Cost of raising dead Obuasi to life

AngloGold Ashanti’s over one century-old gold mine at Obuasi, one of the most productive in the world between the 1980s and the first decade of the new century, is back from the dead. 

After production was halted at the mine some four years ago, in the face of dwindling surface mining productivity and serious encroachment by illegal small scale miners, the mine has been redesigned and subsequently re-engineered as an underground mine.

The redesigned Obuasi required major fiscal concessions from the state though.

The mine’s re-invention as an underground mine has been on the cards for about two decades now and indeed it was AngloGold’s skills in this relatively technologically challenging type of mining that ultimately enabled in win the bid to merge with the erstwhile Ashanti Goldfields in 2003 fighting off competition from Randgold, also a South African gold mining multination with pan-African ambitions.

However a combination of technical bottlenecks and resultant prohibitively high projected operating costs to follow a huge capital investment has deterred the required conversion from surface to underground mining and the situation was worsened in recent years by encroachment by illegal miners who have seen so much potential in scavenging on the concession that they have been willing and ready to resort to violent resistance to efforts to get them off it.

Finally, the President Nana Akuffo-Addo administration took the decision to grant requisite major fiscal concessions to make the conversion and subsequent deep level mining economically viable for investors.

Rising concerns

Unsurprisingly though this has generated controversy among industry analysts, commentators and civil society leaders of thought in Ghana, especially since the fiscal concessions have come at a time that the same government has been very vocal about its dissatisfaction with the benefits the state and its citizens have been getting from the activities of a gold mining industry that is overwhelmingly dominated by foreign companies.

To be sure, the state is sacrificing substantial revenues that would have accrued to it if the fiscal concessions had not been granted. Altogether the concessions are worth US$259 million in foregone revenues, largely from a reduction in the corporate tax rate applicable to the company from 35 per cent to 32.5 per cent, as well as a reduction on the five per cent royalties’ rate applicable to other mining companies.

Giveaway concessions

However, these concessions have enabled a US$881 million investment to be made into the requisite redevelopment of the mine, equity and debt inclusive. Indeed, the total investment that will be required over the projected 22 year lifespan of the mine in its new form will amount to US$1.6 billion altogether.

Importantly, government’s facilitating concessions involve forgone revenue rather than actual contributions to the requisite investment capital. But even with this government still hopes to rake in some US$2.16 billion in royalties, levies and corporate income taxes over the two decade expected lifespan of the re-engineered mine.

This adds up to an average of US$100 million a year, which is why critics of the arrangement are dissatisfied; they want more from Ghana’s biggest, oldest mine which at its peak was producing nearly one million ounces of gold and most of its net revenues were going to government itself, as the largest shareholder at the time, as well as its host.

Bigger picture

On the other hand though, government and the proponents of the arrangement, while admitting that public revenues will be somewhat subdued, point out that its critics should look at the bigger picture. For instance the Ghana Chamber of Mines computes the overall benefits to the state as being worth US$5.3 billion, which is more than twice the direct revenues expected to accrue to the public purse.

Indeed, the whole picture is much bigger, and brighter than the part painted only by projected public revenues and those foregone.

The government has pointed out that the project will create an estimated 2,500 jobs and this provides its justification since the incumbent administration came to power largely on the promise of creating badly needed jobs and the new opportunities being created outside the biggest urban areas makes the Obuasi initiative all the better.

What it does not add though is that many of those jobs are temporary – at the end of reconstruction, they will also end.

Again a lot more are indirect and so there is the strong possibility that the number has been overestimated – or to put it more accurately, exaggerated. Indeed, the mine will use contract mining in a heavily mechanized process – only about 550 permanent jobs are to be created.

One the other hand though a lot of livelihoods that will be created from the licensing of small scale miners to exploit the 60 per cent of the company’s concession has to be relinquished to government under the terms of the agreement.

Vibrant town

Then there are the benefits that will accrue to Obuasi as a community. This once vibrant town has suffered a severe down turn with the cessation of mining from the mine that has been the pivot of all economic activity; the re-opening of the mine will bring the town back to its old vibrancy and the situation will actually be better than before since underground mining comes without the severe noticeable environmental degradation that inevitably accompanies surface mining.

But the most important pieces of the big picture, are the national, rather than the local repercussions. The reactivation of the Obuasi mine and the key role government has played in facilitating it will do wonders for Ghana’s reputation as an attractive mining destination for global mining industry players.

At a time that the threat of tightening of the fiscal framework for the mining industry is coupled with hard criticism from government itself, of the industry’s conduct with regards to fiscal and social responsibility, the facilitating support provided by the state provides direly needed assurances to global players and investors that Ghana still welcomes and is ready to support them.

Illegal mining

This is made all the more crucial by the fact that Obuasi’s recent travails were in part caused by the state itself, through its inability – the harshest critics of government say unwillingness – to curb encroachment on AngloGold Ashanti’s mining concession by violence-prone illegal small scale miners.

At a time when the Ghana Chamber of Mines is warning that new investment into exploration and existing mine redevelopment and expansion is dwindling, the state’s support for the reactivation of the Obuasi mine should prove crucial in rekindling investor confidence and enthusiasm.

To be sure though, most of the benefits that will be derived by Ghana from the redevelopment of the Obuasi mine will not be immediately and clearly recognizable to the public.

Public treasury

Most of the company’s contributions to the public treasury will come in the form of corporate income taxes, which will mostly be spent elsewhere on recurrent rather than capital expenditure and thus will be lost on the general public’s consciousness.

Even the royalties meant to be spent on the host communities will be spent elsewhere too, and if past experience is anything to go by, government will try to cover this up by getting the public to focus on just the AngloGold Ashanti’s corporate social responsibility spend as it only contribution to Ghana’s economic growth and development.

Crucial contributions

Neither the mine’s crucial contributions to Ghana’s direly needed foreign exchange earnings nor its contributions to the enhancement of Ghana’s reputation as a globally competitive destination for mining investment will be part of the considerations of the general public either.

But those contributions will be real, and indeed key to Ghana’s economic fortunes going forward.

This means that though the quantitative analyses of the state’s contributions to the re-opening of the Obuasi mine may bring it into question, those looking at the big picture will tend to agree with government’s decision on the basis that the intangible and unquantifiable benefits will be at least as important as the ones that everyone can see and appreciate.