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Business News of Saturday, 5 September 2015

Source: B&FT

Miners to cut spending by US$1.7 billion

Mining companies in the country could cut spending by US$1.7billion in the next seven years should the price of gold continue to remain low on the world market, a report commissioned by the Ghana Chamber of Mines has indicated.

In 2013, the miners invested about US$3.7billion in their operations on the back of a good season the year before -- but the price of the yellow metal has since taken a nose-dive, forcing them to cut future expansion plans.

The report -- which was prepared for the chamber by the International Council on Metals and Mining (ICMM) -- said in view of the prevailing low gold price, mining operations will progressively cut their expenditure for the next seven years; reaching an all-time low of US$1.7billion in 2021.

The reduction in expenditure for 2021 means that mining companies will have succeeded in cutting by 50 percent what they spent in 2013.

The life-cycle projections made by the report include what some seven mining companies planned for production at the beginning of 2014, based on a US$1,300 per ounce gold price, and it is assumed that international and national policy conditions will remain broadly as they are now.

Currently, gold price is hovering around US$1120-50 per ounce on the world market.

The data provided by the sample of seven mines comprises life-cycle projections on sales volume and revenue, capital expenditure (capex), operational expenditure (opex), social investments, tax payments, mine closure costs and employment figures.

Since 2010 the mining sector has increased production volumes, but from 2014 onward projections using the sample data show production decreasing by an average of 4.6 percent per year.

The report said apart from the low gold price, which has constrained mine extension plans, the decline in production reflects genuine reductions in production due to the life-cycle stage of the mines in the sample.

Ghanaian non-labour capex and operating expenditure, and social investments, comprise half of all expenditures made in Ghana and are considered local procurement expenditures.

Most local procurement relates to contract services such as construction and transportation, utilities and (maintenance) materials.

Compared to supplier and government payments, salaries are a relatively small component of spending in Ghana, reflecting the capital-intensive nature of the mining industry.

According to the report, which was released in July 2015, while the fluctuating gold price directly influences royalty and corporate income tax payments, the drop in government income starting in 2014 is primarily due to capital allowances [which is standard accounting practice to distribute the cost of acquiring capital (buildings, machinery and equipment) over several years] in mining.