Sandile Nogxina, DME Director General
Send this article to a friend
Print this page

» BEE architect goes solo


SA mining licenses leap 13% - DME
David McKay
Posted: Mon, 31 Jul 2006

[miningmx.com] -- FEARS South Africa’s Department of Minerals and Energy (DME) would be swamped by the volume of mining licence applications may ease after it emerged mining licence and new order conversion awards increased in the year to June 2006.

According to information accurate to 5 June, of the 8,293 mining and prospecting licence applications, and conversion of old- to new-order mining right applications to the DME, about 13% had been successfully granted. This year’s information also shows a near doubling in applications.

This represents a significant advance on the previous year’s performance when, of the 4,424 applications, only 2.5% had been granted.

Some 1,078 applications of various kinds were granted by the DME and 955 were refused which means that the applicants cannot submit another one. The DME rejected a further 1,249 applications but in these cases, the companies can resubmit their applications.

One caveat to the increase in licence awards, however, is that many of them would have been for prospecting, which had an earlier deadline before the property rights reverted to the State. Industry sources say there are still a number of mining licences and conversions to be awarded.
We’re still feeling our way
“We are getting the hang of it,” says Sandile Nogxina, director-general of the DME. A crucial improvement to the system is to remove the politicians from the equation. This involved appointing three chief directors responsible for three provinces each.

The ‘clustering’ system has allowed Nogxina to specifically deal with disputes; not having prior knowledge of the application has also helped lift the corporate governance standards in the system. “I just manage the system, impose quality control and then sign the recommendations,” he says.

There have been other improvements. Each major company has been allotted a month of exclusivity in which its applications will be framed with a three-day workshop. The rest of the month is for the company to compile its application, provide supporting papers and walk away with its licences. So far AngloGold Ashanti has fully complied with the conversion and mining licence process.

Privately, mining companies complain about the time taken to complete the mining licence process, but the DME’s efforts are gaining traction. “It’s not surprising the conversion process has taken time owing to its complexity,” says Barry Davison, non-executive director of Anglo Platinum. “But we’re still in the early stages of BEE. The whole system is moving, and we’re still feeling our way,” he says.

Nogxina says there are snags in the system, but many of them related to the quality of mining licence and conversion applications. With some, instances of false BEE are all too obvious. The stand out case is Simmer & Jack Mines, which had a 51% empowerment partner in the Jaganda consortium, without providing Jaganda’s shareholder – Vulisango – with enough voting power to veto a proposal.

“We’re now demanding sight of shareholder agreements in which the protection of minority clauses often disempower the BEE companies,” says Nogxina. “Previously we just hoped mining companies would comply with the spirit of the law, but that’s not always been the case.”

“I wouldn’t yet call that a trend, but it’s an indication of some of the problems in the applications,” Nogxina says.

Another problem is that finance clauses in empowerment agreements allow established companies preference shares that ultimately dilute empowement partners. But it’s not all one-way traffic.

There are instances of empowerment companies abusing the system. “I have granted a mining licence in many cases to allow a BEE company to go and attract an established company to partner it and help it finance a project. But the outcome is that the BEE company sells the mining licence in order to finance their own lifestyles,” he says.

Click on image to enlarge

Another sticking point with empowerment is the extent to which BEE firms participate in the economic benefits of a shared venture. How is it, for instance, that Anglo Platinum derives a profit from its 50% share of the Modikwa platinum mine but the other partner, African Rainbow Minerals, does not?

Part of the answer is that Anglo Platinum treats 100% of the concentrate from Modikwa and gets a higher price for smelting and refining the metal than ARM, which gets paid a lower rate for the concentrate. Known as transfer pricing, Nogxina is critical of the practice.

He warns of strong measures to deal with it and has issued a stern warning to companies like Anglo Platinum. “When applying for a conversion, a company will have to sign a declaration. If it signs a false declaration, it could be deemed a criminal offence,” he says. “There’s no way you can separate this activity from fronting. In fact, where there’s bogus BEE, there’s fronting.”

“There’s only one way of controlling this, and that’s through the conversion process. Once the conversion has been granted, it’s difficult for us to go back into private business and private deals to change it,” he says.

Transfer pricing in empowerment deals has been tackled successfully by De Beers in an agreement it reached with Mvelaphanda Resources (Mvela Resources). A similar process occurs in the two companies’ Ndowana Exploration, a joint venture aimed at discovering diamonds in the Limpopo and Mpumalanga provinces with De Beers holding 67%.

In terms of the original agreement, De Beers also had the marketing agreement, which secured higher margins than the price Mvela Resources stood to gain by selling its diamonds directly to De Beers.

The restructured agreement saw Mvela Resources take a 51% economic interest in Ndowana Exploration. This would revert to the original 33%-67% split in favour of De Beers if diamonds were found on private land. The two parties also agreed to discuss the marketing terms of any diamonds discovered by Ndowana Exploration.

The additional value white-owned platinum companies enjoy from smelting and refining is also thought to be a factor in negotiations between Northam Platinum, Mvela Resources and Anglo Platinum in respect of developing the Booysendal mineral property. Though unconfirmed, it’s thought Northam Platinum is negotiating having its share of concentrate from Booysendal passed through Anglo Platinum’s smelting and refining process.

The improvement in commodity prices is likely to stimulate empowerment again after a period of little to no activity. “The commodity boom has made it very difficult for BEE,” says Gerard Kemp, a banker for Rand Merchant Bank. “But now the non-core assets are becoming core. Now is probably the time to be selling the core assets as it’s not dumping.”

But, if abused, it can be dumping. A note from Numis Securities unintentionally highlights the point. Commenting on a deal in which Toronto’s Bema Gold is to sell a stake in its SA-based Petrex Mines to Pamodzi Resources, an empowerment company, the broker comments: “Management are resolving the troublesome Petrex gold mining division in South Africa through the BEE partnership and its forthcoming listing on the JSE.
Free news alerts: click here to subscribe
“This should limit Bema’s downside exposure to the business while retaining upside potential as earnings rise through higher gold prices and a potential and long-awaited weaker rand,” it said. The suggestion is that there’s only downside risk available to Pamodzi from its investment in Petrex.

Says Nogxina: “It will never stop. We need to remain constantly vigilant. But BEE companies don’t go into deals with their eyes closed either. It takes two companies to front. And so you can’t lay the blame of fronting at the feet of established, white-owned companies either.”