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The Myths Surrounding Agyapa Royalties – Is it a case of Good Strategy but Wrong Tactics?

History and Background

In recent days, the deal on Agyapa Royalties Limited (ARL) has become a common denominator in the Ghanaian public discourse. This article provides further insight into this all-important issue. Primarily, two issues have remained central to the discussion: why do we need a Special Purpose Vehicle (SPV)? and what is the economic value associated with the SPV- set up.

Essentially, we limit our discussion on the latter, we want the scope of this discussion to be about the underlying economic value and financial strategy and financing model. The Agyapa Royalties deal is part of the current government’s strategy to resolve the long-standing problem of lack of capital for developmental projects and maximising the value from our local resource.

In June 2018, Ghana’s Parliament passed the Minerals Income Investment Fund (MIFF) to manage the equity interests in mining companies. In short, it has created a Sovereign Wealth Fund with a remit to manage government receipts from mineral royalties. Through this instrument, Agyapa Royalties limited (ARL) was established as a Special Purpose Vehicles (SPVs) to appropriate this investment with Ghanaians economic interests at heart.

It is worth mentioning that the analysis is based on the reported media information. As known, Agyapa is preparing to raise between $500 – $1 Billion million from the IPO’s constituting 49% of its value.

What is the Strategy and Tactical solution to Agyapa Conundrum?

According to Sun Tzu, ‘’strategy is about winning before the battle begins, while tactics are about striking at weakness’’.

Strategy is a plan of action designed to achieve a long-term or overall aim. In this instance, Ghana wants to monetise and achieve long term value for its mineral royalties. A strategy is made up of parts, which leads us to tactics.

Tactics on the other hand is the specific action and steps, one undertakes to accomplish laid down goals - your strategy. It is about “if this, then that”, ‘’when, how and why’. Let us bear in mind that the tactics is short term and it allows for flexibility. It gives room for manoeuvre and is adaptable.

What are Special Purpose Vehicles/SPVs?

A special purpose vehicle is usually created for a specific objective, in our case to monetise mineral royalties. It is a separate legal entity, from its sponsors or Originators. SPV’s are companies and they can decide to take on debt and or sell shares (equity) to fund their operations just like any company we know. It is not a mythical construct at all.

There are two types of SPV, an Orphan and non-orphan SPV. An orphan SPV’s shares may be held by a nominee share trustee company. In this type of structures, the share trustee is the legal owner of the vehicle who manages the company on behalf of the shareholders. In most instances information on shareholders is not public.

In this type of structure, MIIF will transfers asset / liabilities and/or financial risk to an off balance-sheet vehicle such as a SPV. In an orphan SPV, to maintain independence between the underlying assets – Agyapa and the Originator (the Government of Ghana and MIIF): Agyapa will not appear on the balance sheet of MIIF and the Republic of Ghana. Any debts incurred by Agyapa will not be debt attributed to Ghana.

On the other hand, if the Republic of Ghana wants entirely owns the SPV and its assets and liabilities are on the books of Ghana, then Agyapa will be Non-Orphan SPVs. In this case, the SPV entity continues to be part of the Originator’s corporate group.

Current Agyapa Deal as it stands via an IPO or Equity Placement.

Equity comes in the form of common stock, preferred stock, or retained earnings. Equity consists of ownership rights in the company, without the need to pay back any investment. Equity allows for others to also own a stake in company. Equity is more expensive than debt, especially when interest rates are low. However, equity does not need to be paid back.

Equity is beneficial to companies; shareholders receive payments only when profits are declared. Equity is all about the future- the future earnings of the company go to the shareholders.

Agyapa is on course for an Equity IPO, where they will be paying dividend. Assuming Agyapa sells 49% of its shares from the IPO and raises $2 Billion. Shareholders of Agyapa may receive $100 million for 20 years (extreme value), meaning that after 20 years, shareholders will earn $2 Billion. (with Government of Ghana earning $1,020,000,000) over 20 year with 51% ownership of Agyapa, with the other investors earning $980,000,000 for their 49% shareholding).

In such a scenario the State will be paying shareholders much more money than we gained from the IPO (considered Time Value of Money (Present value and future value calculations).

If the state wants to take full ownership in the future, it will need to pay investors to acquire their shares. This will mean that the state will have to pay over $2 Billion to investors to have 100% stake in Agyapa assuming share prices have gone up, and less if share prices are low. All of this will be in addition to the over $2 Billion Agyapa may have paid out in dividends to investors. The Government of India set up an equity SPV to fund its Smart City project.

Debt as the low hanging fruit.

Debt comes in the form of bond issues or loans (both long and short term) plus interest. Debt is repaid over a fixed time frame with a fixed or variable repayments plans.

Debt has advantages which includes but not limited to the following:

Debt is tax deductible for a company. A company pays less tax if it manages to offset its debt repayment (interest) thereby reducing profit and paying less tax.

Debt also allows a company or business to retain ownership, unlike equity. If Agyapa was to issue debt only, the Republic of Ghana via MIIF will retain 100% ownership of Agyapa. The royalties may be used to repay the debt instead of paying dividends in perpetuity.

In times of low interest rate, debt is easy to come by and may be the best way for a company to finance expansion and growth. For instance, Microsoft purchased LinkedIn through the issuance of debt to fund the acquisition.

Assuming Agyapa decides to forgo an equity, placement and opts to take on debt of $1,000,000,000 at 9% borrowing rate for 20years. Using a time value approach, Agyapa would be expected to pay $5,604,410,768 in a 20-year period.

If Agyapa was to sponsor its debt payment from the regular annual cash flow of $200,000,000 (from Mineral Income Investment Fund - MIIF), then in 20 years, Agyapa will end up paying more than $4,000,000,000 (i.e. $200,000,000 x 20years) of its overall debt of $5.6billion, all things be equal. Thus, Agyapa will still be in excess debt of $1.6 billion after 20 years. This raises serious questions in the operations of Agyapa as an entity:

  1. How can Agyapa survive if all its regular cash flow goes into debt servicing?

  2. How can Agyapa finance any future anticipated growth opportunities?

  3. How attractive will Agyapa be to any future credit lenders?

  4. What benefits do we get as a country if Agyapa is operationally and financially constrained?

Are these the options we want, are we not selling our birth right for a bowl of porridge?

The Way forward: Equity v Debt

Whether a company decides to have debt or equity does not change the underlying value of the Company. Having too much debt or Equity does not over or under-value a company.

Agyapa can decide to do an equity placement and later on accumulate debt as and when it is necessary.

Different Classes of Shares -The shares owned by the Government of Ghana could be given a different class lets call it ‘’Class A or Golden Shares’’. And this represents 51% of Agyapa. Investors on the other hand will own Class B shares, which they can purchase via the stock market.

Voting Rights - The Class B shares could also retain 24.5% voting rights, which is a dilution of their 49% free float, that is stock market listing. Class A shares of the Government of Ghana will then retain voting rights of 75.5%.

Dividends - Class B shares should be non-dividend paying. That is the prospectus / offer document should clearly state that no dividends will be paid to shareholders for a given time, say 5-10 years or not all. (Manchester United did not offer investors any dividend repayment during their IPO on the New York Stock Exchange).

Investors will be able to sell their shares minus dividends. The value of their shares will appreciate or depreciate based on the vagaries of demand/supply and the underlying value of the Company and its cash flow.

Assumptions on Valuation of Agyapa Ltd (Equity v Debt plus Assets)

Let us say the IPO is to raise $ 2 Billion from the sale of 49% shares (Class B). Then the whole enterprise will have a valuation of $4,810,000,000. Of which 2 Billion will be from the 49% sale and the value of the 51% of the Government of Ghana will be about $2,810,000,000.

After 10 years if no dividends have been paid out, Agyapa will still be able to keep the $200 million which would have been earmarked for dividend repayments. Assuming no dividends are paid $2 billion to fund its operations over 10 years. With Equity of $4,810,000,000, plus close to $ 2 Billion in Cashflow (asset) and as working capital; The value proposition of Agyapa will be humongous.

Observations and Conclusions It is about time Ghanaians have a much broader discussion on the nation’s Mineral resources. Ghana is the 10h largest producer of Gold worldwide, yet Bank of Ghana (Central Bank) is not among the top 20 list of Central Banks with Gold reserves.

Countries who do not mine gold like Netherlands and Switzerland are among the top 10 Countries with Gold reserves in their Central Bank.

After 60 years of Independence, Ghana is talking about small chicken change of Royalties. The broader conversation should be about how Ghanaians can be dominant players in the mineral and natural resources value chain.

Ghanaians who participate in mining, are small scale miners, who have little or no knowledge about sustainable environmental development. Mining firms both small and big, conduct their activities with little or no regard for the environment and well-being of Ghanaians. Ghana should be looking at sustainable environmental models developed by the State of Nevada, the world’s 4th largest producer of Gold.

Mining communities like Obuasi and Tarkwa should be rubbing shoulders with the likes of Johannesburg, yet a visit to these towns evince a lack of investment by the government and mineral companies. Community leaders and Opinion leaders should have a say in how wealth and mineral royalties accumulating from their community can be invested locally to make them not lose out.

Ghana should be at the fore front of creating a commodity exchange market. We should also be looking at ways of adding value locally to the minerals. Smelters, and refineries should be strategic imperatives. With such an approach, Mineral companies cannot under-declare profits.

The state will win from payment of Royalties, taxes and then also payment of dividends. Currently not many of the mining companies are paying taxes and dividends.

At the end of the period of leases, the republic of Ghana should ensure that as a condition of renewing mining leases will be that mining firms have a strategic objective to build Smelters and refineries in Ghana. Any breaches will mean that the state’s equity interest will increase in these companies, and locals will own more shares.

This article will be re-produced on the international news aggregation website

Written by Kwadwo Kusi-Frimpong, a Financial Crime, Governance and Regulatory Expert, who has extensive experience working with banks and financial institutions in UK, Switzerland, and The Netherlands. He holds an LLM from University of Law and is a graduate from University of Ghana and Said Business School, University of Oxford (Financial Strategy). Affiliate member of (ICA) International Compliance Association.

George Amparbeng is a Financial Crime, Governance and Regulatory Expert. He has experience working for Banks in UK and Europe. He is a Graduate of University of Ghana and associate member of ICA (International Compliance Association).

Emmanuel Ghunney (MSc), a Securitisation and Regulatory Reporting SME, with extensive experience working with leading Investment Banks in London, Switzerland, Netherlands and France.

The team can be contacted at: and

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