Ghana now Africa’s largest gold producer, but reforms await

Ghana’s gold output of 4.8 million ounces in 2018 surpassed South Africa’s 4.2 million ounce total for the first time. But beating South Africa, where mining is plagued by industrial militancy and the deepest mines in the world, was always likely to happen sooner or later.

• Academics at the University of the Witwatersrand have argued that gold ore grades in South Africa have been in constant decline over the past 80 years.
• Minerals Council South Africa says that 71% of gold mining operations in the country were either marginally profitable or lossmaking in 2018.

According to the 2019 Mining in Africa Country Investment Guide (MACIG), Ghana’s high tax burden has stalled exploration projects and deterred new investors, leading to a dearth of greenfield exploration.

The county’s mining code, the report argues, favours bigger companies with deeper pockets, and has tended to encourage brownfield exploration.

• Sulemanu Koney, chief executive of the Ghana Chamber of Mines, called in in MACIG report for an increase in greenfield investment in Ghana.
• Koney also warned that Ghana’s attractiveness as a destination for mining investment is waning in comparison to neighbouring countries.
• Ghana, he said, needs to raise the visibility of its other mineral resources such as manganese, bauxite, aluminium and iron, rather than continuing to rely heavily on gold.
• The government, he argued, should remove the VAT on exploration, drilling and laboratory services.

Outlook for gold

For now, gold miners in Ghana such as Gold Fields, Newmont, Kinross and AngloGold Ashanti are well placed to benefit from a bullish consensus on the future price of the yellow metal.

Gold remains cheap compared with global equities, copper or the S&P 500, according to research from Deutsche Bank in September. Continued central bank easing and persistent geopolitical risks all point to continued strength, the bank says.

Deutsche Bank identifies powerful long-term factors that are likely to support the gold price.

• Aging populations and lower birth rates in many developed countries already drives greater demand for assets perceived as safe
• A higher ratio of dependent retired people to the working population raises the burden of social programs on the economy, and reduces the natural rate of interest.
• That, in turn, means that government bonds are unlikely to pay much of an income – or even any income at all.

Deutsche Bank argues that gold could rise from its current price of $1,500 per ounce to $1,800 in a global recession.  Yann Alix, head of global mining at Ashurst in London, agrees that if the current uncertainty in global markets continues, then gold is “likely to remain a safe bet.”

For the individual investor, Alix cautions that while mining stocks can mean bigger returns, buying gold itself is generally less risky: it avoids exposure to the individual risks of each producer which are “time consuming to track and understand”.

Bottom Line: The danger for Ghana is that continued gold price strength will make it tempting to ignore the need for economic diversification or mining code reform.