Ghana’s Integrated Aluminium

Industry…
Benjamin Boakye

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 Ghana’s reserves and
Background
production of bauxite

Economic Analysis of
VALCO and the IAI
Outline China’s resource backed
investment strategy • The Case of VALCO
• The $2 billion Sinohydro deal

Economic benefits and Conclusions and

challenges of the IAI recommendations

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Background
Beyond the fiscal contribution to
the national revenue, the
The aluminium industry is
economic benefits from the IAI
projected to play significant role
can be in the form of
in Ghana’s development
employment and activities that
trajectory in the coming years.
contribute to the expansion of
the economy.

The first president of Ghana

started the process of value
addition with a top-down Various attempts have been
approach through the made by successive governments
establishment of an aluminium to complete the value chain have
smelter, the Volta Aluminium proved unsuccessful.
Company (VALCO), before a
bauxite refinery

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Background

• In June 2017, the government of Ghana announced a renewed effort

towards an integrated aluminium industry
• Act of Parliament which sets up the Ghana Integrated Aluminium
Development Corporation (GIADEC) to oversee, participate and
ensure the integration of local business and labour in the aluminium
industry.
• That Government has committed to front load part of its benefits
for the aluminium industry into development. Government is
implementing a $2 billion barter deal with Sinohydro for
immediate infrastructure in exchange for alumina or aluminium
from the integrated aluminium industry.
Questions

Should the $2 billion debt What is estimated What are the contextual
be counted as part of bauxite reserve to offset challenges that impede
public debt? the $2 billion loan? the IAI and its ability to
repay the loan?

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 Ghana’s Reserve and Bauxite Production

Global scale of bauxite producers Production estimates for 2017 in

from 2012 – 2016 (USGS) tonnes (Minerals Commission)

About 550 million tonnes in

reserves (Kesse 1985)
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Ghana’s Reserve and Bauxite Production

AREA DEPOSIT (TONNES)

Sefwi-Bekwai (Awaso Deposits) 19 million

Aya-Nyinahin Group 350 million

Kibi 180 million

Mt. Ejuanema 5.1 million

Total 554.1 million

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China’s Resource backed investment
strategy
Developing countries
• Abundant natural resource reserves
• Desire for resource extraction is offset by the lack of financial and technical capacities
• Tightening of monetary policy conditions from donor institutions to developing countries
• Seek financing from other sources to meet infrastructural needs.

China to the rescue!

• Increasing natural resource demand
• Increasing demand of raw materials
• Less stringent conditions
• Provide financial assistance in return for natural resource

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Ghana-China’s Resource backed loans
• Chinese $3billion
CDB loan
• Poor planning for
delivery in MFA
• Changing rules of
engagement

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Economic Analysis of
VALCO and the IAI

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 The case of VALCO

Current Capacity
Smelting capacity:
200,000 tonnes

GIADEC’s Envisaged Capacity

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• Key Challenges
• Struggle to optimize current
capacity
The case of • Efficiency of the Smelter
• High cost of power
VALCO
• VALCO’s non profitability
• Average loss of $19 million
between 2014 to 2016
 2016 (US$ M) 2015 (US$ M) 2014 (US$ M)
Indicator
Revenue 61.00 61.00 80.00

Net Profit -24.00 -24.00 -10.00

Total Assets 327.00 335.00 353.00

Current Assets 83 83 90
The case of Current Liabilities 96 80 71
VALCO Total Liabilities 99 82 73

Equity 227 253 279

Ratios
Net Profit Margin -39% -39% -13%

Return on Equity -11% -9% -4%

Current Ratio 0.9 1.035 1.2

Gearing 0.3 0.24 0.21

Source: Ministry of Finance (2016)

 Challenge
The uneconomical one cell line
operation which negatively affects
production volumes
Insufficient and erratic power supply
Globally uncompetitive power price
The case of charged the Smelter, when electric
power is a core component in
VALCO VALCO’s production
Long depressed Aluminium Metal
Prices (LME). Long depressed
Aluminium Metal Prices (LME).
Comments
This is the key ingredient which limits production of the
volumes of aluminium.
This challenge indicates that for VALCO to operate
optimally, it requires greater stability and efficiency in the
supply of power. Erratic supply increases the inefficiency
of the plant which increase the power costs per unit of
output.
At 5 US cents per kwh, VALCO essentially operates at the
upper tier of the global power cost for aluminium smelters.
other considerations such as the efficiency of the plant are
relevant to examine. Modern equipment are able to operate
at 13.5MWh per tonne of aluminium against VALCO’s
which is between 16 to 17 MWh per tonne
These are universal conditions that cannot be directly
controlled by government or VALCO.
Cost saving scenario analysis
for VALCO’s smelter

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 Current cost scenario: Power cost is set at 5 US
cents and efficiency level of power plant is
16MW per tonne.

Scenario one: Reducing power costs to 3.5 US

cents while maintaining current efficiency level of
the smelter at 16MW per tonne
VALCO’s
Scenario
Analysis Scenario two: Increasing efficiency level of
smelter to 13.5MW per tonne while maintaining
current power costs at 5 US cents per kwh

Scenario three: Simultaneously reducing power

costs to $3.5 US cents per kwh and increasing
efficiency levels of smelter to 13.5MW per tonne.
Cost Savings for VALCO
800.00
Power costs ($ /Tonne)

675.00
560.00
472.50
327.50
240.00
125.00

Current scenario sc 1 sc 2 sc 3
Power cost per tonne cost savings per tonne

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Cost Savings for VALCO

Sc 1 (reduce Sc 2 (Efficiency
Sc 3 (Both
Base case power to 3.5 improved to
reductions)
cents) 13.5kwh/ T

Cost per tonne ($/tonne) 800.00 560.00 675.00 472.50

Cost savings per tonne ($/tonne) - 240.00 125.00 327.50

Total Cost of power for 200,000

160.00 112.00 135.00 94.50
tonnes ($ million)

Total cost savings for 200,000

- 48.00 25.00 65.50
tonnes ($ million)

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The case of VALCO and IAI-Discussions
350,000 metric tonnes capacity will be inadequate to smelter the resulting alumina from
bauxite

Current production of 1.4 million tonnes of bauxite is enough to meet demand and assumed
expansion capacity

Greater power cost savings by improving efficiency and reductions in power prices.

For VALCO to operate at the same cost savings in the best-case scenario (scenario three) at its
current efficiency level, it needs to purchase power for as low as 2.9 US cents per kwh.

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The $2 billion Sinohydro
repayment structure

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The 2 billion Sinohydro deal
Item Value
MPSA Amount $ 2 billion
Grace period 3 years
Repayment period 12 years
Repayment Item Receipts from refined Bauxite (Alumina or
Aluminium)
Interest Rate US Libor + 2.8% - 3.3% per annum
Commmitment Fee 1% p.a
Management Fee 1.2% flat
Sinosure premium 7%-9% Flat and financed upfront
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Ghana's annual repayments for $2 billion loan

Item Amount*
Principal value (incl Sinosure premium and $2,180,000,000
Management fee)
Future value of loan (Libor + 2.8% + 1% $4,522,563,366.42
commitment fee)
Annual payment (Libor + 2.8% + 1% $263,886,606.08
commitment fee)
*This report uses the lower rate of the interest payments i.e. Libor + 2.8%.

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 Royalties

Government’s
Corporate income tax
entitlement
per Minerals
and Mining Dividend
Act
Property rates
Other receivables Charges on rents
etc.

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Scenario one
• The bauxite mining company is the same company that
refines bauxite into alumina
• The refinery capacity is estimated at 2.5 million tonnes
of alumina p.a.(this is equivalent to the amount of
bauxite produced i.e. 5 million)
Government’s • The government takes royalty in the form of alumina
entitlement - • Government obtains 125,000 tonnes of alumina based on
Scenarios a 2:1 refining ratio.
• To meet the estimated revenues, government needs to
seek investor / investment worth over $2.5 billion in
bauxite refinery to be able to refine the 5 million output
of bauxite
Scenario one - Financial details

Item Amount
Average operating cost of alumina ($/Tonne) $ 289
Average alumina price ($/Tonne) $387
Average alumina margin ($/Tonne) $98
Royalties from Alumina $48 million
Net revenue of alumina production $233.9 million
Investment payback period 11 years
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• Payback period of 11 years suggests that government is

not likely to receive substantial taxes in this 11-year
period

• Assuming capital allowance of 5 years, zero tax is

guaranteed in the first five years
Scenario one - • Tax and dividends are contingent on the profitability of
the industry
Discussion • Ghana stands to obtain only royalties as guaranteed
payments from the IAI in the value of $48million within
the short to medium term.

• Government can pay about 18 percent of the total annual

repayment required for the $2 billion from the IAI
receipts
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Scenario two
• There are separate investors involved in mining and
refining
• The refinery capacity is estimated at 2.5 million tonnes of
Government’s alumina
• The government will take royalty in the form of bauxite
entitlement - (250,000 tonnes)

Scenarios • Government obtain taxes and dividend from bauxite

mining and alumina
• To meet the estimated revenues, government needs to
seek investment worth over $2.5 billion in bauxite
refinery.
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Scenario two – Revenue streams

• Royalties in the form of 250,000 tonnes of
bauxite based on an estimated bauxite price of
Government’s $32 per tonne (GHEITI, 2017).
entitlement - • Tax obtained from net revenues of bauxite
production
Scenarios • Tax obtained from net revenues of bauxite
refinery into alumina.
 Scenario two - Financial details

Item Amount
Total royalties from bauxite $ 8 million
Net revenue from mining (5 million $15.2 million
tonnes)*
Government take (Corporate income $5.3 million
tax)
Total revenue for government $13.3 million

*Available data shows that net revenue from Awaso mines is 4.1% of gross revenue
The analysis assumed a net revenue of 10% of gross revenue
Scenario two - Discussion
Ghana stands to obtain only guaranteed royalties of about $8million

Tax receipts of about $5 million is subject to the profitability of the industry

Government can pay about 5 percent of the total annual repayment

required for the $2 billion from the IAI receipts

Similar analysis of alumina refinery in scenario one occur here

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Government’s optimisation strategy – Repaying
the loan

No clarity on whether Ghana intends to refine 100% of bauxite or a

blend or domestic refinery and exports

Based on available information it is likely not all the 5 million tonnes of

bauxite will be refined

$1 billion investment in refinery equates a refining capacity of between

900,000 to 1 million tonnes of alumina (40% of bauxite production)
Economic benefits and
challenges of the IAI

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 Employment

Value addition
potential
Supply of local
inputs
Increased
economic activity
Benefits Technology
Local content
Labour
Export earnings
Capacity building

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 Power
• High cost of power
• Potential subsidy from government requiring extensive
cost benefit analysis

Equity participation
• Requirement of government to raise at least 30% local
participation
Challenges Environmental concerns
• Soil erosion
• Noise pollution
• Air pollution
• Destruction of ecosystem
Increasing demand for recyclable aluminium
• A threat to taking from the earth
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Conclusions and
Recommendations

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There are benefits to the IAI which must be pursued

by government, however the following should be
noted
• VALCO needs substantial subsidies to be profitable
• Current data published by the state on bauxite
reserves is unavailable
Conclusions • The importance of Sustainable Environmental
Assessment is ignored
• Likelihood that bauxite will not be refined in Ghana
because of the barter deal
• The IAI cannot pay the $2 billion loan
Recommendations
Government should find other
sources of financing development
projects in the country
Government should pursue the
IAI agenda with deep reflection
on the global situation of the
aluminium industry
An option is for government to start processes
to refine the output of the Awaso mine which
is enough to feed VALCO
Recommendations
Cost benefits studies should
Strong and independent SEA
be conducted to justify
is required for the bauxite
subsidies in electricity to
mining in the new prospects
VALCO

Government should exhaust Recycling of Aluminium must

public engagement on the form an integral part of the
IAI agenda IAI

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