Hubert Baidoo writes to Kofi Ansah and Fui Tsikata on Ghana’s Lithium Deal

While I do not completely agree with the IEA’s view that a joint venture is currently a good idea, I do appreciate their perspective on the overall Lithium deal as being correct and patriotic. At this point, a joint venture is not feasible due to financial challenges faced by our nation, stemming from balance of payment pressures. The development cost for the Lithium project is $185 million, a sum that, under normal circumstances, a country like Ghana should easily raise without taking on debt. However, our fiscal recklessness and inherently corrupt economy have complicated matters. With our economy currently experiencing an inflationary depression, leading us to resort to the IMF as a last option, we lack the capacity to bear some of the production or exploration costs for minerals at this scale.

On the other hand, we might explore the possibility of conducting a Discounted Cash Flow Analysis to assess the feasibility of using debt to finance the project ourselves, comparing it with the alternative option of constructing an office complex for the Bank of Ghana.

It’s worth noting that even though this deal isn’t a joint venture, Ghana, through the Minerals Income Investment Fund, is investing over $28 million in exchange for a 6% equity stake in Baravi. This means we will have control over 6% of all the assets therein, after additionally leasing out 510 km² of concession to Baravi DV. Essentially, we are renting our land to a foreign company, contributing some funds, and assuming all potential environmental risks associated with mining operations. This is the cost to Ghana. On the flip side, Baravi DV is only shouldering $38million of the capital expenditure.

Furthermore, it is helpful to highlight that over the projected 12-year mining life, Baravi anticipates revenues exceeding $6 billion, resulting in a post-tax Net Present Value of about $1 billion at an internal rate of return of 105%. In this deal is also Piedmont Lithium, an American company with a stock price of less than a dollar, which is contributing approximately $108 million in exchange for a 40.5% equity in the project.

At a glance, a simple ratio and proportion calculation reveal that Ghana’s $28 million should have entitled us to a 10.4% controlling stake, in contrast to the stated 6%. This raises questions on the fairness of the equity distribution in relation to the financial contributions made by different parties. In the submission of Kofi Ansah and Fui Tsikata, they posit that the total annual income Ghana may get from the Lithium deal is effectively 51% of the total profit.

To borrow their words, this is fundamentally flawed. First, Baravi is not bound to pay shareholders dividends every year. Dividend payments are contingent on profit realization. That said, the 6% anticipated annual dividend is not guaranteed. The same logic applies to our 13% free carried interest. The only revenue that is guaranteed is our tax revenue of 35%, albeit susceptible to avoidance strategies. For example, the total executive compensation may be maliciously expanded, leaving the amount of taxable income very little compared to what it could have been.

Furthermore, the valuation of Baravi DV at $ 467 million is high, given the initial capital requirement, and that also suggests that a substantial portion of the project’s perceived value was not based on the initial capital requirement, raising questions on why our land and mineral deposit only merits 13% free carried interest.

Dear Kofi and Fui, The crux of the matter is not merely about mining revenues. Ghanaians are asking for ownership and control. They are asking for the ability to control the entire value chain, learning from lessons in gold and cocoa. If we had significant control in the entire cocoa value chain, we would be able to fund our annual budget with cocoa alone. If we cannot do this with Lithium, we may want to leave the deposits in the ground.

We have more than enough natural endowment aboveground which we need to pay more attention to. The critical consideration that merits attention is the full value chain of the lithium industry. Well-meaning Ghanaians are not looking at the deal in isolation but rather as part of a broader narrative that extends from lithium extraction to the final use in electric vehicles (EVs).

The increasing global demand for electric vehicles heightens the significance of a cautious and strategic approach to the lithium market. Rather than hastily exploiting mineral deposits, understanding, preparing and participating in the entire lithium value chain would position Ghana not just as a raw material supplier but as a key player in the growing EV market. This approach aligns with a prudent, forward-looking strategy in the evolving landscape of the lithium industry, emphasizing the need to secure significant or total control. At a valuation of about $ 360 billion, the Li-ion battery industry is just the beginning. Let us take our time.

Hubert Baidoo
Concerned citizen