There's a parable in this somewhere about killing the goose that lays the golden egg.
Because of its vast, largely untapped resource wealth, Africa has the opportunity to be the next booming economy, as global drilling and mining operators compete to tap into its riches, but like many other countries grasping to increase their return on others' investments, they may drive industry away because of their greed.
At 89 tonnes produced in 2012, Ghana is the world's 10th largest gold producer and is second on the continent only to South Africa, which produced 170 tonnes last year. But that could be jeopardized by the country's proposal to impose a windfall tax on mining operations generally and gold producers such as AngloGold Ashanti (NYSE:AU) and Gold Fields (NYSE:GFI) specifically, which currently operate at a loss in the west African country. As gold prices have fallen, their projects may become even more uneconomical.
Gold mining in Ghana is expensive because of rising water and electricity rates, which the country blames on unstable natural gas supplies from Nigeria. Anglo's leading but aging Obuasi mine produced 68,000 ounces in the third quarter, but it has all-in sustaining costs of $1,910 per ounce that generated a loss for the miner of $8 million. Gold Fields' Ghanian Damang mine also has higher all-in costs, which were reported at $1,727 per ounce last quarter.
Because of government spending that's running far ahead of receipts, Ghana's budget deficit is approaching 10.2%. It wants to reduce that to 8.5% in 2014, but rather than live within its means, the country wants a quick fix of taxing miners instead. It proposed that solution once before when gold prices were soaring, but failed to find enough support for it, and now that gold has lost a quarter of its value or more this year a tax would seem to be specially counterproductive.
Newmont Mining (NYSE:NEM) is one of the few profitable miners in Ghana, operating the Ahafo mine that produced 144,000 ounces in the third quarter at a significantly lower all-in cost of just $801 per ounce. Yet its operations have suffered from lower grades realized, and though it might be able to absorb higher costs than its rivals, it doesn't mean a tax hike wouldn't be without consequence. Newmont reported reported pre-tax earnings on the project of $80 million, which were down 18% from last year, while recording losses of $3 million on its Aykem project that its still developing.
The problem Ghana faces is that it entered into so-called "stability agreements" with the miners in a bid to encourage development of its resources. Largely signed a decade ago, these agreements set parameters that limit the government's take from the resources mined.
For example, under the country's Mining Act, Ghana had the right to take as large a stake in Newmont Mining as 20%, but waived it along with imposing a value-added tax on the miner. But because the industry has resisted the country's proposals to raise the corporate income tax to 35% from 25% and impose the 10% windfall tax, now the government is reviewing the agreements with the stated purpose of ensuring its "mineral resources are maximized, sustained, and distributed to the good of the country." That's polite-speak for rewriting them, a move that could scuttle the uneasy balance that has existed in the country.
While the Ghanian tax would impose a burden on the miners, it's not nearly as egregious as the 70% windfall tax Ecuador sought to impose on Kinross Gold (NYSE:KGC) that resulted in the miner's walking away from its Fruta del Norte gold project. Even so, Ghana poses problems for Kinross as it wrote down $3.2 billion in assets earlier this year, $111 million of which were related to its operations in Ghana.
The country, though, is merely following the lead of its neighbors such as Ivory Coast, which imposed a 19% tax on profits last year and came after Burkina Faso, Democratic Republic of Congo, and Senegal all levied new taxes. Certainly the plunge in gold's price has played a role in miners cutting back on their operations, but Ivory Coast has seen work under its 81 exploration permits virtually dry up in the past year with the country's trade association, saying maybe just 10% of them at best are active, while Burkina Faso has seen production at some mines fall 25%.
When gold prices are flying high as they were for the past few years, windfall profits taxes seem like an easy way to replenish government coffers, but now that they've fallen around 30% from those peaks, the impositions are a heavy burden, and miners may find their goose is cooked in Africa.