GLOBALLY, royalty financing in the gold industry has become a significant source of capital yet Africa has a small share despite contributing an estimated 20% of global gold production.
But this will change in view of three trends: African governments are seeing royalties as the ideal revenue stream, royalties are becoming more of an accepted form of financing, and all stakeholders are beginning to appreciate the virtuous cycle that ensues when governments and corporations work together.
As a revenue stream, royalties are the optimal choice for governments (versus taxes, dividends, capital allowance, mining rights, government equity participation, etc). Not only do royalty payments come from the top line (revenues not profits) but returns are more stable and predictable.
An example of a country harnessing the power of gold royalties is Ghana, which in April was recognised as the fastest growing economy in the world and recently overtook South Africa as the largest gold producer in Africa with 130.5 tonnes produced in 2018.
Ghana has an average mineral royalty of 5% and has shown its commitment to ensuring royalties are used in the best possible way through the establishment of a Mining Review Committee that reviews fiscal regimes and mining agreements with a view to ensuring that all Ghanaians gain fairly from the mining sector.
Beyond Ghana, there are plenty of opportunities for smaller and fragile countries to monetise their abundant natural resource endowments, such as Sierra Leone and Liberia. By forward selling their gold and other minerals they would be able to finance the development of the critical infrastructure needed so they can reach their full potential.
But what about corporates? How do they profit from a government-instituted royalty regime? First, general taxation benefits the miner over the long term due to investment in infrastructure, education and health care, all of which benefit the company’s local workforce. Moreover, because royalties are relatively simple to forecast, there is transparency. Lastly, a corporate earns its license to operate when it ensures the wealth it creates is inclusive.
Royalties are also beneficial to miners when they are looking for financial solutions to develop and/or expand their mines. Consider that a royalty agreement with an investor does not dilute its existing shareholders nor adds significant and onerous layers of debt to its balance sheet. In my experience in the role of financier, royalties have proven themselves to be effective and efficient, partly because they do not require government regulatory approvals nor are they dependent on an exit strategy.
Royalty regimes will only become more established once there is dialogue. Ahead of making any tax regime modifications, governments must engage with industry players (including DFIs and corporates) to ensure their changes will not prevent future investment into their country and to confirm the regime will be simple to follow for current operators. Moreover, governments need to be as transparent as possible about how the funds will be reinvested.
I’m pleased to see these trends today and believe they will make a world of difference for the mining industry. By working together corporates and governments can build a better mining environment that works for everyone – corporations will have a stable and sustainable platform for growth and African counties can access more capital as well as diversify and improve their economies directly from their mineral wealth.
Osam Iyahen, Head of Natural Resources, Africa Finance Corporation