IRR; Mining Charter’s homework deserves a fail mark - BizNews

Anthea Jeffery

The 2018 draft mining charter is better than its 2017 predecessor in some significant ways. But the IRR remains concerned that the charter still exposes mining companies to the risk that their mining rights could be cancelled if they fail to maintain a 100% score on their ownership obligations for a period of 30 years.

The draft charter will also add enormously to the costs of mining in South Africa – and this at a time when some 50% of gold mines and 60% of platinum ones are battling to survive at current minerals prices.

Some of the potential impact can be gauged by looking at the draft charter’s requirements for new mining rights – and the burden they would place on a prospective investor.

Let’s assume a company called Azania Manganese (AzMan) is considering investing R20bn in a new manganese mine. Under the draft charter, AzMan will have to start by ceding 30% of its equity to BEE beneficiaries. Of this 30% stake, 8% must go to mine employees, 8% to neighbouring communities, and 14% to a BEE ‘entrepreneur’ – defined as a company which is 51% black-owned (BEEco).

Since mine employees and communities cannot be asked to pay for more than 3% of their 8% stakes, AzMan must provide 10% of its equity free of charge to these groups. In addition, if BEEco lacks the capital to pay for its 14% stake, AzMan may in practice have to offer it a 25-30% discount on the market price of its shares. It may also need to lend BEEco the money to finance its purchase, again on preferential terms.

Under the draft charter, if BEEco sells out before ten years have passed, AzMan will get no credit for its earlier 14% deal and will have to start again on this. If BEEco waits for ten years before selling out but then still has debt outstanding on its stake, then AzMan will probably also have to start again. This is because the (poorly worded) draft charter states that AzMan’s empowerment credentials can be recognised only if the ‘unencumbered net value’ of BEEco’s shares has been ‘realised’. (This seems to trump another clause providing for a more gradual vesting process over the duration of a mining right.)

If BEEco unexpectedly sells out after nine years and AzMan cannot find or finance a new BEE entrepreneur for six months, AzMan will have failed to maintain the necessary 100% score on the ownership element, as required by the draft charter. Since the charter does not provide for a grace period, AzMan may thus be ‘regarded as non-compliant with the provisions of the Charter and in breach of the Mineral and Petroleum Resources Development Act (MPRDA)’. Its mining right might then be cancelled, while the company and its directors might be subjected to fines and prison terms.

If AzMan is unable to pay dividends for five years, then in the sixth year it will have to pay a ‘trickle down’ dividend to mine employees and communities. This will be set at 1% of gross profits (earnings before interest, taxes, depreciation and amortisation or Ebitda) and will add to operating costs.

AzMan will also have to comply with onerous BEE procurement requirements. At least 70% of its spending on capital and other mining goods will have to go to locally manufactured products. Of this 70%, 26% will have to be bought from 51% black-owned firms, while the remaining 44% must come from firms with 26% BEE ownership and a good (level 4) BEE ranking.

However, AzMan will battle to meet this requirement as few South African companies – and even fewer firms that are 51% black-owned – have the capacity to produce sophisticated draglines, ore crushing and processing plants, or similar capital goods. Yet if AzMan falls down on this requirement, this could also jeopardise its mining right – especially as procurement obligations count for 60% of the points on the charter scoreboard. This will put pressure on it to help establish and build up the necessary 51% black-owned suppliers. Yet this could prove an enormous burden on its resources, both human and financial, and will prevent it from focusing on its core business.

Similar provisions apply to the mine services AzMan will need. According to the draft charter, these include ‘mining production services’ and ‘drilling’ as well as ‘mineral marketing’, ‘transportation’, and ‘shipping’, along with ‘consulting’, ‘financial’, ‘insurance’, and ‘legal’ services. AzMan must purchase 80% of all these services from South African companies. Of this 80%, no less than 70% must be sourced from 51% black-owned companies. Again, the necessary 51% black-owned firms often do not exist, so AzMan may have to help establish them in all these different spheres.

At the same time, AzMan must invest 5% of annual payroll (in addition to the 1% levy it will have to pay to the state) in skills development. Of this, 3.5% must go to training for both employees and members of mine communities. The remaining 1.5% must go to public universities and other research entities, and must be apportioned among them according to ‘national or provincial demographics’.

This wording suggests that preference will have to be given to historically black universities, despite their limited capacity for the complex research (into mechanisation, for example) the industry needs. Moreover, this substantial payment for skills development will have to be made in every year – and even before AzMan’s new mine has started yielding any profits.

In addition, BEE requirements in mining (and other sectors) have been changed so often over the past 14 years that AzMan cannot be confident that the draft charter’s rules will remain the same for the 30-year duration of its mining right, irrespective of what assurances are currently being provided. Now that the supposedly immutable 26% ownership target has been raised to 30%, the chances are high that a 51% BEE ownership target will in time be introduced – as the ruling party has long desired.

AzMan also faces further burdens under the MPRDA Amendment Bill of 2013, which the National Council of Provinces is currently trying to push through the legislative process in double-quick time. If the bill is enacted in its current form, the mining minister will be able to declare manganese a ‘designated’ mineral which is needed for local beneficiation. AzMan will then have to sell whatever proportion of its product the minister specifies (anything from 1% to 99%) to local producers at ‘mine-gate’ prices, even if overseas buyers are willing to pay more. This will limit the revenues AzMan needs to pay for all its onerous charter obligations, to say nothing of its operating costs.

Also relevant is the ANC’s determination to implement expropriation without compensation (EWC), either via a constitutional amendment or under the Expropriation Bill of 2015. The ANC keeps implying that EWC will be confined to land alone, but both the Constitution and the Expropriation Bill define property as ‘not limited to land’. Unless this definition is amended – and the ANC shows no intention of making such a change – AzMan could in time also confront the uncompensated expropriation of its mining right, along with its plant and other assets.

Why, then, would AzMan – or any other potential investor – want to gamble on investing in mining in South Africa? Why take the risk when other countries not only have substantial mineral reserves but also offer certain, predictable, and stable mining regimes? Already, new mining investment in South Africa has dropped substantially. Hence, the more the government continues on its present interventionist path, the more mining in South Africa will become a sunset industry.

Dr Anthea Jeffery, Head of Policy Research at the IRR, and the author of ‘Sunset or Sunrise for Mining in South Africa’, released by the IRR this week. 

https://www.biznews.com/thought-leaders/2018/06/21/draft-mining-charter-fail-anthea-jeffery/