Making More of Its Riches
The paradox of Africa’s mineral riches versus its economic poverty has been explained by different theories, many having to do with the continent’s colonial past. What they all agree upon is that mineral endowment cannot singlehandedly ensure wealth, or else Niger, which holds some of the world’s biggest uranium reserves, would not make the cut as the 10th poorest country in the world. More ironic is that, while Niger’s uranium powers 30% of French households, Niger has one of the worst electrification rates worldwide with 90% of its people sitting in the dark.
In many cases, mining has been the most potent driver of West African economies. For Ghana, the most developed country in the region, mining is a key GDP contributor and an important source of foreign currency, and provides the only employment option in some remote areas. Yet, in over 100 years of mining in Ghana, none of the mining companies are Ghanaian, many white-collar jobs are still performed by expats, and the industry remains limited to exportation of raw materials without added-value processing.
In view of these facts, already in 2009 the African Union was putting together the “African Mining Vision,” a framework for mineral resources to be used for more broad-based, sustainable and inclusive development. It recommended localization policies and better national levies in the negotiation with multinationals, setting the tone for a more balanced playing field. In 2021, the question of driving more benefits from mining is compounded by three factors: The imperative of post-pandemic recovery demands more receipts to be paid into national budgets; The desire that higher commodity prices are fully -and faster- translated to a local level; And, related to the former, higher mineral outputs, whether projected or obtained, call for more stable, well-balanced tax frameworks with a long-term view. Furthermore, governments need to be careful that their policies are perceived as fair and not read as instances of resource nationalism. Most crucial is that these policies continue to attract and not drive away investors.
The two principle considerations - to ensure a favorable contribution of mining for the country’s development and to ensure the country’s fiscal attractiveness for foreign investors – and their delicate balancing act play out differently in different countries.
At the one end of the spectrum, well-established mining jurisdictions like Ghana can afford to tax more. Ghana knows it offers investors a stable ground with clear policies, a mature servicing sector, and reputational distinction. Countries like South Africa and Ghana have been the first to weigh up how to extract the most benefits from mining without becoming too expensive, especially when compared to other countries. The cost of land for exploration is roughly twice as high in Ghana than in Burkina Faso and four times higher than in Ivory Coast, while its costs of production, averaging at US$1,190/oz AISC, are also higher compared to the African average.
Occupying a more middle-ground, landlocked countries like Mali and Burkina Faso need to make up for higher operating costs related to security and logistics, as well as less developed in-country capabilities. At the same time, Mali recognizes its huge resource potential and sees yearly growing production. Mali produced 65.2 tonnes of gold in the last year, but it also discovered a further 65.7 tonnes of additional reserves. These numbers show that Mali has matured considerably as a mining jurisdiction, so the country is moving away from its incentive-driven tax regime of the early days: In 2020, Mali eliminated VAT exemptions and shortened the length of stability agreements from 30 to 20 years.
The younger mining jurisdictions are leaning in the opposite direction, ready to put forward very attractive fiscal policies as they seek to digress from an oil-dominated past, like Nigeria or Equatorial Guinea, or their agriculture-based economies, like Cameroon. Yet, emerging mining countries bear the downside of their inexperience. In Nigeria, for instance, the government incentivizes investors through generous tax holidays: Juniors, miners and processing companies are exempted from taxes for the first three years of operation, while also paying 0% import duty on equipment and machinery related to mining. However, Nigeria’s fiscal regulations are still very new and they lack the clarity and specificity of those attributable to the O&G industry in the country, which makes planning for foreign investors difficult.
An incompletely developed fiscal and legal environment has also seen Ivory Coast dealing with a higher number of litigation cases over the level of compensation that mining companies should pay to the communities living in their proximity. Kouamé Klemet-N’Guessan, partner at Ivorian law firm KSK Avocats, said the country struggles, first and foremost, with the legal interpretation: “The tax administration considers that mining agreements cannot derogate from the law, but mining agreements contain provisions that need to be legally validated. The government is quite passive in enforcing the provisions stipulated in mining agreements.”
To drive beneficiation, West Africa must participate more extensively in end-to-end mining value chains, but the African value chain starts with exploration and ends with exports of ore. The government of Ghana is trying to create new mechanisms to localize investments, for instance by paying for gold for using cedi rather than USD, as the Bank of Ghana is currently proposing. Understanding the importance of in-country value addition, Ghana has also invested in a new gold refinery, helped by investment from India – the world’s largest consumer of jewelry gold. The country has two other private refineries, the Gold Coast Refinery and the Sahara Royal Gold Refinery. Though new in the gold space and without any domestic large-scale gold production yet, Nigeria has hurried to inaugurate its second refinery this year, after the Kian Smith gold refinery was opened in 2018. The two refineries produce bullion sold to the Central Bank of Nigeria (CBN) at international prices.
Countries in the region are also looking at ways to maximize the revenue generated from mining royalties. In 2018, Ghana set up the Minerals Income Investment Fund through which the country is reforming the way it manages royalties from natural resources. Seth Asante, managing partner at Ghanaian legal firm Bentsi-Enchill, Letsa & Ankomah (BELA), explained how this works: “The Fund is authorized to establish special purpose vehicles (SPV), assign specified royalty streams to the SPV, and procure the listing of the SPV on a reputable stock exchange.”
“The existing legal framework cannot be relaxed without jeopardizing the entire structure of small-scale miners. New policies need to fall within the current framework and encompass the full value chain, from extraction to selling. At the moment, the gold extracted by small-scale miners is mostly illegally exported, without any taxes or royalties paid. We need a new reform structure to control the full small-scale mining supply chain.”
Seth Asante, Managing Partner, Bentsi-Enchill, Letsa & Ankomah (BELA)
As a majority shareholder, Ghana is able to trade its royalty earnings on both the Ghana Stock Exchange (GSE) and the London Stock Exchange (LSE), offering 49% of the shares to investors in the two countries.
Also looking for ways to maximize the value of mining payments at a local level, Burkina Faso set up a Local Community Fund where it allocates 1% contribution from the annual turnover of mining companies to finance infrastructure projects in 50 communities. Adama Soro, the president of the Burkina Chamber of Mines, thinks the next step for the country is to ensure proper governance of the fund: “Municipalities with 60,000 inhabitants and less than US$100,000 annual budget are now entitled to yearly budgets of up to US$3 million, but the money goes through the national treasury and the disbursement is subject to delays. There is also a lack of guidance when it comes to allocating this money to create a real impact on living standards.”
Above all, Ghana’s localization efforts have focused on local content policies. In 2020, Ghana passed the Local Content and Local Participation Regulations applicable to mining companies, support service companies and mineral exporters. Local content regulations had been in place since 2006, but the new law adds more sophisticated provisions on recruitment at the management level, gender diversity, local procurement of goods and services, and prescriptions on JVs between international and local service providers. A novelty for the new decree is the requirement for mining companies to list a minimum of 20% of their equity on the Ghana Stock Exchange (GSE), though the capital expenditure threshold for this requirement has not been established yet.
Zoe Phillips Takyi–Appiah, senior partner at JLD & MB Legal Consultancy, sees this as a positive development: “This will grant access to local investors who may otherwise not have the opportunity to invest in some of these nationally significant projects.”
While listing on the GSE is typically the domain of producing companies, Asante Gold (CNX: ASE) is one of the first juniors expressing a wish to trade in Ghana as a way of further embedding in the local economy. “Listing on the GSE is a key part of our vision to build a Ghanaian mining company. Trading here will also create very interesting arbitrage opportunities between Ghana and the other markets we’re listed in, like Canada and Germany, while giving local companies the chance to trade securities or get involved in the mining business in their own country,” said Douglas MacQuarrie, president and CEO.
Already 35% of Asante’s shares are in Ghana and almost half of its board is represented by Ghanaian nationals. After acquiring the Bibiani mine from Resolute Mining (ASX: RSG), Asante is undergoing a transition period from explorer to producer.
Looking at Ghana as a country of reference for the role and impact of mining in West African economies, one can observe a greater assertiveness of the government in the mining sector, at the same time facilitating diversified investments in other industries. Ghana is rolling out industrialization programs like ‘One-District, One-Factory’ (1D1F) through which it wants to ensure that one production factory exists in every Ghanaian district, as well as creating up to 10 years’ long tax holidays for exported products to attract more foreign currency into the country. Initiatives like “Ghana Beyond Air” are also promoting the local use of resources to create value-addition and industrialization.
“This is a major social issue because local people have mined these lands for decades to make a living; even though they have no legal right to mine the area, artisanal miners have established value chains and working methods that come face to face with formal miners.”
Lolade Ososami, Partner, Udo Udoma & Belo-Osagie
Formalizing artisanal mining
One of the most evident means of boosting government revenues from gold is the formalization of artisanal or illegal mining. So far, most efforts in this sense have been futile.
Informal miners, known as Galamsey in Ghana and Orpailleurs in francophone West Africa, represent a second layer of mining activities that is unregulated and harmful to the environment and to human health. But artisanal miners are also deeply entrenched in the history of these countries and an essential part of indigenous livelihoods, and possibly identities. Calling artisanal mining “illegal” and policing their practices is not a solution, and governments are still looking for the best approaches to formalize the sector for the good of the country, the environment, the mining industry, but also for the good of the informal mining communities.
This sector is by no means marginal. In Nigeria, informal mining represents most of the country’s mining. In Ghana, small-scale mining is believed to contribute to 40% of Ghana’s gold output, accounting for US$2 billion dollars of revenue generated between 2016 and 2020. In Burkina Faso, about one million orpailleurs are believed to produce the equivalent of US$1 billion/year. This is money that falls outside national pockets, and worse, it can feed into illegal value chains on the black market.
Artisanal mining is mostly a subsistence practice, lacking both the knowledge and equipment to use standard extraction techniques, which exposes the environment to contamination and poses a threat to human health. Paa Kwesi Morrison, partner at legal firm ENSafrica Ghana, explained the damages: “Galamsey will go to any lengths to access the gold inland and underground, and most of the time this is done by manually digging the ground and using toxic substances. In recent years, it has become easier for them to get hold of equipment like excavators, which amplifies the scale of the mining activity and the hazardous impacts. The most visible impact is on the rivers, where illegal miners conduct their activities and sometimes dispose of the waste. The river changes color and composition due to heavy pollution.”
The Ghanaian government has intervened so far by restricting artisanal mining close to water bodies to limit pollution. Ghana has sent the army to enforce the ban. But a comprehensive approach to formalize the sector is not in place, the issue being not only a legal one but also a social and even an ethical one: Before Europeans mined gold in Ghana, rumor was that gold could be fetched from the sand on the beaches. “Locals who have been mining the soil for centuries consider gold to be a natural gift and they see themselves as legitimate owners,” said Morrison.
Under the Ghanaian Constitution everything found beneath the soil or waters of the country belongs to the State. For international mining companies, this means they must apply for a license to operate. For indigenous people, they consider it a birthright to mine what’s theirs, like their ancestors have done for centuries.
Tensions between formal and informal miners, the first group entitled by law, the other entitled by a sense of history, have become even more apparent as exploration ground is getting tighter. Explorers have taken up more ground in recent years as part of a regional exploration boom. Also, the deterioration of security in the north and east of Burkina Faso has pushed orpailleurs south, encroaching on private licenses. These encounters can have tragic results – in 2021, seven illegal miners were killed by police tear gas after infringing the Bissa mine in Burkina Faso.
Different governments have tried to engineer the right programs to formalize artisanal mining activities. In Burkina Faso, the recently formed National Agency for the Supervision of Artisanal and Small-Scale Mining Operations (ANEEMAS) is piloting 26 different projects to find the best ways to regulate the sector. In Nigeria, the government launched a program to buy gold produced by artisanal miners and process this into gold bars for Nigeria’s Central Bank’s vault. The program is called PAGMI and stands for Presidential Artisanal Gold Mining Development Initiative.
The Ghana Ministry of Lands and Natural Resources has also announced plans to launch a “National Alternative Livelihood Program,” which would include a reclamation program of the mined-out areas and offer alternative jobs to illegal mining. “The only sustainable way through which we can prevent conflict is by providing alternative employment opportunities, especially for the youth,” said Morrison, hinting that local content policies could also encourage the integration of artisanal miners.
Nigeria is the first to have required mining license operators to obtain a community development agreement with the host community, through which artisanal miners can be brought into formal employment. Tree Mines Global (TMG), a small-scale mining group operating in Nigeria, shared with GBR their model of co-operation with local communities, many of whom being artisanal miners who have exploited the land of the Kabbu Bunu gold project before it was taken up by TMG: “We have signed a community development agreement to lease the land for 99 years. TMG also made different commitments to support the community with employment and skills development, as we plan to source our workforce from the local community. We decided that we will actually live within the community rather than in separate camps because we wanted to be a part of the locals. The community has a history of artisanal mining, and we include them in our operations,” said Anthony A. Madagua, CEO at Tree Mines Global (TMG).
Images courtesy of Gold Fields