Finance Minister, Ken Ofori Atta has tasked the newly formed board of the Minerals Income Investment Fund, to appropriately address concerns raised by critics and stakeholders of the Agyapa Royalty Deal before it is re-submitted to Parliament.
This he said, is to make the deal operational and fit for purpose.
The Finance Minister made the call when he inaugurated the Board in Accra on Tuesday, October 12, 2021.
This is the clearest indication so far that government has not given up on its major initiative aimed at monetization a large part of Ghana’s expected incomes from gold mining royalties through the establishment of a special purpose vehicle.
Addressing the Board of the Minerals Incomes and Investment Funds (MIIF), Mr Ofori-Atta said government has taken note of concerns raised against the bill and the Attorney General will address them before taking it back to Parliament.
“You must continue with the work that has been done following the theme of the budget ‘Continuity, Consolidation and Completion’ and address and overcome all the concerns against the Agyapa transaction, so we can go to the market and create the first mineral royalty company in Ghana and in Africa because it is good for Ghana,” he said.
He charged them to continue with the work that has been done in fulfillment of the theme of the 2021 budget, ‘Continuity, Consolidation and Completion’ in order to launch the Deal on the international market as soon as possible.
According to the Minister, “I’m unequivocal that it is the way to go in terms of monetizing our minerals and finding a way to leverage it to reduce the level of debt of the country and move it into equity. And with the concerns that were raised, we should be able to address them and move forward.”
Importantly though there are indications that government has accepted the need to review the valuation of the proposed new SPV upwards. The low valuation of the proposed company was the major sticking point for its critics many of whom suspected that this was deliberately done to enable chieftains of the incumbent government and their allies buy into Ghana’s expected future income streams (and investments made with those income streams) on the cheap.
However there are indications that government may accept a valuation for Agyapa’s stock market flotation closer to the US$1 billion computed by independent local and international financial analysts than the US$500 million initially proposed by government. Indeed it is instructive that the MIIF’s chief executive, after the Board’s inauguration spoke of Ghana getting some US$1 billion out of the planned stock market listing rather than the US$500 million target originally declared by government which set off the controversy that ultimately resulted in the suspension of the initiative following the very public resignation of Martins Amidu as Special Prosecutor
The Agyapa Royalties deal, was approved by Parliament but was withdrawn by government following a Corruption Risk assessment by the former Special Prosecutor, Martin Amidu.
The Corruption Risk Assessment revealed that there was reasonable suspicion of bid-rigging and corruption activity in the selection process of the deal.
It was also discovered that the transaction was embroiled in infractions regarding relationships and conflict of interest
On August 14, 2020, Parliament approved the Agyapa Minerals Royalties Investment Agreement and four related documents to allow for the monetisation of Ghana’s future gold royalties.
Under the agreement, Agyapa Mineral Royalties Limited has been incorporated in Jersey near UK to receive and manage royalties from 16 gold mining leases over the next 15 years or so.
In exchange, the firm would list on the London and Ghana Stock Exchanges (GSE) and raise at least US$500 million for government to invest in infrastructure, health and education.
The listing would allow private people to buy a 49 per cent stake in the firm.
However, some 22 civil society organizations called for a suspension of the deal, insisting it was not in the interest of Ghana.
Indeed there is still lots of controversy that will need to be resolved before civil society as represented by the consortium of CSOs accepts it; and even after that further opposition can be expected from the political opposition which now has a much stronger hand in parliament than it had last year
In an attempt to raise capital in difficult times, the President Nana Akufo Addo administration have embarked on a plan, designed primarily by Ken Ofori-Atta to leverage the country’s gold royalties in what the government has called an “innovative financing solution.” Under the plan, Ghana will assugn a significant part of its future gold mining royalties to an offshore company it has created in return for cash upfront – originally estimated by government at about US$500 million.
The government plans to raise the money by listing the company on the London and Ghana stock exchanges while retaining majority ownership. But the news quickly raised alarm among CSOs even as the opposition National Democratic Congress promised to repudiate the deal should it win the elections later this year (which it eventually lost). The Special Prosecutor then called for a halt to the plans until completion of a corruption risk assessment which, when subsequently carried out found it to be flawed in both design and execution.
Actually, the plan has been in the works since 2018 with the passage of the Minerals Income Investment Fund Act. The act established a corporate government entity called the Minerals Income Investment Fund. The fund has the right to receive and invest mineral royalties and other related income that Ghana receives from mining companies. Pursuant to the act, the fund created a royalties company called Agyapa Royalties Limited (Agyapa) in Jersey. Under a series of complex arrangements approved by parliament in August, the fund has allocated the rights to just over 75 percent of royalties from several gold mining leases to Agyapa’s wholly owned Ghana subsidiary, ARG Royalties Ghana Limited (ARG) for $1 billion. These leases represent most of Ghana’s current gold production. The fund has assigned this money to Agyapa as consideration for Agyapa’s shares. The fund plans to then raise capital by selling 49 percent of these shares on both the London and Ghana stock exchanges in an initial public offering (IPO).
The COVID19 pandemic brought the plan to the front burner as gold prices have soared during the crisis, with prices exceeding US$2,000 an ounce at one point last year per ounce in August; indeed this triggered the commencement of the execution of the long standing plan. The government indicated that it is keen to capitalize on this gold price surge to fund infrastructure and human capital development without incurring repayment obligations or interest payments.
Now that the Finance Minister has revealed that the initiative has been sent back to the Attorney General for redrafting to take the complaints of dissatisfied stakeholders such as the CSOs into consideration, a number of issues will have to be at least considered
For one thing, given the novel arrangement, the government might still chose to start smaller than originally planned. Indeed, as currently conceived, the deal is expansive in scope and open-ended. The government will allocate 75.6 percent of royalties from 16 areas under production or development. (Together these currently comprise 48 mining leases.) These mining leases essentially cover all of Ghana’s current industrial gold production. The deal also includes prospecting licenses and any mining leases that may be later granted in the areas covered by these prospecting licenses. This means the volume of gold production involved in the deal is as yet unknown. The duration of the arrangements is equally indeterminate. The arrangements would apply until the last of the mining leases has expired or been terminated without any further extension or renewal. The deal could therefore endure for decades.
While the government has pointed to private sector precedents, commodity-backed sovereign financing more often takes the form of resource-backed loans. As a point of comparison, typical resource backed financing studied by Natural Resource Governance Institute set out either the total volume or total value of resources and interest to be repaid. This makes their valuation much more straightforward than in this case. The Agyapa arrangement conversely runs the risk of wring valuation by the various stakeholders, a worry at the centre of the controversy it has created/
Moreover, by offering as much as 49 percent in the IPO, the government also loses the potential benefit of selling additional shares later at a higher price while retaining majority ownership.
A deal with a more limited scope would be less risky for Ghana points out the NRGI.
Some analysts argue that the US$1 billion valuation put forward by government is too low. At current gold prices, Agyapa may annually receive US$150 to US$200 million in revenues net of administrative fees, for many years to come. Depending on the market’s assumptions on both price and volume of future gold production, there is indeed potential that investors value this deal at a much higher price.
In a traditional IPO, the offer price is set by investment banks (the underwriters) based on the amount of money the company wants to raise and a gauging of investor interest. If the actual price at which the shares start to trade on the open market is higher than the offering price, the profits accrue to IPO investors (mostly large institutional investors or clients of the investment banks). While the government’s shares would also appreciate in value, the government would only realize this gain by selling additional shares and further reducing its level of ownership. Given the uncertainties, Ghanaian officials are being asked to consider this approach that might better enable the government to capture the market-determined value of the shares. This might be done through a Dutch auction IPO or other mechanism, though such other approaches also come with their own risks. The government will therefore have to explain how the approach it chooses best allows it to capture the true market value of the shares.
The price at which Agyapa shares will eventually be sold – if the deal actually goes through at its second attempt – will be closely watched. But the basis for evaluating the deal by disgruntled stakeholders may not be whether the valuation is ultimately mispriced or not. Rather, the key financial question they are asking is whether the capital raised through these means is ultimately any cheaper than other forms of available financing.
Another controversial aspect of the deal that will have to be revisited is that if the stability clause embedded in the original structure.
A stability clause included in at least one version of the royalties’ investment agreement prevents changes to the royalty rate that would have a “material adverse effect” on ARG (since investors would be relying on the royalty stream). For possibly decades to come, this clause would limit the government’s ability to reduce royalty rates for the mining leases included in the agreement, even if such a reduction would, for example, encourage companies to maintain gold production in times of financial difficulty. Meanwhile, Ghana’s mining act caps stability agreements with mining companies at 15 years.
The agreement caps the royalty rates at a rate specified in the agreement for each mining lease. Presumably this means the government could raise the royalty rate, but Agyapa would not be entitled to royalties above the agreed rates.
The government of Ghana has asserted that it is not mortgaging future revenues for a lump sum of cash today. Per the government, as 51 percent shareholder the Minerals Income Investment Fund will hold two seats on the board of Agyapa, will exercise its right to vote for the other directors, and will receive a majority of the future dividends. However, an agreement establishing the relationship between the fund and Agyapa includes several clauses that may limit the fund’s (and therefore the Ghanaian government’s) future control over Agyapa’s decisions. These clauses include commitments by the fund and the government to not use voting rights to prevent Agyapa from making decisions for the benefit of the shareholders of the company as a whole or in a manner that would require the company to make decisions solely for the benefit of the fund or Ghana.
The Ghanaian government’s level of control over the board is also uncertain. Under the agreement the fund is able to appoint two directors as long as it maintains at least 30 percent equity in the company, but a majority of the directors must be independent. The fund is able to vote on independent directors as a shareholder. However, the relationship agreement prevents the fund from exercising its voting rights against a shareholder resolution to appoint any independent director and from using voting rights to remove any independent director appointed by the board. The agreement defines “independent director” using the definition set out in the U.K. Corporate Governance Code, which includes “represents a significant shareholder” as a factor likely to impede independence. It is also not clear that Ghana will be able to retain majority ownership should the board seek to raise additional equity financing in future to expand the business. The agreements scrutinized by parliament and the company’s articles of association do not contain any provisions that would prevent the company from reducing or “diluting” the fund’s percentage ownership by issuing additional shares.
In general, the relationship agreement is meant to establish Agyapa as an independent commercial entity, free to pursue its own profitability without considering Ghana’s budgetary needs. It is questionable whether Agyapa will be able to diversify its portfolio by acquiring new assets while at the same time distributing proceeds from the IPO to the fund and distributing meaningful dividends annually (at least at the outset) while the fund maintains 51 percent ownership in perpetuity.
Nevertheless, anti-dilution provisions (for example, requiring approval of the fund-appointed directors to issue additional shares) and a clear dividend policy might provide Ghana with some protection of its interests, although it might also affect Agyapa’s commerciality.
All this means there is plenty of work yet to be done before government can come up with a framework acceptable to technically and financially savvy CSOs. But at least it is possible to win them over by designing a framework that fully benefits Ghana the way Agyapa is supposed to.
Where the most difficult opposition will come from is the political opposition; none of the aforementioned technical issues will matter a hoot in parliament when a ewdesigned framework for Agyapa reaches it.
Indeed, the resurrection of Agyapa is just the beginning.
