Another policy “own goal” for the struggling SA mining sector –, 21 January 2015

With all the excitement in oil markets, it’s easy to forget about other primary industries, like the mining industry that plays such a crucial role in the economy of South Africa. In this piece, Dr Anthea Jeffery of the IRR talks us through the latest policy developments in the mining sector, and how they have the potential to negatively affect the already-struggling industry. It’s sobering to think how quickly bad policy can eviscerate such a long-lived sector.

by Dr Anthea Jeffery

The end of December 2014 marked significantly more than the end of a difficult year for the mining sector – a year in which prolonged strikes cost platinum mining companies R25bn in lost revenue, electricity shortages worsened, and mineral prices came sharply down.

It also marked the time by which the various black economic empowerment (BEE) objectives in the mining charter were supposed to have been met. Moreover, as mining minister Ngoako Ramatlhodi warned last year (and reiterated last week) companies that fall short on their charter obligations could lose their licences to mine.

But meeting the BEE targets laid down in the mining charter will not be easy, if only because goals that were largely aspirational in the beginning were unilaterally turned into hard targets by the then mining minister in 2010.

For example, in the initial charter signed in 2002 and made operative in 2004, mining companies made broad commitments to increase their procurement from black suppliers where possible. Under the revised 2010 charter, by contrast, mining companies must increase such procurement to 40% of annual purchases for capital goods, 50% for consumer goods, and 70% for services.

However, the necessary black-empowered suppliers are not easy to find, especially for capital goods. Yet the revised charter also identifies any failure to meet the amended targets as a breach of mining law which may result in the revocation of mining rights.

As journalist Tim Cohen commented: ‘Suddenly, all the soft targets of the charter were turned into black letter law. Suddenly, not achieving the procurement targets meant your competitors could insist on your licence being revoked.’

Though the 26% ownership target remained largely unchanged in 2010, the Department of Mineral Resources (DMR) is nevertheless now insisting on two major variations to the rules.

The 2002 charter said BEE deals should take place ‘for fair market value’. But the DMR now takes the view that these deals do not count unless BEE investors – most of whom lack the capital to pay for shares – have largely been freed from debt.

Hence, when the Chamber of Mines put BEE ownership of mining companies at 28% on average in 2011, the DMR instead insisted that black ownership stood at a mere 9%. Though deals worth R280bn had been done, ‘debt funding had reduced BEE stakes’, the DMR said.

The 2002 charter, in keeping with the ‘once-empowered, always empowered’ principle, also said that the ‘the continuing consequences of all previous deals’ must be taken into account. But in 2010 the minister declared an end to this principle, saying that if BEE investors sold out, mining companies would have to do fresh deals.

This issue could prove crucial to the capacity of mining companies to retain their mining licences, now that the ten-year charter period has come to an end.

It also explains why Northam Platinum recently entered into a new BEE deal to replace an earlier one that had already raised its BEE ownership to 26%. This deal collapsed in 2012 when BEE investors sold out because a sharp drop in the company’s share price meant they could no longer service their debt.

With its BEE ownership down to 4%, Northam in October 2014 entered into a new BEE deal, valued at R6.6bn and intended to bring its black ownership up to 35%. The additional deal was ‘imperative’ if the company was to avoid losing its mining licence, it said.

Other companies, notably Sibanye Gold, regard this revision of the BEE rules as ‘absolutely unacceptable’ and refuse (in the words of CEO Neal Froneman) to ‘be bullied into new empowerment deals’ at further cost to existing shareholders, both black and white.

These unilateral changes to the mining charter have made compliance much more challenging and could see various companies lose their mining licences in 2015. This insecurity of title is a policy ‘own goal’ that is all the more damaging because it comes on top of the electricity crisis and a host of other obstacles to successful mining operations.

BEE in the mining sector has clearly brought great wealth to a small elite. However, it has also fostered abuses in the granting of mining rights, deterred investment, cost jobs, and made it much more difficult for South Africa to capitalise on its enormous untapped mineral wealth. How this has helped the disadvantaged is hard to understand.

The damaging 2013 mining bill is now being sent back to Parliament for reconsideration. This gives South Africa a key chance to recast its mining legislation to ensure it complies with international best practice. This requires certainty, stability, and predictability in the relevant rules. The general formula is already well known. What is needed is the political will to adopt it – and then stick to it.

Anthea Jeffery holds law degrees from the University of the Witwatersrand and from Cambridge, and a doctorate in law from the University of London. Dr. Jeffery is head of policy research at the IRR, and her books include BEE: Helping or Hurting?, Business and Affirmative Action, People’s War: New Light on the Struggle for South Africa, and Chasing the Rainbow: South Africa’s Move from Mandela to Zuma.