GHANA'S ENERGY CRISIS II: Mining Industry Coping Better

UNCLAS ACCRA 001012

SIPDIS

SENSITIVE SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON ETRD GH

SUBJECT: GHANA'S ENERGY CRISIS II: Mining Industry Coping Better
than Most

REF: A) Accra 2006 00933, B) Accra 01634 C) Cotonou 232 D) Lagos 182

D) Accra 847



1. Summary: This is the second in a series of cables on Ghana's
energy crisis. It focuses primarily on the impact on the mining
sector and the industry's response. The mining sector accounts for
40 percent of Ghana's total foreign exchange earnings and consumes
nearly 20 percent of total power production. The World Bank
estimated that the growth rate for the mining sector will be about
five percent annually, rather than 10 percent, because of
electricity shortages. Seeing no relief in sight, the four largest
mining companies are financing an 80-100MW diesel-powered backup
system in Tema. End Summary.

IMPACT OF ENERGY CRISIS ON MINING SECTOR
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2. Ghana's mining sector accounts for 40 percent of total foreign
exchange earnings and consumes nearly 20 percent of total power
production. Full mining operations draw about 150MW of power and
strong growth was foreseen. Energy shortages are already cutting
into the growth. According to a November 2006 World Bank Aide
Memoire, the projected growth rate for the mining sector has fallen
from ten to five percent annually because of electricity shortages.
Current total installed back-up energy capacity to date for mining
facilities is about 25MW.


3. In late August 2006 the Volta River Authority, the GoG company
that runs the Akosombo Dam, asked the mines to cut electricity
demand by 25% and in September that was increased to 50%. However,
VRA unofficially backed down from the 50% target after about a
month. This may have been because the four largest mining companies
collectively financed a $500,000 deal to air-freight a rotor from
Manchester, England to repair a thermal turbine at the Takoradi
power plant.


4. The timing of the energy crisis is particularly poor for
Newmont, a U.S. firm. Newmont significantly ramped up gold mine
operations in Brong Ahafo in June/July 2006 and electricity needs
have grown as they move toward optimal operating capacity. Newmont
has 12.8MW of back up power on site; operating at full capacity,
Newmont needs 32MW.

TAKING MATTERS INTO THEIR OWN HANDS
--------------


5. Seeing no relief in sight and to avoid further future
disruptions, the mining companies are taking matters into their own
hands. The four largest companies (Goldfields and AngloGold Ashanti
of South Africa, Golden Star Resources Ltd., and Newmont Mining) are
financing an 80-100MW diesel-powered backup system in Tema. The
mining companies are working out an agreement whereby VRA will
operate the plant on their behalf. The companies hope to generate
power by May 2007 using diesel fuel, but expect to use gas from the
WAGP once it is on-line (free flow expected later this year). This
would reduce the cost from 20 cents per kwh for diesel to around six
cents for natural gas. Newmont suggested that the GoG might be
planning to share/use the mines' power if, once complete, other
crisis-averting solutions are not yet functional.

COMMENT
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6. The energy crisis is hitting the manufacturing sector hard, with
potentially serious follow-on impacts on Ghana's economic growth.
For example, Ghana's booming construction industry contributed about
9% of GDP in 2006. However, most buildings are constructed out of
concrete block and cement prices have risen about 50%, making some
projects too expensive to start or to complete. Ghana Cement
Company (GHACEM),which supplies 90% of the country's cement, claims
the increases are due to shortages brought on by energy cuts and
recently installed 5.1MW of its own generating capacity to try to
compensate. Most local businesses, however, do not have the
resources of the mining companies or GHACEM to make such
investments. For example, the local press reported a Cape Coast
corn miller's daily income fell from about $20 to $5, and a soap
maker's company lost about a third of its production capacity. Even
those firms with generators are faced with the high cost and
periodic shortages of diesel. Quantifying the economic impact is
difficult given multiple variables but the World Bank aide memoire
estimated that real GDP growth in 2006 would be reduced between 0.7%
and 0.9% as a result of the impact of the energy crisis on mining
and manufacturing. Not only is existing industry in Ghana suffering
as the cost of doing business with limited energy continues to rise,
but until the situation stabilizes, Ghana's attractiveness as a
destination for investors is tarnished. End comment