Gold Fields to invest US$2.5bn over 11yrs
Lead gold producer, Gold Fields Ghana Limited (GFGL), is confident the development agreement (DA) reached between the government and the company in March, this year, will serve as a fiscal incentive and a morale booster for shareholders to pump a total of US$2.5 billion into its operations in Tarkwa and Damang between now and 2027.
Although a requirement for renewal under the agreement, US$2.5 billion new investment is needed to help stimulate growth in the Tarkwa operations and revive the Damang Mine, where growth has stagnated over the past five years due to challenges with rising costs of production vis-a-vis declining gold prices.
The company's Vice President (VP) for Stakeholder Relations for West Africa, Mr David Johnson, told the GRAPHIC BUSINESS in Tarkwa that of the expected new investments within the 11-year period, US$2 billion would go into the Tarkwa operations, which is considered the biggest surface mine in West Africa, with the remaining US$500 million going into the Damang operations.
Beyond creating a level playing field for Gold Fields to properly compete in the country, Mr Johnson said in an interview over the weekend that the agreement also provides fiscal predictability for the company, as it eliminates the painful fiscal uncertainty that is often occasioned by the periodic adjustments in taxes, royalties and other statutory payments,
"We needed a stable fiscal environment that will help us to make an informed decision as to investments. So, having the development agreement actually helps us a lot in making that decision," he said.
A case in point, he said was the commencement of feasibility studies into the mineral worth of the Damang Mine, following the successful signing of the agreement, which is the outcome of nearly three years of back and forth between the government and Gold Fields.
The study is to help ascertain the level of resources and type of investment needed to properly exploit the reserves and bring the mine back to live.
"Once we get the results of that study, at least, we will know that these variables (fiscal indices for ming companies) are constant and so it will make sense for us to make this huge investment," he said, explaining that the lack of a DA would have made such investments discouraging.
Adjustments between 2011 and 2015
Over the last five years, corporate taxes for mining companies have gone up from 25 per cent to 35 per cent, royalties have been fixed at five per cent compared to a range of three per cent to six per cent in the earlier regime and capital gains for miners has been changed to a straight line amortisation over five years at 20 per cent each year from the initial 80 per cent in the first year and 50 per cent thereafter per annum on a declining basis.
In addition to a five per cent fiscal stabilisation levy that was introduced in 2013, the assets of miners have also been ring-fenced, making losses carry forward almost impossible. Beyond these, the exploration permit fees and stool fees for mining concessions have been jacked up by an average of 1,350 per cent between 2011 and last year, something mining companies said was punitive to up new investments in explorations.
These adjustments, although good for government's fiscals, are inimical to the investment plans of companies that require millions of re-investments every year to keep their operations running, Gold Fields' VP for Stakeholders Relations in West Africa told the GRAPHIC BUSINESS.
"Generally speaking, the DA just gives us that level of comfort and certainty. It is not (always) so much of whether the increment is 30 per cent or 20 per cent or 15 per cent corporate tax; it is the certainty over a period because that is what we can plan with. That is what we can go to the market and say 'we can't control gold price but if the price is this, this is how much we can give you," he explained.
With gold price now at staggering at US$1,300 per ounce after ending last year at US$1,US$1,050 per ounce, Mr Johnson said investors in mining companies needed to be continually assured that making huge investments in ongoing projects would help guarantee returns and that assurance can only come from fiscal policies such as a DA.
"Every business makes business decisions based on certain factors. It is not even just in the interest of investors but also for government and our communities to ensure that when we are making investment, that investment is going to bring value to the company, government and the communities," he explained.
"Now, in the mining sector, there are so many factors you cannot control and price of gold and cost of production are some of them. That is not good for business because in business, you need to have some level of predictability and you need to be able to convert some of the factors into constant so that you can borrow."
"The thing also is that investor has options; does he/she out the investment in mining and in this case Gold Fields or should he put it in other investment opportunities. So, to be able convince investors that this is the place to invest, you need to also give them some level of comfort that when you invest here, at least ABC are guaranteed," he added.
Feigning off criticism
Following the announcement of the DA in March, this year, many people, including civil society organisations, have criticised the government for handing Gold Fields a flexible fiscal regime that is inimical to the revenue fortunes of the nation.
Although Gold Fields had opted to be silent on the matter, the government has been on the
defensive, with the Deputy Minister of Finance, Ato Forson, saying in April that it was to help create a level playing field in the mining sector, which accounted for 6.3 per cent of total output in 2015.
"As soon as you set one precedent, in the case of Ghana, like Newmont, others doing similar investments will ask for similar equality. Failure to do it will mean they are going away and that is why I said that in taxing petroleum or mineral resources in the extraction industry, you really will have to look at what your sub-region is doing," he said in April.
Gold Fields' agreement brings to three, the number of stability/development agreements the country has signed with mining companies, which are aimed at creating stable fiscal environments for the miners, whose operations hinge on the volatility of gold prices.
Newmont Ghana Gold and AngloGold Asanti had earlier secured separate agreements from the government, then prompting Gold Fields to describe as unfair, the fiscal regime governing the operations of mines in the country.
With the taking off of its DA, however, that unfair playing ground has now been leveled, makes it possible for Gold Fields to pay corporate tax at 32.5 per cent instead of the general 35 per cent.
Its royalty rate has also been tired to the gold prices such that if prices of the precious metal is US$1,300 and below, the company will pay three per cent as royalty; 3.5 per cent if it is between US$1,300 and US$1,450; four per cent if it is between US$1,450 and US$2,300 and five per cent if the price peaks at US$2,300 and above.
This compares to the flat rate of five per cent (of a company's total revenue) that is currently paid as royalty by mining firms without stability agreements.
The agreement also fixed rates for key utilities such as fuel, which is one of the top headaches in the mining business, according to the DA, which has not been fully made available to the general public.