effective option. Domestic maritime trade is served by two ports: Tema, around 25 km east of Accra, the capital; and Takoradi, 230 km to the west. The two ports handle more than 90% of foreign trade. Tema in particular has also increasingly served as an outlet for Ghana’s landlocked neighbours, Burkina Faso, Niger and Mali – especially as shippers began to shift over from the Port of Abidjan in 2011, following the spate of post-electoral violence in neighbouring Côte d’Ivoire – further adding to the total throughput at the Ghanaian facilities.

In 2012 the Tema and Takoradi facilities handled 19.4m tonnes of cargo, comprising 4.4m tonnes of exports and 15m tonnes of trans-shipments and imports, according to data issued by the Ghana Shippers’ Authority in April 2013. This figure was an 8% increase over the 2011 total, with imports rising by 9.7% and exports up by more than 4%.

While the ports have managed to handle the increased volume so far, the strain is beginning to show in the form of congestion and increased waiting times, leading to a higher cost of doing business. As with so many emerging economies, Ghana’s economic growth has outpaced the country’s ability to invest in sufficient infrastructure. Currently, the domestic rail system provides transport for most of the country’s key producing areas, but its limited capacity is restraining output. “The rail infrastructure is a major constraint which could potentially impact the long-term viability and sustainability of the two bulk-mining companies in Ghana, namely GBC and GMC,” said Dan Owiredu, president of the GCM, at the group’s 2013 annual meeting.

LAND TRANSPORT: Mining companies whose output exceeds the capacity of the railway often turn to truck transport, which is more expensive and slower, and faces similar infrastructural challenges. “If these trucks travel over the same road for three months, the road will collapse,” Abudulai said. The road conditions also make it difficult to transport equipment and material between mines, forcing firms to invest in excess equipment or face delays. Even for workers, it now requires an hour and a half to travel the 30-km road between Tarkwa and Bogoso, according to the GCM. Furthermore, increased congestion at the ports causes delays in bringing equipment into the country and shipping minerals out.

Notwithstanding the current infrastructure gaps, many observers point to the opportunity that a better travel network could have on bringing in more modern mining equipment. Emad Adeeb, the managing director for Mantrac Ghana, a mining equipment producer, told OBG, “The expansion of the road network as well as increasing construction activity will remain key growth drivers for the heavy machinery industry over the upcoming years.” Significant investment in the transport sector will be required to expedite this growth, however.

GOVERNMENT REGULATION: Mining producers from Australia to Canada have been revising their regulatory frameworks in recent years in a bid to increase their local capture of production value, and Ghana is no exception. The domestic mining industry contributes more than any other sector to government revenues, and metals continue to be the nation’s top export. In the last several years, however, the government has increased the tax rate for the nation’s mining companies, seeking to bring in a larger share of revenue for local communities.

In 2012 the mining sector paid GHS1.46bn ($750.6m) to the Ghana Revenue Authority (GRA), accounting for 27% of the GRA’s total direct taxes and 39.9% of company taxes. Ghana’s mines also garnered the most foreign direct investment, and gold production alone accounted for close to 35% of total export earnings in 2012.

“There must be a national consensus that if the mining industry is properly regulated, it can be taxed, and will help the development of the government and the Ghanaian economy as a whole,” Reuben Darko Damptey, the managing director for the PMMC, told OBG. In 2010 the government shifted the royalty rate for miners from a sliding 3-6% to a fixed 5%.

In 2011 the government overhauled the corporate tax regime, raising the rate from 25% to 35% and reducing the capital allowance rate to a flat 20% over five years as opposed to the previous 80% the first year and 50% the second year. The MoF also proposed a windfall tax rate of 10%, though falling gold prices make this unlikely to come into force. Environmental regulations require mining firms to put down a $5m-10m bond as a deposit against damages, Edward Mills, exploration supervisor for Australia-headquartered Castle Minerals, told OBG.

In 2013 the price of licences and permits also increased, Pierre Coussey, Gold Fields’ country manager, said in a June 2013 presentation on the sector. Explosives permit fees rose from 3% of cost, insurance and freight (CIF) to 5% of CIF, and water permit fees increased 377%. “The government has put in place various measures to enable Ghanaians to gain from mining,” Simon Atebiya, technical director of the MLNR, told local media in early 2013 in reference to the new tax rates.

The industry views the changes from a different perspective. Data from the GCM’s 2012 “Mining Outlook Report” shows Ghana’s effective tax rate has risen 47%, the second highest among Africa’s mining countries. Only Guinea has a higher rate at 49%.

The all-in costs of gold mining in Ghana rose 11.4% in 2012, from $1079 per ounce in 2011 to $1202 per ounce. Part of the jump was attributed to global costs increases, but “another area of significant cost appreciation is the cost of compliance with regulatory requirements,” the GCM report added.

FLEXIBILITY: As gold prices fell in the first half of 2013, the government signalled more flexibility around the increased tax burden. The MoF told local media that if prices fall too far, taxes will decrease, and if operations become unprofitable, no taxes will be paid. Additionally, any losses can be carried forward against future profits for five years. Both AGA and Newmont have agreements with the government that protect the firms from tax changes for a set number of years and allow them to retain exportation proceeds in foreign currencies offshore.

AGA signed a 15-year stability agreement in 2004 that locked the firm into a 3% royalty rate and a 30% income tax rate, and Newmont signed a comparable agreement in 2006. However, in early 2012, the MoF established a committee to review the stability agreements and potentially renegotiate the terms. The goal of the review “is to ensure that the country’s mineral resources are maximised, sustained and distributed to the good of the country,” then-finance minister Kwabena Duffuor said in February 2012. Other sector players, however, are subject to the new rates and regulations.

Despite these recent changes in Ghana’s regulatory regime, the country remains an attractive destination for investment thanks to limited country risk and a history of productive mining. Foreign investment in the sector has increased in 11 out of the last 12 years. “Everybody wants to come into Ghana because of the stability,” Abudulai told OBG.

A LARGER SHARE: For Ghana, getting more money from its mineral resources would address a longstanding grievance, as citizens and public officials have for years agreed that the country has not benefitted enough from its decision in the 1980s, with support from the World Bank, to open up mining opportunities for the private sector and offer low royalty rates to attract investment. Prior to the liberalisation of the industry, Ghana’s gold production had sunk and revenues were declining but the generous terms offered then have limited the amount the local economy has earned from output.

However, changes in the other direction are now being backed by international organisations. The World Bank and the IMF have both advised the country to take a larger share. In a global context, Ghana is hardly the only country looking to get a better deal from its private sector partners in extractive industries. Worldwide, the average royalty rate for mining companies is 3.9%, according to a recent report by Goldman Sachs. That figure is up around 1% in the past three years, the firm reported.

Resource nationalism has flourished in both developed and developing countries: Australia’s minerals resource rent tax was introduced in July 2012, and in the same year, the South African government publicly contemplated nationalising the entire mining sector. In Mongolia, the massive mixed-minerals Oyu Tolgoi project has been the source of much discussion, as the government and lead developer Rio Tinto continue to negotiate the terms of how to split the profits from future operations.

Counting royalties and corporate taxes, Goldman Sachs estimates the average tax revenue in mining countries is around 39%. Ghana’s new regime would place it at about 45%, more expensive than any in the survey, with the exception of India and Zambia, the investment firm calculated.

COMMUNITY RELATIONS: As the wildcat strikes in South Africa – which have cost the country millions of dollars in production annually – have demonstrated, ensuring strong ties with local stakeholders is crucial. In addition to a stable political environment, Ghana offers relatively positive relationships with the local mining community. “Community relations are very warm,” Koney told OBG. It was not always that way, however: nearly two decades ago, when the privatisation of Ghana’s mines began, relationships between mine operators, labour and environmental activists were more problematic.

In 2003 Ghana became a signatory to the Extractive Industry Transparency Initiative (EITI). The EITI provides best practices for promoting transparency and competition in countries with large extractive industries. The international framework works by encouraging companies to publish what they pay and governments to publish what they receive from the mining and oil and gas industries. In 2012 Ghana was ranked 15th out of 58 countries worldwide and the highest in Africa, on the Resource Governance Index, ahead of Liberia and South Africa, which ranked 16th and 21st, respectively.

In addition to disclosing revenue, the GCM works with members to disclose health and environmental performance records. The chamber leads outreach and advocacy to the government and regularly brings members of parliament to the mines.

Individual corporate social responsibility activities have also been on the rise among Ghana’s mining companies. In 2012 GCM members spent a total of $26m on community investments in schools, roads and clinics, among other projects.

“Mining firms are doing more for communities – some of the mines have improved hospitals and schools. Some have built whole townships or invested in agribusiness,” said Abudulai. One challenge according to Abudulai, however, is that some local chiefs misappropriate funds for personal luxuries rather than developing the community. As a result, mining firms lose respect among local communities.

However, unlike other nations that are heavily dependant on extractive industries, Ghana’s mines are rarely shut down due to protests or strikes. When a strike stalled operations at Gold Fields in April 2013, the event was universally acknowledged to be an anomaly. “You never hear about Ghana – it just runs. That is why it was such a shock when they had the illegal strike,” said Peter Major, fund manager at Cadiz Corporate Solutions, a financial services group headquartered in South Africa.

However, the rise in illegal mining (see analysis) and the associated environmental degradation is causing the deterioration of community relations. Small-scale mining is licensed in the country to provide Ghanaians with the opportunity to benefit from the nation’s mineral wealth. Traditionally employing hand tools and tapping limited tracts, tens of thousands of small-scale miners known as “galamsey” (from the English phrase “gather them and sell”) have worked across the country for decades. In recent years, however, small-scale miners have turned to foreigners, mainly from China, for mining expertise and equipment and have begun industrial-scale mining without the requisite regulatory and permitting process. Research from Wassa Association of Communities Affected by Mining (WACAM), a nongovernmental human rights organisation, estimates that 250 rivers have been polluted with chemicals, including cyanide, from these operations.

Rural villages often bear the brunt of the pollution, and tensions have increased between local populations and often-foreign illegal miners. Ghanaians have attacked illegal miners, and conflicts have escalated into violence, leaving miners dead. A recent crackdown from the Ghanaian government led to the arrest of 166 illegal Chinese miners, and the local populace, the government, and legal mine operators hope that this will be the first step toward better regulation of the practice. In reality, formal mining operations are also criticised by local community groups, including WACAM, for pollution and poor labour practices. “The formal mines, they make their mistakes too,” Mills told OBG, “but the environmental degradation is not comparable.”

LABOUR: A lengthy history of mining and continued investment in training and development provides a solid base for human capital in the mineral sector. Of the 20,000 people employed by members of the GCM only about 300 are expatriates.

Around 10% of mining revenues are used to support Ghana’s University of Mines and Technology (UMaT), located just outside of Tarkwa in the Western Region. The only mines, science and technology university in Africa, UMaT attracts students from across the region, and its graduates work as specialists in mines from Burkina Faso to Mali. Still, the GCM reports that increased production of gold has driven up the demand for skilled labour and mining companies face difficulties filling these roles.

Additionally, UMaT has recently launched programmes to expand training for Ghana’s nascent oil and gas sector, and some mining firms are concerned that geological engineers and other crossover specialists will be enticed by hydrocarbons firms. The GCM acknowledged the shortage of skilled labour in a recent report. “For Ghana’s mining industry, this has been made acute with the commencement of commercial oil production in Ghana. The reason is not far-fetched. Critical skills required in the mining industry find places in the oil and gas sector.”

However, the oil and gas industry currently employs only a small number of Ghanaians, by some accounts less than 800. The overall numbers in the hydrocarbons sector are not likely to compete with mining in the medium term. Steven Rickman, senior vice-president of AGA, told OBG, “Mining is a key employer, and it creates a lot more employment than the oil and gas sector. This will become even more so as local content policies are pursued.”

ALONG THE VALUE CHAIN: The size of Ghana’s mining sector provides business opportunities for local and international companies all along the value chain, from services and equipment to downstream industrial activities. Members of the GCM spent a total of around $1.2bn on local supplies in 2012, including foreign-manufactured equipment sold through local distributors, according to GCM data. Manufacturers from China had been increasingly eating up market share in terms of the distribution of mining equipment, a traditional purview of companies from the US like Caterpillar.

George Apostopoulos, the regional general manager for Atlas Copco, a leading producer of mining equipment, told OBG, “The presence of Chinese products is a major threat since they can afford to offer equipment for 65% of the price.”

In the last year, however, some construction and mining firms have been turning back to more expensive American and European manufacturers that provide after-sale services. Indeed, service companies offering a wider variety of services, such as training, technical assistance, maintenance and fuels, stand to benefit from the industry’s growth.

Supplying fuel to Ghana’s mining companies, for example, is a $400m industry. Three years ago, Ghanaian-owned Zen Petroleum won a contract to supply 50% of Gold Fields’ fuel needs. In fact, Zen was established after the founder and managing director, William Tewiah, had a conversation with a mining executive who lamented the low quality and high price of the diesel being supplied to the mines. Within three years Zen’s total contracts had increased from $20m to $200m.

Tewiah believes that local companies are at a substantial disadvantage in Ghana. “As there is no clear government policy to indigenise the downstream sector or to outlaw illegal practices such as predatory pricing by multinational players,” he told OBG.

LOCAL CONTENT: There is consistent debate among the mining industry and Ghanaian policymakers about expanding and identifying opportunities for local companies. Currently, the government does not enforce the existing local content policy for the sector. One issue is the definition of a “local” company and whether it focuses on management, production or profits.

An additional challenge is to identify the inputs that Ghana’s underdeveloped industrial sector could reasonably manufacture. “Producing inputs locally is the next stage,” Koney told OBG. Indeed, the GCM’s 2013 summit was titled “Making Mining the True Catalyst for Development”.

In cooperation with the International Finance Corporation, the GCM has identified 29 products that could be locally produced for the mining industry, including caustic soda, steel fabrication and lime production. Activated carbon, currently imported into the country, can be produced from coconut shells, a resource in which Ghana is rich. Some of the grinding balls, used for miners’ ball mills, are already produced in-country.

Using a variety of incentives from the International Finance Corporation, the Ghana Investment Promotion Council and the government, the country hopes to improve local procurement. “We want to get Ghanaians involved, but we are realistic about the need for time and for the continued involvement of overseas suppliers,” Toni Aubynn, CEO of the GCM, told Business Excellence magazine in early 2012.

DOWNSTREAM OPPORTUNITIES: Ghana’s mineral output is almost entirely exported for refining abroad. Gold refining is limited to Asap Vasa, which works with small-scale miners and produces only 40,000 oz a year. Koney identified investment opportunities in jewellery making and goldsmithing, currently small fields in Ghana with room for growth.

Ghana possesses the infrastructure to support an integrated aluminium industry, but power shortages have significantly reduced the segment’s capacity. The state-owned smelter, VALCO, was once a private leader in West Africa, but is now fully owned by the state after foreign investors pulled out in the past decade. The plant’s decline has been largely linked to a lack of reliable electricity, and it is operating just one of its five potlines, meaning that it produces around 40,000 tonnes of aluminium annually, just 20% of its 200,000-tonne capacity.

The electricity shutdowns are mainly due to managed off-loading of the grid, as VALCO consumes close to 6% of the country’s electricity, according to the World Bank, an unsustainable amount given Ghana’s current electricity challenges (see Energy chapter). In mid-2013, the World Bank advised the government to shut down the plant completely, saying the power consumption and power subsidy carries “a high economic cost”.

Indeed, the plant was closed between 2003 and 2006 as well as 2007 and 2011 due to difficulties negotiating electricity supply. Parliamentary leaders have resisted the call of the World Bank, citing the plant’s role in an integrated supply chain: VALCO produces the ingots required by another government-owned company, Aluworks, and employs a total of around 600 people.

But in April 2013, John Abdulai Jinapor, deputy minister-designate for the Ministry of Energy and Petroleum, said assessments of VALCO suggested that, with adequate power supply, it could run all five potlines and return to profitability – and indeed make a major contribution to the country’s economy again. With ample deposits of bauxite, Ghana could rise as aluminium producer, though infrastructure connecting bauxite mines to manufacturing facilities is still in need of an upgrade. In August 2013, VALCO signed a memorandum of understanding with Ghana Gas for a dedicated power plant, however, local media has reported plans for a VALCO power plant as far back as 2008.

While input supply is not a problem for Aluworks, which purchases around 10,000 tonnes of aluminium each year, the firm, like steel manufacturers, faces stiff competition from low-price Chinese imports, Kwasi Okoh, managing director at Aluworks, told OBG. Despite this, Okoh is confident about the future. “Thanks to a young population and a deficit in housing stock, demand for aluminium products in West Africa will remain strong and continue to increase in the coming years. Aluworks has plans to expand and is already doing so to meet expected growth in demand,” he said.

OUTLOOK: While Ghana’s mineral sector faces some regulatory and infrastructure constraints, the Gold Coast remains a profitable location for mining. At the advice of international organisations, new government policies are seeking to ensure that Ghanaians are able to receive greater benefit from the country’s substantial mineral wealth. Efforts are under way to develop the supply chain and create new downstream manufacturing capacity; however, progress is continuing gradually. It is likely inevitable that mining output will slow as the market for gold flags.

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The Report: Ghana 2013

Mining chapter from The Report: Ghana 2013

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