How did Government value all Ghana’s gold royalties at US$1.0bn? – CSOs and experts demand answers
Adnan Adams Mohammed
The Alliance of Civil Society Organisations (CSOs) working on Extractives, Anti-Corruption, and Good Governance have questioned the government through the ministry of finance, Minerals Infrastructure Investment Fund (MIIF) and the Agyapa Royalties Company on how it arrived at the US1.0 billion value of all the royalties that could accrue the country for the next 15 years.
According to the group of CSOs which is calling for the suspension for the deal, the justification from government that the US$1.0 billion is the book value for Agyapa is not the actual valuation for the IPO, doesn’t answer the question.
Already, some financial and resource governance experts have contested the figure given as the estimated value for all the gold royalties of all the over 40 mining concessions (with 12 active companies now). A net present value (NPV) calculations by Kofi Ansah of Ghana’s gold mining royalties pegged the valuation of total royalties at US$2.4 billion at a market price of US$1,600/oz and at US$2.7 billion at a market price of US$1,800/oz.
But, the Member of Parliament for Adentan Constituency and also the Communication Director of the New Patriotic Party (NPP), Yaw Buaben Asamoa has justified that, the US$1 billion valuation put on the Agyapa Royalties deal was only to ‘spice’ up the deal to attract investors on the stock market. Noting that, the money to be recouped from the deal should be between US$1.5 – US$2 billion. However, that doesn’t mean Ghana has to put out the actual figure of valuation out there on the market.
“This doesn’t answer the question. The US$1.0 billion valuation reflects the Ghana government’s assessment of its assets assigned to Agyapa which has been approved by Parliament”, the CSOs asserted in their statement released to the media on Tuesday.
The CSOs expatiated that, in recent communication, the Minister of Finance has stated that Agyapa’s asset value of US$1 billion approved by Parliament will not be the fair value that will be determined by the market. This is where appreciating the difference between net asset value and fair value becomes extremely important. Granted that the market will determine the fair value of the asset, it is important for government to determine the appropriate net asset value for the market to consider what it deems fair. This essentially is what the contract states as US$1 billion.
“Therefore, if the asset is under-valued by government itself, then Ghana cannot expect the market to give a favourable valuation of the IPO which the Minister himself states will be about 0.6 to 3.2 times the asset value. This indicates that Ghana is just gambling on the market for the determination of the value of an important revenue stream.
“The interesting thing for citizens to appreciate is that, through government’s communication it is evident that it is either not paying attention to the revenue flows in the sector, or deliberately undervaluing the assets for unknown reasons. When a direct question was posed to the Deputy Minister of Finance on the amount of royalties received from gold in 2019, he said Ghana received about GHS650 million ($123 million). The truth is that Ghana received GHS 1.06 billion ($200 million) from the big companies under the Chamber of Mines alone.”
The CSOs surprisingly alleged that, “Government has data on the other receipts, yet it decided to under-report the numbers.
“Again, in our meeting with the Ministry of Finance, we were given half year receipts for 2019 of $72 million (GHS 366 million). The underreporting of the 2019 revenue which is the most significant period for revenue projection and emphasis on old royalty numbers is intriguing.”
The Parliament of Ghana passed the Minerals Income Investment Fund Act in 2018 for the management of Ghana’s equity interest mining companies and also receive royalties on behalf of the Government of Ghana. The Minerals Income Investment Fund, which is mandated to invest royalties and revenues it receives on behalf of the government, is also allowed by law to establish Special Purpose Vehicles (SPVs) to help realise its objectives.
As a result, the Minerals Investment Fund established a company called Agyapa Royalties Limited, which will trade 49% of its shares on Ghana Stock Exchange and the London Stock Exchange, with the Government of Ghana, through the Mineral Income Investment Fund, remaining as a majority shareholder.
Below is the full Calculation of the NPV by Mr Kofi Ansah:
ESTIMATION OF THE PRESENT VALUE OF THE AMOUNT TO BE ASSIGNED TO AGYAPA
The factors that go into the determination of the valuation are:
1. Total Projected Gold Production over a chosen period by all the mining companies included in the agreements.
2. Gold Price projections over the chosen period
3. Effective Royalty Rate
4. Discount Rate (for discounting future amounts)
5. Number of years over which valuation is considered.
6. Percentage assigned to Agyapa
Projections of Gold Production
The 2020 forecast of total gold production from 12 gold mining companies currently in production is 3.2 million ounces.
The 2021 production forecast for these same companies is 3.5 million ounces. A number of companies in the group have embarked on expansion projects. In addition four more companies with mining leases that haven’t yet started production but are likely to do so within the next 4 years are included in the agreements. Therefore it is reasonable to assume that production over the 15-year valuation period would on the average be 4 million ounces per annum for the 12 mines.
Additionally, a number of companies at various stages of prospecting are included in the agreements and when they start producing their royalty payments will be included in the Agyapa assignment. Even if it is assumed that only a couple of them would succeed in making commercial finds it will be reasonable to add 0.5 million ounces per annum to the 4 million ounces per annum projected to be produced by the current mining lease holders.
Therefore we use 4.5 million ounces in our valuation computations.
Gold Price Projection
The current gold price is around $1,950 per ounce and has been around that level for the past few months. Current predictions suggest that prices would trend at this level for quite some time to come.
However, predictions from experts on future gold prices over the years have not been known to be very reliable. We therefore do the valuation estimate for two average gold prices: first, a conservative $1,600 per oz, and then a more optimistic $1,800 per oz, over the 15-year period.
The assumptions for computing the valuation are:
1) Annual average production – 4.5 million oz
2) Average gold price – $1,600 per oz/$1,800 per oz
3) Effective Royalty Rate – 4.5%
4) Discount Rate – 6%
5) Valuation Period – 15 Years
6) Percentage Assigned to Agyapa – 75.6%
Annual Royalty Amount = Annual average production x Average gold price x Effective Royalty Rate
= 4.5 Million oz x $1,600/oz x 0.045 = $324 million
(AP) Annual Amount Assigned to Agyapa = Percentage Assigned to Agyapa x Annual Royalty Amount
= 0.756 x $324 million = $245 million
Present Value over the 15 years using the annuity formula
Amount = AP × [ ]
r = 6%
AP = $245 million (for $1,600 per oz gold price)
n = 15
Valuation Amount for $1,600 per oz gold price = $245 million x 9.7 = $2.4 billion
Valuation Amount for $1,800 per oz gold price = $2.4 billion x 18/16 = $2.7 billion
These makes government’s position and justification with the US$1.0 billion valuation is really a case of concern to every independent minded Ghanaian.