The Sunday Mail
Business Editor
RESOURCE-rich countries have found a tonic to address their fiscal deficits: They are now adjusting royalties and demanding a significant claim in mining ventures.
Big mining companies are naturally resisting. Sceptics also say the new thrust towards resource nationalism is likely to put the finances of emerging economies – the majority of whom pushing the new measures – into jeopardy. African countries, in particular, have for the past 14 years been affected by low royalties most of which were set in consultation with the World Bank.
African Development Bank vice-president and chief economist Dr Mthuli Ncube said in a June 2012 report some of the royalties, particularly for the gold sector, were pegged as low as three percent in some African countries.
He further demystified the assumption that an increase in royalties will naturally alter a mining company’s profits. The report was based on an analysis of 39 gold mines based in Botswana, Burkina Faso, Ghana, Guinea, Mali, Niger and South Africa between 2008 and 2010.
Most interestingly, Dr Ncube noted that while the case for low royalty rates was based on a coherent argument, it was seldom backed by empirical evidence. It was generally discovered that royalties per unit of production have no significant effect on both production cost and profit.
“The empirical findings in this brief provide suggestive evidence that there is room to increase royalty rates in gold mining . . . there is evidence that modest increases in royalty rates have limited impact on profitability of mines,“ he concluded.
Since 2010, most African countries have begun reviewing their royalties in order to claim a sizeable chunk from their mineral resources.
BURKINA FASO: The country indexed its royalty rates such that the effective rate varies positively with commodity (gold) prices. Specifically, the minimum royalty rate is 3 percent, which increases to 4 percent for gold prices between US$1 000 per ounce and US$1 300 per ounce, and to 5 percent for prices above US$1 300 per ounce.
GHANA: The West African country previously had an ad-valorem royalty rate that ranged from 3 percent to 6 percent for gold in its 2006 Minerals and Mining Act. Most companies, however, paid the minimum rate of 3 percent by taking advantage of loopholes that allowed for significant deduction of expenses. A flat royalty rate of 5 percent was introduced in 2010.
MALI: Mali’s 1999 Mining Code, crafted with World Bank assistance, instituted a royalty rate of 3 percent for precious metals. This was subsequently reviewed.
SOUTH AFRICA: It is claimed that South Africa was the only major mining country on the continent without a royalty on mining. A profit-based royalty was subsequently introduced in 2008.
