Since the advent of the Agyapa Royalties deal, recently announced by the government, the deal has stirred a great deal of debate in the public domain. There have been several discussions about the agreement, ranging from its technical merits to its political ramifications. I needed a breakdown for myself and others like me who find themselves baffled at all the Economic jargon. I also wanted to fully grasp the deal’s technical merits without all the harmful and negative political noise coming from the opposition and CSO’s. So, Akua Dede As3mp3 I went seeking answers from my brother and good friend, Richmond Kyei-Fordjour, an expert in Economics. This article focuses more on the contract’s technical values by sharing valuable insights into the Agyapa deal’s pricing.
Richmond writes… “At first glance, one might want to assign a single point valuation to the deal, and rightly, doing so is completely sensible, especially because when sold to investors, the convention is to sell it at a single point price. I mention the “single point price” and “single point valuation” to create a premise against which I can motivate the notion of “a range of possible prices” and “a range of possible valuations.” It is worth noting that we can employ some mechanism to summarize the information represented by the notion of “a range of possible prices” and identify that as the object we call “a single point price.” In the subsequent discussion below, the concept of “a single point price” shall be identified NOT to be an object summarizing information represented by “a range of possible prices.” Instead, an interpretation of the “single point price” means a price in a single patented scenario—the same interpretation people have consciously or subconsciously adopted when they’ve discussed the deal.
With the foregone definitions presumably crystallized, allow me to describe a valuation of the Agyapa deal that is best suited to the peculiar features of the deal’s structure. The Agyapa deal essentially takes about 75.6% of the Royalties accruing from some 12 mines and places this sum in a Special Purpose Vehicle (SPV), which in essence is an autonomous corporate entity. Most SPVs act as passive structures, but in Agyapa’s context, the SPV will be a more active entity than is usually seen. It will actively run as an operating business that prospects for gainful business opportunities by deploying its balance sheet in a quest to grow that balance sheet further. In acting as an active for-profit operating business, Agyapa creates subtleties that must not be overlooked during its valuation. These subtleties tacitly cue in analysts to not evaluate Agyapa as some pass-through structure, which passes Ghana’s gold royalties through to investors who have purchased the cash-flow streams.
After taking in the 75.6% of Royalties annually, with 49% sold as Equity stakes in Agyapa, 51% will still be held by Ghana’s government to provide it with a controlling stake in the entity. The management of Agyapa will have to use this periodic annual endowment as its operating capital. So, in the end, the entity will incur operational expenditure and potentially generate additional operating revenue, much like any for-profit business entity would actively perform. Following its operations, Agyapa would declare “profit,” out of which its board in turn, through voting, would express a dividend sum to be paid out to shareholders. This is where the equity holdings in Agyapa (51% held by government and 49% owned by other investors) will see payouts flowing in (we do away with discussing capital gains, because those also have their valuations hitched to these dividend flows that accrue to the stock).
At this juncture, I believe the main issues at the crux of the valuation discussion has been laid bare; it should be straightforward from here to make the connection with the notions of “a single point valuation” and “a range of possible valuations.” There are two takeaways: (i) the face value of the 75.6% endowment exchanged for $500MM, plus a 51% stakeholding which partakes in dividend payouts, (ii) and the aspect relating to how effectively the managers of Agyapa can run its operations to generate positive returns, and thereby produce payouts to the 51% equity owner (the Government of Ghana). Whereas the former is relatively deterministic and resolved using a simple equation that equates discounted flows from the 12 mines, the latter is somewhat more uncertain. It can only be determined to produce a range of values, from zero to some upper-bound, representing the achievable value-added conditional on Agyapa’s management’s ability to generate positive operating profits.
This is where the need to differentiate a-single-point-valuation from a-range-of-possible-valuations arises. A-single-point-valuation considers only the former valuation component (the deterministic piece). In contrast, a-range-of-possible-valuations would take both parts together and recognizes that the latter component constitutes uncertain flows and can only be assigned a range of values, not a single point estimate. The deterministic component establishes a lower-bound for the value the government of Ghana is getting from this deal. This component patently represents a lower-bound value for the government. This fact becomes readily apparent if the total value accruing from the deal to government is written as Component_1 + Component_2. We know that Component_2 represents a range of values from zero to some upper-bound. Therefore, the lowest value possible for the sum (Component_1 + Component_2) occurs when Component_2 is at its lowest level, which is its level at zero, thereby making clear that the lowest level the sum (Component_1 + Component_2) can assume is (Component_1 + zero), which is itself Component_1 alone. So, what is the value of Component_1? Its value lies in the exchange of 75.6% of Royalties for 49% equity stake at a market value of $500MM. This exchange inherently reflects a yield level that the investor receives as payment.
Consequently, the value derived by the seller (government) is the inverse of the yield the buyer (investor) receives. If the yield is too high, the deal’s value becomes too low for the government, and vice-versa. Consequently, the valuation of Component_1 reflects a zero-sum game, in that wherever the seller loses value, the buyer gains that value lost to the seller, and vice-versa. This yield is determined from a perpetuity viewpoint since that is what this deal offers investors. The 12 mines paying royalties into Agyapa currently produce about 2.9MM ounces of gold; let us round this up to 3MM ounces, assuming growth in medium-term capacity. Over the past decade, gold price’s high-water mark has been in the range above $1500 and below $2000. Gold has seen prices in this high-water mark region between 2011 and 2013, and recently in 2020. In a familiar market environment over the recent decade, the cost of gold reverts to a level between $1200 and $1300; let us use $1250 for the exposition in this analysis. Let us also assume a royalty rate of 5%. The foregone produces average royalty flows of about $142MM/year, and exchanging 49% of these flows into perpetuity for $500MM today translates to a yield to the investor of approximately 13.9%. Keep in mind that mines do not produce forever; thus, the perpetuity assumption applied here requires a commensurate yield adjustment. Let the reader judge whether 13.9% is a high enough yield compensation for the risk associated with making the perpetuity assumption.
In conclusion, before the seller (government) enjoys the value-addition of partaking in 51% of Agyapa’s dividend payouts, the government would have paid only a 13.9% yield to investors that gave it $500MM for a highly risky cash-flow stream into infinity, which is known with utmost certainty that it is going to terminate at some point and not indeed keep paying forever. Additionally, the valuation of Component_2 hinges largely on the ability of Agyapa’s managers to grow the pie to generate returns in which both buyer and seller would partake in tandem. As such, the drivers of value for Component_2 are collaborative, rather than zero-sum as it is in the case of Component_1.
It is imperative to note that, though the government gives up these 75.6% flows to get the $500MM, 75.6% does not flow wholly to the investors. Preferably, a portion of it is used in operations to grow further the 75.6% sum. It is only after netting out the cost of these value-enhancing operations that the investor gets paid. Essentially, a good part of the 75.6% eventually will return to the government (the seller), albeit as a portion of a potentially magnified version of the initial 75.6%. This will create a leverage effect which serves to attenuate the 13.9% yield the seller paid to the buyer (investor), while at the same time increasing the net yield the buyer receives through this same leverage effect. Note that the seller can reduce the yield it pays the buyer. At the same time, the buyer sees an increase in the yield he gets because of the leverage effect, so there is no contradiction here—it all owes to this aspect of the investment game’s collaborative nature, i.e., growing the pie. How much further attenuation in the 13.9% indeed occurs for the seller? Well, there is no point estimate (“a single point value”) for that attenuation apriori; instead, we can only identify “a range of possible values” for it at best!”
MS (Mechanical Engineering)
MBA (Quantitative Finance & Economics)
MA (Statistics & Applied Math)
Ph.D. candidate (Financial Economics)
Wheeeeeeeeeeew! My reading glasses are foggy from reading and digesting this valuable piece of information. Well, folk, As3mp3 asked, and boy did she receive.
THANK YOU, RICHMOND!!!