Miners equity model at ‘breaking point’

Mr. Nick Holland, Group Chief Executive Officer (CEO) Gold Fields Limited says the global mining industry is faced with difficult times, with rising production cost, price-dip and increase in the number of taxes.

 “The equity model is at breaking point, mining investments are under threat. Existing mines are under pressure from price decreases, and cost increases and greater taxes will aggravate the problem.

“Prospective foreign investors are relocating to other destinations, as they appear unenthused about Ghana.

“The companies are also not interpreting the dynamics of mining operations properly to the public, thereby creating the impression that there is much money in the sector.

“The reality is that margins and returns from mining are declining with gold price fallen as low as 1,300 dollars  per ounce,  while operating cash flows are not sufficient to cover investment with the equity model breaking point.

 “The infighting will encourage investors to flee, causing the industry to shrink and hurt all parties,” Holland told participants at a forum on resource nationalism in Accra.

The forum, spearheaded by the Ghana Chamber of Mines in collaboration with Gold Fields Ghana Limited, brought together policymakers, natural resources experts, civil society organisations, think-tanks, government officials, members of parliament, and representatives of regulatory bodies as well as opinion leaders from host resource-rich communities.   

Resource Nationalism is when countries make efforts to extract maximum value and developmental impact for their people from their finite natural resources.

Mr. Holland observed that countries like Chile, Peru, Botswana and Zambia are making strides in addressing resource nationalism and have put in place strategies, programmes and measures to remodel their fiscal margins.

“Protecting investor rights will help countries make the most of their resources,” he said, “equity investors are frustrated,” he added. 

The world’s biggest mining companies are cutting costs, selling assets and scrapping expansion plans to counter lower prices.

The decline in the price of gold in the global market currently is equivalent to about 25%.

The cash cost of gold production went up 25% from US$768 per ounce in the first half of 2012 to US$962 per ounce in the same period in 2013.

The industry has already announced it will undertake massive job-cuts by the end of the fourth quarter of 2013 as part of its strategy to streamline the cost structure and improve business-efficiency.

Newmont Ghana is terminating the employment of approximately 300 of its workers, whilst AngloGold Ashanti’s (AGA) Obuasi Mine is also expected to lay-off about 430 of its workers.

Mr. Holland explained that companies must work with governments, workers, investors and communities to expand the industry rather than fighting over profits -- citing Peru, Chile, Botswana and Zambia as nations where cooperation has been successful.

“The industry can either take the high-road and start collaborating and forming partnerships, which will increase investments; or we can keep on fighting each other for a bigger share of a diminishing pie.”

Mr. Holland argued that governments instead of putting in place stable, competitive tax systems that allow equity investors to earn competitive risk-weighted returns with governments benefitting increasingly from the upside, is rather seeing mining as a means of putting more into their central coffers.

He said all this, including increased pressure from civil society organisation and government, has become a disincentive to critical investments in the industry.

“It is time for honest partnerships and collaborations among stakeholders to ensure that resource nationalism is managed more effectively.

“Government must seek collaborative partnerships with miners who are better able to operate and develop ore bodies and who are good social partners.” 

He urged government to create a climate conducive to responsible investment that provides policy certainty; develop infrastructure and the broader economy; partner to manage input costs; and help miners to procure locally. 

In 2012, research revealed that most governments’ -- especially developing countries’ -- balance sheets were under pressure because they view resource nationalism only in the context of mining profits, Mr. Holland said.

He added that a study of 40 top mining companies in 2012 also indicated that they were operating at a loss due to the general economic hardship -- with some closing down and making people lose their jobs, whereas everybody’s focus is on the resources in the sector.

“Mining investments are under threat with many trillions of dollars that should have been made in the past three years.

Dr. Toni Aubynn, CEO of Ghana Chamber of Mines explained that resource nationalisation has assumed and retained the number-one risk ranking on the side of the investor and operators, while governments around the world have  tended to proffer a mix of increased taxation, a wave of mandated beneficiation, export levies and limits on foreign ownership.

He said it is time for honest partnerships and collaborations among stakeholders to ensure that resource nationalism is managed more effectively.

“Ghana and other stakeholders should therefore draw synergies that would boost the mining sector for mutual benefits.

“The mining industry forms a key component of the economy, and everything should be done to boost investor confidence in the industry,” Dr. Aubynn said.