Risk and Reward in Ghana’s Agyapa Gold Royalties Deal: Eight Points for Consideration
Co-Authors: Nicola Woodroffe, David Mihalyi, Nafi Chinery
In an attempt to raise capital in difficult times, Ghanaian officials have embarked on a plan to leverage the country’s gold royalties in what the government has called an “innovative financing solution.”
Under the plan, the government has created a royalty company and assigned a substantial portion of its future gold royalties to this company. It hopes to raise non-debt cash up front by floating almost half its shares in this company on the London and Ghana stock exchanges.
The Agyapa deal might be a creative solution to Ghana’s current economic constraints, but it is also fraught with risks. Most of Ghana’s current gold production is included in the deal. Stakes are high.
Further consideration and public consultation might create the opportunity to strengthen the deal for the benefit of Ghana.
In an attempt to raise capital in difficult times, Ghanaian officials have embarked on a plan to leverage the country’s gold royalties in what the government has called an “innovative financing solution.” Under the plan, Ghana will assign a significant portion of its future gold mining royalties to an offshore company it has created in return for cash up front (estimated at approximately USD 500 million). The government plans to raise the money by listing the company on the London and Ghana stock exchanges while retaining majority ownership. But the news has raised alarm among civil society organizations. The largest opposition party has promised to repudiate the deal should it win the elections later this year, while the special prosecutor has called for a halt to the plans until completion of a corruption risk assessment.
Despite the current outcry, the plan has been in the works since 2018 with the passage of the Minerals Income Investment Fund Act. The act established a corporate government entity called the Minerals Income Investment Fund.
The fund has the right to receive and invest mineral royalties and other related income that Ghana receives from mining companies. Pursuant to the act, the fund created a royalty company called Agyapa Royalties Limited (Agyapa) in Jersey.
Under a series of complex agreements approved by parliament in August, the fund has allocated the rights to just over 75 percent of royalties from several gold mining leases to Agyapa’s wholly owned Ghana subsidiary, ARG Royalties Ghana Limited (ARG) for $1 billion. These leases represent most of Ghana’s current gold production.
The fund has assigned this money to Agyapa as consideration for Agyapa’s shares. The fund plans to then raise capital by selling 49 percent of these shares on both the London and Ghana stock exchanges in an initial public offering (IPO).
Structure of Ghana’s Agyapa deal:
The government has touted the deal as a means to raise non-debt funding for development while dismissing suggestions that this move is driven by desperation. Like so many others, though, Ghana’s economy is in dire straits amid the pandemic.
While governments in richer countries have responded to the economic crisis with large spending programs and plentiful credit to businesses, Ghana’s options are more limited. Its budget has been under stress for some time, dragged down by immense debt (nearly 70 percent of GDP). The government had borrowed, in part, in anticipation of growing petroleum revenues (which reached over 10 percent of budget revenues last year), but is now finding it increasingly difficult to repay after the oil price collapse. Conventional credit is becoming increasingly expensive to raise.
Ghana has experimented with unconventional borrowing in the past, including taking multiple resource-backed loans in exchange for bauxite, cocoa and oil cargoes. It also collateralized portions of revenue from value-added tax to fund an education trust fund in 2018.
But gold prices have soared during the crisis, with prices exceeding $2,000 per ounce in August. The government has indicated it is keen to capitalize on this moment to fund infrastructure and human capital development without incurring repayment obligations or interest payments.
The Minerals Income Investment Fund Act may lay the groundwork for creative solutions to Ghana’s economic needs. However, the deal at hand raises a number of concerns as to whether the terms represent the best deal for Ghana, even under present circumstances. Government officials may wish to:
1. Consider reducing the scope of the agreement
Given the novel arrangement, the government might have chosen to start small. Instead, the deal is expansive in scope and open-ended (a concern initially raised by Ghana’s attorney general). The government will allocate 75.6 percent of royalties from 16 areas under production or development. (Together these currently comprise 48 mining leases.) Based on our research, these mining leases essentially cover all of Ghana’s current industrial gold production. The deal also includes prospecting licenses and any mining leases that may be later granted in the areas covered by these prospecting licenses. This means the volume of gold production involved in the deal is as yet unknown. The duration of the arrangements is equally indeterminate. The arrangements would apply until the last of the mining leases has expired or been terminated without any further extension or renewal. The deal could therefore endure for decades.
While the government has pointed to private-sector precedents, commodity-backed sovereign financing more often takes the form of resource-backed loans. As a point of comparison, typical resource-backed loan agreements studied by NRGI set out either the total volume or total value of resources and interest to be repaid. This makes their valuation much more straightforward than in this case. The Agapya arrangement runs the risk of being mispriced/undervalued by both the government and investors. Moreover, by offering as much as 49 percent in the IPO, the government also loses the potential benefit of selling additional shares later at a higher price while retaining majority ownership.
A deal with a more limited scope would be less risky for Ghana.
2. Consider safeguards against the risk of undervaluation
Some analysts have argued that the $1 billion valuation put forward by government is too low. At current gold prices, Agyapa may annually receive $150 to $200 million (our estimate) in revenues net of administrative fees, for many years to come. Depending on the market’s assumptions on both price and volume of future gold production, there is indeed potential that investors value this deal at a much higher price. In a traditional IPO, the offering price is set by investment banks (the underwriters) based on the amount of money the company wants to raise and a gauging of investor interest. If the actual price at which the shares start to trade on the open market is higher than the offering price, the profits accrue to IPO investors (mostly large institutional investors or clients of the investment banks). While the government’s shares would also appreciate in value, the government would only realize this gain by selling additional shares and further reducing its level of ownership. Given the uncertainties, Ghanaian officials should consider an approach that might better enable the government to capture the market-determined value of the shares. This might be done through a Dutch auction IPO or other mechanism, though such other approaches also come with their own risks. The government should therefore explain how the approach it chooses best allows it to capture the true market value of the shares.
3. Disclose assumptions underlying the valuation of the deal
The price at which Agyapa shares are ultimately sold will be closely watched. But the basis for evaluating the deal should not be whether the $1 billion valuation is ultimately mispriced or not. Rather, the key financial question is whether the capital raised through these means is ultimately any cheaper than other forms of available financing.
One way to compare would be to calculate the internal rate of return (IRR) from the stream of forgone royalties. Analysts could then readily compare that figure with the interest rate the government pays on conventional loans to assess value for money. If the IRR is much higher than the interest rate(s) the government is paying, this would indicate the deal is actually more expensive for the government than conventional loans. No one can know this figure for sure until the deal ends (i.e., once royalties are no longer being paid out to Agyapa). But the government should disclose its own modelling and reveal what interest rate or IRR it has used in its current valuation.
4. Protect the right to adjust fiscal terms
A stability clause included in at least one version of the royalties investment agreement prevents changes to the royalty rate that would have a “material adverse effect” on ARG (since investors would be relying on the royalty stream). For possibly decades to come, this clause would limit the government’s ability to reduce royalty rates for the mining leases included in the agreement, even if such a reduction would, for example, encourage companies to maintain gold production in times of financial difficulty. Meanwhile, Ghana’s mining act caps stability agreements with mining companies at 15 years.
The agreement caps the royalty rates at a rate specified in the agreement for each mining lease. Presumably this means the government could raise the royalty rate, but Agyapa would not be entitled to royalties above the agreed rates. At the very least, the agreement should specify that the government may increase fiscal terms but that Agyapa is not entitled to benefit from any increases above the specified rate, for the avoidance of doubt.
5. Consider including anti-dilution provisions and a dividend policy to preserve influence over Agyapa
The government of Ghana has asserted that it is not mortgaging future revenues for a lump sum of cash today. Per the government, as 51 percent shareholder the Minerals Income Investment Fund will hold two seats on the board of Agyapa, will exercise its right to vote for the other directors, and will receive a majority of the future dividends. However, an agreement establishing the relationship between the fund and Agyapa includes several clauses that may limit the fund’s (and therefore the Ghanaian government’s) future control over Agyapa’s decisions. These clauses include commitments by the fund and the government to not use voting rights to prevent Agyapa from making decisions for the benefit of the shareholders of the company as a whole or in a manner that would require the company to make decisions solely for the benefit of the fund or Ghana.
The Ghanaian government’s level of control over the board is also uncertain. Under the agreement the fund is able to appoint two directors as long as it maintains at least 30 percent equity in the company, but a majority of the directors must be independent. The fund is able to vote on independent directors as a shareholder. However, the relationship agreement prevents the fund from exercising its voting rights against a shareholder resolution to appoint any independent director and from using voting rights to remove any independent director appointed by the board. The agreement defines “independent director” using the definition set out in the U.K. Corporate Governance Code, which includes “represents a significant shareholder” as a factor likely to impede independence. It is also not clear that Ghana will be able to retain majority ownership should the board seek to raise additional equity financing in future to expand the business. The agreements scrutinized by parliament and the company’s articles of association do not contain any provisions that would prevent the company from reducing or “diluting” the fund’s percentage ownership by issuing additional shares.
In general, the relationship agreement is meant to establish Agyapa as an independent commercial entity, free to pursue its own profitability without considering Ghana’s budgetary needs. It is questionable whether Agyapa will be able to diversify its portfolio by acquiring new assets (a stated government ambition for the company) while at the same time distributing proceeds from the IPO to the fund and distributing meaningful dividends annually (at least at the outset) while the fund maintains 51 percent ownership in perpetuity.
Nevertheless, anti-dilution provisions (for example, requiring approval of the fund-appointed directors to issue additional shares) and a clear dividend policy might provide Ghana with some protection of its interests, although it might also affect Agyapa’s commerciality.
6. Consider the risk of severe knock-on effect on other loans
By pledging one of Ghana’s larger and more reliable revenue streams to Agyapa investors for years to come, the government will have fewer funds with which to repay Ghana’s existing domestic and international lenders. Investors closely watch the ratio of interest payments to government revenue, and Ghana is already performing quite poorly in this respect. (Half of its revenues now go toward interest payments, a key consideration given by S&P for its recent downgrade.)
If the Agyapa deal is successful, future governments may be tempted to raise further funds on the back of other sources of income. If lenders ultimately perceive that Ghana’s debt repayment capacity is deteriorating, they will demand higher interest when rolling over existing, much larger loans. In such a scenario, any benefit from the Agyapa deal may be outweighed by overall borrowing costs.
The government should clarify to the public how it plans to guard against such risks and ensure that additional costs for medium-term financing needs do not outweigh any short-term gains.
7. Ensure parliamentary oversight of use of mineral income flowing to the fund
The government has said that the proceeds from the deal will finance infrastructure and socioeconomic development. Plans floated include new health facilities, developing a university jewelry course, building a mineral refinery, and developing road networks in mining communities. However, it is unclear whether monies will be remitted to the treasury and spent through the normal budgetary process, subject to parliamentary oversight. The act only requires the fund to distribute the investment income it receives in accordance with an investment policy statement and any directives by the minister of finance. To ensure the most effective use of the capital raised, the government should clarify the process for investing the proceeds from the IPO and ensure necessary safeguards for spending it wisely.
8. Build consensus
Ghana’s present challenges warrant unconventional thinking. But the many open questions around the deal and the strong opposition in parliament and by civil society actors may actually deter investors and lead to a much poorer valuation than could otherwise be achieved with consensus. Further public consultations could create the opportunity to improve the structure of the Agyapa deal and close gaps in the act to ensure that the people of Ghana ultimately benefit from their resources. After all, under the constitution Ghana’s minerals are held in trust for the people of Ghana.
Nicola Woodroffe is a senior legal analyst with the Natural Resource Governance Institute (NRGI). David Mihalyi is a senior economic analyst at NRGI. Nafi Chinery is NRGI’s West Africa (Anglophone) regional manager.