Can Capital Injection Make Challenged Gold Projects in Ghana Economically Viable? – A Case Study

Abstract

Damang Gold Mine (DGM) in Ghana uses open pit mining technology to mine its gold deposit. It has an estimated mineable gold reserve of about 32 Mt exploitable for 8 years. As the gold price kept falling from 2013 and operating cost kept rising, the mine down sized its operations. But the operations became challenging due to poor performance of ageing mining equipment and processing plant, and the need for a new tailings dam. As the gold price stabilises, it could be gainful to invest capital to resolve the challenges and increase production. This study aims at investigating whether DGM would be economically viable if the intended investment is made assuming the gold price falls to US$ 32.15/g. The study estimates the required capital and annual operating cost to be US$89.49 M and US$100.84 M respectively.  A cash flow analysis is carried out assuming no price escalation, discount rate of 20%, and applying the following investment laws of Ghana: royalty of 5% of gross revenue; straight line depreciation of capital expenditure over five years (20% per year); investment allowance of 5% in the first year only; loss carry forward; and corporate tax of 35%. The results give Net Present Value of US$82 723 720.28 and Internal Rate of Return of 41.13%, indicating profitability. Sensitivity analysis reveals that the project will continue to be profitable until the revenue falls below 24%, assuming all other economic parameters remain constant. The project will also continue to be profitable until the operating cost increases beyond 30%, assuming all other economic parameters remain constant. Risk analysis on the project indicates the project has 70% chances of success. DGM could invest the capital to mine its gold reserves because the mine will make profit provided cost is controlled and production level maintained to generate needed revenue.

Keywords: Net Present Value, Internal Rate of Return, Sensitivity Analysis, Risk Analysis