Gov’t challenged on valuation of gold royalties in Agyapa Royalties deal
Adnan Adams Mohammed
A financial expert has put up a challenge to
the government on the valuation of Ghana’s mining royalties pegged at US$1.0
billion in the Agyapa Royalties deal which has generated many concerns in the
country.
A net present value (NPV) calculations by Kofi
Ansah of Ghana’s gold mining royalties pegged the valuation of total royalties
at US$2.4 billion at a market price of US$1,600/oz and at US$2.7 billion at a
market price of US$1,800/oz.
But, the Member of Parliament for Adentan
Constituency and also the Communication Director of the New Patriotic Party
(NPP), Yaw Buaben Asamoa has justified that, the US$1 billion valuation put on
the Agyapa Royalties deal was only to ‘spice’ up the deal to attract investors
on the stock market. Noting that, the money to be recouped from the deal should
be between US$1.5 – US$2 billion. However, that doesn’t mean Ghana has to put
out the actual figure of valuation out there on the market.
“The market capitalization of Ghana’s gold is
expected to be between US1.5 billion - US$2 billion. One does not necessarily
have to market its total receivable value”, the MP said.
The Parliament of Ghana passed the Minerals
Income Investment Fund Act in 2018 for the management of Ghana’s equity
interest mining companies and also receive royalties on behalf of the
Government of Ghana.
The Minerals Income Investment Fund, which is
mandated to invest royalties and revenues it receives on behalf of the
government, is also allowed by law to establish Special Purpose Vehicles (SPVs)
to help realise its objectives.
As a result, the Minerals Investment Fund
established a wholly-owned Ghanaian company Agyapa Royalties Limited, which
will trade 49% of its shares on Ghana Stock Exchange and the London Stock
Exchange, with the Government of Ghana, through the Mineral Income Investment
Fund, remaining as a majority shareholder.
Below
is the full Calculation of the NPV by Mr Kofi Ansah:
ESTIMATION OF THE PRESENT VALUE OF THE AMOUNT
TO BE ASSIGNED TO AGYAPA
The factors that go into the determination of
the valuation are:
1. Total Projected Gold Production over a
chosen period by all the mining companies included in the agreements.
2. Gold Price projections over the chosen
period
3. Effective Royalty Rate
4. Discount Rate (for discounting future
amounts)
5. Number of years over which valuation is
considered.
6. Percentage assigned to Agyapa
Projections of Gold Production
The 2020 forecast of total gold production
from 12 gold mining companies currently in production is 3.2 million ounces.
The 2021 production forecast for these same
companies is 3.5 million ounces. A number of companies in the group have
embarked on expansion projects. In addition four more companies with mining
leases that haven’t yet started production but are likely to do so within the
next 4 years are included in the agreements. Therefore it is reasonable to
assume that production over the 15-year valuation period would on the average
be 4 million ounces per annum for the 12 mines.
Additionally, a number of companies at various
stages of prospecting are included in the agreements and when they start
producing their royalty payments will be included in the Agyapa assignment.
Even if it is assumed that only a couple of them would succeed in making
commercial finds it will be reasonable to add 0.5 million ounces per annum to
the 4 million ounces per annum projected to be produced by the current mining
lease holders.
Therefore we use 4.5 million ounces in our
valuation computations.
Gold Price Projection
The current gold price is around $1,950 per
ounce and has been around that level for the past few months. Current
predictions suggest that prices would trend at this level for quite some time
to come.
However, predictions from experts on future
gold prices over the years have not been known to be very reliable. We
therefore do the valuation estimate for two average gold prices: first, a
conservative $1,600 per oz, and then a more optimistic $1,800 per oz, over the
15-year period.
Valuation Computations
The assumptions for computing the valuation
are:
1) Annual average production – 4.5 million oz
2) Average gold price – $1,600 per oz/$1,800
per oz
3) Effective Royalty Rate – 4.5%
4) Discount Rate – 6%
5) Valuation Period – 15 Years
6) Percentage Assigned to Agyapa – 75.6%
Therefore;
Annual Royalty Amount = Annual average
production x Average gold price x Effective Royalty Rate
= 4.5 Million oz x $1,600/oz x 0.045 = $324
million
(AP) Annual Amount Assigned to Agyapa =
Percentage Assigned to Agyapa x Annual Royalty Amount
= 0.756 x $324 million = $245 million
Therefore;
Present Value over the 15 years using the
annuity formula
Amount = AP × [ ]
Where;
r = 6%
AP = $245 million (for $1,600 per oz gold
price)
n = 15
Therefore;
Valuation Amount for $1,600 per oz gold price
= $245 million x 9.7 = $2.4 billion
Valuation Amount for $1,800 per oz gold price
= $2.4 billion x 18/16 = $2.7 billion
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