Rising taxes affect mining sector

Global ranking agency Fitch Ratings has painted a gloomy macroeconomic outlook in western economies, and China’s growth related worries, will continue to impact commodity prices.

After initially falling in late 2011 commodities have remained weak, while mining cost inflation is likely to persist, driven by wage inflation and rising energy prices, said Fitch.

“But in the coming year we expect higher costs to be much more evident in miners' earnings,” said the agency.

In Ghana, the mining industry in 2011 returned about US$3.1 billion out of the US$4.6 billion dollars of their mineral revenues through the Bank of Ghana and the Ghana Commercial Bank against the statutory requirement of 25 per cent.

The industry has also injected more than 27 million dollars to support their communities of operations and other public services.

However, critics have not spared the sector any comfort. They point to the lack of transparency concerning the financial remittances mining companies make to government institutions, coupled with the inability of revenue departments to audit the complicated accounts of the multinational mining companies.

Indeed, the mining industry is an attractive target for government as it seeks to expand its tax revenues, especially since gold prices are at an all-time high. Gold mining tends to be messy for the environment, does not employ the hordes of workers that the agricultural and services sectors do and, for the past century has been seen as an “enclave” economy which has failed to link up sufficiently with the national economy as a whole and thus spread the benefits of its growth widely enough.

But it is hard to convince the critic that the mining industry is going through hard times. After all, gold prices are currently hovering at about US$1,600 per ounce, which is a slight retreat from the peak of a little over US$1,800 reached in 2011.

The mining industry is suffering from tough fiscal regimes much to the discomfort of the operators. In early 2011, government increased royalties on mining from a range of three per cent to six per cent, to the current flat rate of five per cent.

The argument is that given some latitude, the mining companies mostly get away with paying the low end three per cent, even when they were supposed to pay close to the high-end six per cent, and so the five per cent flat rate was simply to stem deliberate royalties evasion.

Corporate tax for mining companies has been increased from 25 per cent to 35 per cent. Capital allowance has been changed from 80 per cent in the first year and 50 per cent on declining balance to a straight line amortization over five years at 20 per cent per year, which government claims is the norm for extractive industries.

Mining assets will now be ring-fenced for the purposes of determining tax payable which means mining companies must treat each of its operations separately for tax purposes and can no longer write down its tax obligations from one profit making mine against the losses made at another. Government defends this saying that mining companies have taken advantage of the old system to reduce their tax obligations.

NEWMONT's ARGUMENT

In their 64-page report on the impact of Newmont’s Ahafo Mine on its local economy and the nation as a whole, renowned political economist, Prof. Ethan Kapstein and his co-author, Dr. Rene Kim, a former MIT scholar, argued against increasing the royalties paid by mining companies and noted that “The life of a mining project is a function of the price of the commodity on the one hand and the cost of production on the other.”

The writers argue that as the commodity rises in price, the life of the project increases as, for example, it becomes profitable to mine lower grades of ore or higher cost ore, cautioning; “But in this context it is important to recall that commodity prices are volatile: they go up, but they also come down. When they fall below the cost of production the project is, of course, no longer viable.”

They specifically state “If we suppose that the operating cost (which does not include capital expenditure, exploration and other non-operating costs) of the Ahafo mine is in the neighborhood of US$500 – US$600 per ounce then the mine would not have been profitable before 2006. However, production costs prior to 2006 were much lower too,” adding, “In any event, it took 16 years from the first gold discovery at Ahafo to the first gold production in 2006.”

“When seen from this perspective, an increase in royalty payments, for example, effectively acts to decrease the life of the mine (and therefore its benefits). In setting royalties, governments must, therefore, consider the influence of their policies on the life-span of the mine,” Kapstein and Kim warn.

REVENUE FROM GOLD MINING

Gold mining is a significant activity for Ghana. In 2009 alone, Ghana’s Internal Revenue Service (IRS) collected US$243 million in taxes from the mining sector, equivalent to almost 20 per cent of total tax collections.

Aside employing more than 17,000 workers while averaging job growth to over four per cent a year since 2002, overall, the mining sector contributed 6.3 per cent to Ghana’s 2009 Gross Domestic Product (GDP) and 43 per cent of its exports.

The contribution of the mining sector to Ghana’s GDP, according to the report, has tripled from slightly less than two per cent in 1991 to 6.3 per cent in 2009 (5.9 per cent in 2008). With a value of US$2,551 million in 2009, gold represented 97.4per cent of Ghana’s mineral exports and 43.4 per cent of Ghana’s total exports.

Mining is highly complex and capital intensive. Interruptions through review of existing fiscal regimes, especially without due consultations, distort the free flow of operations which is detrimental to the mining business.

Meanwhile, in 2009, Newmont alone produced 531,470 ounces of gold (about 15 tonnes), equivalent to 17.0 per cent of Ghana’s total production, while corresponding revenues were US$528 million or 20.7 per cent of Ghana’s gold exports. Ahafo’s proven and probable gold reserves, as of 31 December, 2009, were estimated at 9.1 million ounces.

Newmont’s US$528 million of gold exports represented nine per cent of Ghana’s total exports in 2009. Of this, $196 million remained in the Ghanaian economy and was spent on local procurement, payments to government, and salaries.

The payments to the government (i.e. taxes and royalties) amounted to nearly US$40 million, which is equal to nearly one per cent of the government’s domestic revenues. The US$75 million of capital investments made by Newmont are equal to about 4.5 per cent of the US$1.67 billion in direct investments in Ghana recorded in 2009 by the Bank of Ghana.

This report examines Newmont’s gold mining activities in the Brong-Ahafo Region of Ghana and attempts to answer questions relating to the benefits of those activities to Ghana’s socio-economic development, whether Ghana is making good use of its gold wealth to aid in the process of development and if Newmont is a good partner in that endeavour among many others.

Newmont is fully owned by Newmont Mining Corporation (NMC), a publicly traded company with headquarters in Denver, Colorado and one of the largest gold producers in the world with assets in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand, and Mexico.

Newmont’s Ghana operations are very significant to NMC, because its gold reserves are estimated to comprise almost 20 per cent of the corporation’s assets worldwide.

The mining operator advised the government to look at the total life-cycle contribution of mining operations other than rent-sharing and gives an ominous admonition: “Excessive taxation in mining could be disruptive and kill the hen that lays the golden eggs.

Story by Suleiman Mustapha/Graphic Business