Rising gold prices and the dwindling appeal of South Africa as a production source should be the perfect backdrop for Ghana to extend its lead as Africa’s biggest producer of the yellow metal.

Gold has risen about 30% over the last 12 months even as mining majors have sought to diversify away from South Africa, due to problems such as electricity supply, labour relations and diminishing yields from deep mines.

It looks like a perfect scenario for Ghana. Fitch Solutions expects gold production in Ghana to grow 9% in 2021, after COVID-19 held back 2020 growth to just 2%. But the threat of resource nationalism under re-elected president Nana Akufo-Addo could undermine his country’s ability to keep pole position.

Resource nationalism is not unique to Africa and is also faced by mining investors in Russia or South America. Yet Ghana’s need to raise cash from royalties as fast as possible may reduce its attractiveness to majors. Akufo-Addo’s re-election as president will mean a continuation of the agenda to monetise future royalties, posing risks to mining investment in Ghana, says Fitch.

Ghana last year delayed a planned initial public offering (IPO) of Agyapa Royalties, the government-financed fund which holds the country’s gold mining revenue, under political pressure from the opposition. If a listing of Agyapa is accomplished, “international miners could face increasing threats of resource nationalism as the government could seek to increase gold mining royalties. “If Ghana wishes to prosper, it should avoid the resource nationalism curse at all costs,” says Steve Hanke, professor of applied economics at Johns Hopkins University in the US.

Hanke expects the gold price to enter a bullish “supercycle” this year. But the benefits to producing countries could be reduced by resource nationalism which “has doomed the development of most of Africa”, he argues.

The continent “has some of the greatest mineral potential on the
planet but is also fraught with massive political risk,” says Hanke. For investors, “the safest bet would be to go with the larger and intermediate companies with the financial strength and management expertise to navigate political risk,” as well as Environmental, Social and Governance (ESG) issues, says Hanke, who is also experienced as a commodity trader.

AngloGold Ashanti and Gold Fields fit the bill, he says. These offer exposure to production in Ghana as part of diversified portfolios. Phase 2 completion of AngloGold Ashanti’s Obuasi project is likely to contribute to higher Ghanaian production this year, while Gold Fields has joint-venture mines at Tarkwa, Damang and Asanko.

South African decline

The deteriorating security situation in West Africa represents risks for extractive operators across the region, says Alexandre Raymakers, senior Africa analyst at Verisk Maplecroft. Jihadist groups currently operating in Mali, Burkina Faso and Niger are the main security threat to gold mining operations in Ghana, he says. to maximise the return”, Fitch argues.

Still, Ghana has already deployed significant security assets to the northern border area, which is distant from most major mining operations. This should be enough to contain the threat, Raymakers says.
In the short run, Hanke prefers South African gold miners, due to their large volumes, with high costs meaning that the they get the greatest leverage from an increasing gold price.

Further out, he sees further decline for the South African industry in the absence of political reform. Most South Africa-based mining majors have dramatically decreased exposure in their home country. Regulatory certainty must be restored, he argues.

The Mining Sectors Empowerment Code must be clarified and the ‘once empowered, always empowered’ principle needs to be confirmed, says Hanke. “This will only happen when the ANC loses its effective monopoly on power.”
Until then, dilution of share and economic rights is permitted, which will continue to reduce the South African mining sector’s attractiveness to foreign investment, he argues.

“In the long run, I would favour Ghana because political risk in South Africa seems to be increasing,” he says. “Ghana appears to be more stable with prospects for an improved political risk environment.”

Bottom line

Squeezing the miners for more cash is tempting but will risk Ghana’s leadership position in African gold mining.