No one can quarrel with “value addition”. It is a sweet phrase for those of us from African countries, like Ghana, that seem to have missed the industrialisation boat.
But as I recently explained, the term is rather nuanced since every raw material base, to which “value” may be added, would typically have its own physics, chemistry, and economics. Gold is no different.
For Ghana, Africa’s pre-eminent gold producer, the term sometimes induces analysis-fatigue. Who seriously wants to examine any further the notion that instead of exporting raw doré to be purified in Switzerland or Dubai, the state should mandate domestic refining, and capture the elusive margins of the midstream? No-brainer!
Yet, as Ghana doubles down on a government-backed partnership with the Gold Coast Refinery (GCR), some basic scrutiny is warranted. As I hinted in Semafor a few days ago, what is often marketed as “adding value to our resources” can, in fact, become a complex new channel for money to leak out of government chest without commensurate benefits. If care is not taken.
I do have to give it to Ghanaian politicians. They have kept at it. Just before the former government left power, they announced the Royal Ghana Gold Refinery initiative, a state-backed refinery meant to do the exact same thing the new government now wants to do with GCR. Small problem: the whole affair got smothered in controversy. As we speak, no one will even tell us who the real owners of the majority shareholding of that refinery are.
The current iteration of the strategy involves the state aggregator, GoldBod, committing to supply GCR with one metric tonne of gold per week in exchange for 15% state-owned equity in the company. This 50-tonne-a-year throughput guarantee is reinforced by a technical partnership with South Africa’s Rand Refinery.
I don’t doubt the sincerity of the goal. In the classic framing of katanomics, the devil is always in the detail of policy execution and not the political intent of leaders. No information has been shared by GoldBod to clarify what kind and level of rigorous due diligence was done to ensure that industrial policy does not merely move losses from a private balance sheet to a sovereign one.
Gold Refining is a matter of brutal efficiency
The engagement between GoldBod and GCR is for the latter to act as a tolling refinery. That is to say, GCR will process impure gold metal delivered by GoldBod to the 99.5% threshold often required for bullion categorisation (there is also a 99.9% standard but the costs are higher). GCR would then be paid a fee for its work. Readers familiar with Ghana’s policy history would recognise the same pattern that Tema Oil Refinery (TOR) has tried to use to circumvent its capital inadequacies.
Success in the tolling model depends on extreme scale, metallurgical precision, and the relentless compression of costs.
The benchmarks are sobering. Major wholesale refiners in Australia and Switzerland operate on net profit margins often lower than 0.1 per cent of revenue. Service fees for large-scale tolling refining contracts in the gold sector can fall as low as 10 to 30 US cents per ounce (yes, you are reading that right, the gross margin for a tolling refinery can be as low as 0.002%).
In this environment, profitability is driven by secondary factors: the recovery of silver and platinum-group metals, interest earned on the “float” of metal in the system, and fabrication premiums on branded bars. Without the massive throughput of a global hub, the fixed costs of high-intensity induction furnaces, specialised chemical reagents like Miller process chlorine, and the requisite security infrastructure quickly erode any commercial upside.
So far, GoldBod has yet to shed light on these issues but to its credit it has published the contract with GCR, which helps address some but not many of the critical issues raised in this essay. The tolling fee in its arrangement with GCR is disclosed as 0.2%, double the global average and nearly ten times the rate in the most efficient markets. Perhaps to partially compensate, GoldBod keeps all the base and precious “side metals” recovered during refining.
But there are even more critical issues, because GoldBod owns the gold “feedstock” GCR shall be refining, any loss of material due to equipment failure or suboptimal processing must be clearly pinned as a liability on GCR. Does the contract do this? Is there insurance to cover serious liability?
Well, the contract attempts a half-hearted resolution: GCR may lose 0.5% of the gold it is given to refine. At the projected volume and current prices, that is a loss tolerance of about $81 million.
Is gold refining that unprofitable anyways?
An attentive reader may be puzzled by a seeming contradiction. The apparent contradiction that gold refining is actually expanding in Dubai, India, and China. If the gig is unprofitable, why is everyone in those places piling in? The answer is to be found in “ecosystem economics”.
In Dubai, refining is the loss-leader for a massive trading, vaulting, and jewellery fabrication hub. In India, the industry exists almost entirely as an artefact of the tax code, surviving on the “duty differential” between raw doré and refined bullion imports. We may say that the scale, hub, and arbitrage effects in such markets trump the commercial logic of refining per se.
The GCR Model: Capacity vs Reality
Ghana’s current path relies on the Gold Coast Refinery (GCR), a facility that has historically languished at utilisation rates below 5 per cent. The state’s commitment to supply 200kg of gold per operating day represents a monumental leap in operational tempo.
It goes without saying that the technical requirements for such a ramp-up are non-trivial. Sustaining that volume requires a seamless “technology stack”: reliable electricity for 2,000 Hz induction furnaces, a steady supply of hydrochloric and nitric acids for aqua regia circuits (it is doubtful that GCR would brave the more stringent Wohlwill and Miller processes), and a sophisticated, internationally accredited fire assay laboratory. The departure of several expatriate specialists during GCR’s long fallow period suggests a significant “human capital” deficit that must now also be bridged. GoldBod asserts, without any evidentiary annexes, in the contract that it has performed a technical evaluation and is confident in GCR’s technical capacity. One just has to give them the benefit of the doubt.
Moreover, the presence of Rand Refinery as a technical supervisor, while lending much-needed credibility to assay standards and responsible sourcing, is not a panacea. Rand is a supervising consultant. They add costs and not through equity-exposure. Nor has Rand agreed to be a quality guarantor and bear the requisite liabilities. In fact, Rand has no clear responsibilities in the contract at all. If throughput falters – perhaps because artisanal miners prefer the immediate cash and opacity of illicit export routes – it is the Ghanaian state, through GoldBod, that bears the take-or-pay and other fixed cost burdens imposed by the contract. The specific number is a minimum floor of 500 kilograms a week in guaranteed deliveries from GoldBod to GCR. In the world of state-backed tolling, empty furnaces can become a sovereign liability.
Nonetheless, we would like to commend GoldBod for publishing its contract with GCR to assist with independent analysis.
Avoiding a Quasi-Fiscal Black Hole
This brings us to the heart of the risk: potential subsidies. When a state mandates local refining and guarantees raw gold feedstock, it is opening itself up to fiscal liabilities in exchange for perceived policy benefits. Transparency on the cost-benefit sides of the ledger is always crucial in such arrangements.
There are three primary channels for potential leakage. First is the “feedstock subsidy”. If GoldBod must outbid illicit traders to secure 50 tonnes of gold annually, it may find itself paying premiums over spot prices or absorbing the logistics costs of aggregation. Second is the “tolling subvention”. If GCR’s operational costs, possibly inflated by high electricity tariffs and imported reagents, exceed the competitive global tolling fee, and given the context this is almost inevitable, the state effectively pays a hidden premium to process its own gold.
Third, and perhaps most significant, is the “cost of capital”. Gold refining requires a massive “metal lock-up” (especially for high-purity processes like Wohlwill). Hundreds of kilograms of gold are permanently tied up in the refining circuit, from electrolytes to anodes. At current prices, a one-tonne lock-up represents approximately $160 million in idle capital. In an environment where Ghana’s commercial interest rates are prohibitively high, the financing cost of this inventory is a massive, often unrecognised, public expense.
By some estimates, the total subsidy required to sustain a 50-tonne-a-year throughput in a non-competitive environment could exceed $130 million annually, under conservative forecasts. In a state-backed tolling arrangement, any such lockup carry costs must be treated as subsidies with fiscal implication.
Of course, the government can lay out its own view of benefits it anticipates from maintaining the skills associated with gold refining in Ghana, but transparency is important. Sustaining the policy commitment may, however, also require roughly $100 million in working capital injections over time if margin pressure persists. It is unlikely that any public entity in IMF-austerity Ghana, other than the Bank of Ghana, would have the capacity or stamina to shoulder such a burden.
A Pattern of Ambition
Ghana is not alone in this push. From Zimbabwe’s Fidelity Gold Refinery to Zambia’s state-led aggregation models, the continent is replete with “beneficiation” mandates. The recurring pattern has, however, been a misjudgment of where value actually accrues. In the gold value chain, the “rents” sit at the extraction stage (mining) and the retail stage (jewellery and branding). The middle – the refining – is a thin, competitive pipe.
If Ghana’s strategy is to succeed, it must move beyond the nationalist optics of “retaining value at home” and adopt the cold-eyed discipline of cost-benefit analysis. Doing so would require clear performance benchmarks, transparent accounting of the total state support (including any power and tax holidays), and a “sunset clause” that forces the refinery to compete on global terms within a set period.
Most importantly, the state must have a real “exit option”. Industrial policy is as much about knowing when to stop as it is about knowing where to start. Without an independent technical audit and a willingness to let the project fail if the commercial logic does not hold, Ghana’s gold refinery risks becoming another “fiscal sink” like Valco.
Value addition as a concept radiates nobility, but in the brutal world of global commodities, alchemy remains a myth. You cannot turn a low-margin service into a high-yield asset simply by wrapping it in the national flag.
Source:
www.ghanaweb.com