Controversies surrounding the Ewoyaa Lithium Mining Lease: some comments

Given the state of governance in our country and the long-held conviction that the
the country has not had enough benefits from mining, it is understandable that there is
suspicion about a significant transaction such as the grant of a lithium mining lease to a
subsidiary of an Australian-listed mining company whose significant U.S. shareholder
will buy half the product of the mine and send it to its U.S. plant for processing. This is
especially so when the first time potentially affected communities and other significant
stakeholders learn about the transaction is in a manner that conveys the impression
of a fait accompli. The task, however, is to assess the terms of the transaction in clearheaded fashion and determine whether it should be rejected entirely or improved in any
particular.
After considering two areas in which we think improvements should be made to the
terms of the transaction, we will address three widely-publicized criticisms which are
patently wrong, in our view. We will also discuss longer-term measures for improving
our knowledge about our lithium and green mineral resources and for developing policy
around them.
The first area of improvement relates to the provisions for pricing of its main product,
namely, the beneficiated lithium ore, and spodumene concentrate. It is the sales price of this
that essentially determines the company’s gross revenue. It is on that gross revenue
that government royalties and the growth and sustainability levy would be calculated.
That would also be the basis for assessing the company’s income tax liability. It is
clearly in the interest of Ghana for the company to obtain the highest prices possible for
its products. As we understand it, half of the concentrate which will have a lithium oxide
content of 6% (so-called SC6) will be sold through an off-take agreement to a US
company, Piedmont, which has significant direct and indirect ownership interest in the
Ewoyaa project. The other half, having a lithium oxide content of 5.5%, will be sold to
others. The agreement must require that prices obtained by the company are in line with
market prices, and especially in the case of the sale to Piedmont, that prices are at
arm’s length. Surely the government must insist on seeing the provisions of the off-take
agreements. The lithium market is very dynamic and in the last few months and weeks
has been very volatile. The government could by itself engage a commodities research
company to regularly provide it with prices – both open market prices and where
possible contract prices between unaffiliated companies – for its guidance. Another way
is for the government to have a side agreement with the company which would provide for
the engagement of an independent and reputable company to provide, regularly, current data on prices which would be used for the gross revenue determination
of the company.
The second area in which we would like to see tighter language in the mining lease and
associated agreements is that relating to the possibility of establishing a plant to
process concentrate from the mine. Schedule 2 of the mining lease contains provisions
requiring the company to undertake a “scoping study to evaluate the economic benefits
of the downstream conversion of the concentrate in Ghana”. It also provides that if the
company “is unable to establish a chemical plant, the Company shall make concentrate
available to any chemical plant(s) established in Ghana for refining on terms to be
agreed.” As we understand it, this relates to the possibility of establishing a plant to
convert concentrate into lithium hydroxide or lithium carbonate. It would not harm to
be more precise about this. In any case, it should be made clearer that the obligation is
to make the concentrate available to any Ghana plant on terms no less favourable than
those on which the mine supplies any other customer, including its
shareholder/customer. This would be an important step along the path of achieving
value addition in the country.
The IEA and Professor Ransford Gyampo of the University of Ghana have respectively
made computations of revenue the country is giving away under the terms of the current
mining lease which, if true, would be scandalous and be a basis for rejecting the
agreement. The IEA, backed by a former Chief Justice, Ms Sophia Akuffo, has also
contended that a “joint venture” agreement or a “service contract” are preferred legal
vehicles as opposed to a mining lease or concession, which they characterise as a
colonial form. Unfortunately, there are fundamental flaws in the methods used by the
IEA and Professor Gyampo in computing revenues and the allocation of potential direct
monetary benefits from the project which undermine the conclusions they seek to draw.
The contention by the IEA and Ms. Akuffo that “joint venture” agreements or “service
contracts” are better than leases or concession contracts suffer from the error of
promoting form over substance.
As indicated above, the main product from the project which will be exported for sale is
spodumene concentrate. The grade (quality) of this material is normally measured in the
industry in terms of the proportion of lithium oxide it contains (rather than in terms of
pure lithium metal). The Ewoyaa feasibility report indicates that half the spodumene
concentrate to be exported will contain 6% lithium oxide (so-called “SC6”), i.e., 0.06
tonnes of lithium oxide per tonne of spodumene concentrate. So, for an annual
concentrate production of 160,000 tonnes, even if we were to assume that all the
production would be SC6, the lithium oxide content would be 0.06 × 160,000 tonnes,
i.e., 9,600 tonnes per year. Now a way of pricing lithium compounds is by reference to
lithium carbonate price. So, the particular lithium compound in question is converted to
its lithium carbonate equivalent (“LCE”) in weight and priced accordingly.
For lithium oxide, the conversion factor is 2.473, meaning, 1 tonne of lithium oxide is
equivalent to 2.473 tonnes of lithium carbonate, for the purposes of pricing. So the
160,000 of spodumene concentrate with a grade of 6% lithium oxide (9,600 tonnes) will
be equivalent to 9600 × 2.473 = 23,712 tonnes per annum of lithium carbonate.
If the price of lithium carbonate is indeed US$29,000 per tonne, then the gross revenue
per year will be US$29,000 × 23,712, or US$688 million. There is evidently a vast
difference between US$688 million and US$24 billion. The IEA ought to explain how it
arrived at its computation if its figures and the arguments based on them are to be taken
seriously. (The company itself has indicated that its annual concentrate production is
expected to be 350,000 tonnes, but that does not affect the issue of the method of
computing revenue that is under discussion here.)
Professor Gyampo says that the agreement gives Ghana “about 13% of our lithium
proceeds and 87% to foreigners”. This is a gross error. For a company operating under
a regime of a 10% royalty rate and 1% levy; 35% corporate income tax rate; and 13%
government free-carried interest in the operating company the proportionate division of
direct monetary benefits is not as Professor Gyampo implies.
We can illustrate this with a simplified hypothetical example. Take a company with an
annual gross revenue of GHC100, and an operating cost and other allowable
deductions amounting to GHC30, resulting in a taxable income of GHC70 and an
income tax of GHC24.5 leaving a profit of GHC45.5. Assume that the whole profit is
paid out in dividends to shareholders, viz, government, and the investors. Dividend
payments would be 13% of GHC45.5 or GHC6 to government and GHC39.5 to the
investors. Therefore, the annual total amount of money from the project to the government
would be:
1) royalty plus levy equal to 11% of GHC100 or GHC11
2) income tax of GHC24.5
3) Dividend of GHC6.
These add up to GHC41.5 for the government vs. GHC39.5 for the investors. The two
amounts together totalling GHC81 can be taken as a proxy for the annual direct monetary
benefit derived from the project for the government and the investors. And so, in this
model, simplified for illustrative purposes, government takes 51% of the available direct
project monetary benefit and the investors 49%.
Similar comments apply to Professor Gyampo’s reference to gold mining projects where
he seems to think that the division of benefits is 5% to the government and 95% to
investors. There, with a regime of 5% royalty, 35% income tax rate and 10%
government free-carried interest, using a similar simplified model of GHC100 annual
gross revenue and an operating plus other tax-deductible amount of GHC30, the direct
monetary benefit sharing proportions turn out 45% for the government and 55% for
investors.
As for the argument relating to “joint ventures” and “service contracts”, making express
the implication that they are inherently better than leases makes the error clear. The
proposition does not even attempt to engage in a meaningful comparison of financial
terms. If, for instance, under the terms of a service contract government pays the
contractor 60% of mining revenues and retains 40%, that would be less beneficial than
in a “concession” contract in which the direct monetary benefits are 50:50. And vice
versa.
Besides, the terms “joint venture” and “service contract” are so broad as to cover such a
multiplicity of mechanisms that it makes the proposition too vague to be meaningful. In a
sense, any legal entity with more than one shareholder can be called a joint venture
between the shareholders. Presumably, the fact of some government shareholding in
the project vehicle is not, in this instance, sufficient to characterise it as a joint venture in
the minds of the authors of the IEA statement. Would majority shareholding be
required? Or is shareholding irrelevant or merely insufficient? If insufficient, what else is
required? When the IEA and Ms. Akuffo propose a “service contract”, is the underlying
proposition that the government should risk money in mine development and engage
contractors who have no legal rights in what is mined? Or does the term encompass
risk service contracts in which the “contractor” takes the risk of exploration and
development and is compensated only if the project is successful and then, in many
instances by an allocation of product?
There is one other set of matters raised by the IEA that we think is worthy of
consideration but about which we would like to modify its recommendation. That
has to do with the issue of developing policy for lithium mining and value addition as
well as improving the level of information on available resources. This, of course, goes
beyond the Ewoyaa project. Indeed, we think that it is important to pay attention to
implementing such a task not only for lithium but for other so-called green minerals. In
this regard, the example of the feasibility studies done in the 1970s to establish the
extent of bauxite reserves available at Kyebi and Nyinahin and the viability of an
alumina plant based on those reserves could provide some guidance on the approach
to be taken. This would not only improve the country’s bargaining position in
negotiations with mining companies; it would also make it clearer on which elements of
the value chain policy should be seeking to focus and over what time frames. However,
we think it is premature to be contemplating the establishment of a Ghana Lithium
Company. The risk of creating a new entity (with its own board of directors, chief
executive, and secretariat), with its avenue for wasteful, unproductive expenditure, leads
us to suggest that the requisite feasibility studies should be carried out under the
auspices of existing institutions. The Minerals Commission and the Ghana Geological
Survey Authority are obvious possibilities. Perhaps the Minerals Income Investment
Fund (MIIF) can collaborate and pay for such studies. Our curiosity about the quality of
investment decisions being made at the MIIF goes beyond the scope of this statement.
We simply note our interest in that issue for now.

By: Kofi Ansah & Fui Tsikata