Mine firms may have to "facilitate" BEE deals

Allan Seccombe | Fri, 30 Apr 2010 13:05

[miningmx.com] -- The South African government is dissatisfied with the wealth created in empowerment deals by the mining sector and amongst the proposals being studied are the specification of a “minimum value of facilitation” mining companies should give to new partners and to ensure some cash flow to these parties.

There is a strong health warning on this story. This is just a proposal at this stage and there is a long way to go yet before a final decision is reached on this aspect of the Mining Charter review.

This facilitation value proposal forms part of talks around the revision of the Mining Charter, which was enacted in 2004 and outlined the requirements for mining companies to transform their ownership, management and labour structures as well as their community obligations to qualify for new-order mining rights.

A sub-committee was tasked by the government, labour and industry to study the ownership and funding models that have been put in place over the past five years to meet the first target of 15% black ownership of mining companies by 2009. The next target is 26% by 2014 and the government is keen to ensure the next round of black economic empowerment (BEE) deals to reach that level are far more effective.

"We’ve done the review of the charter. I’m not satisfied with the achievement we have right now. Even when we reach 26% you can’t say we will be satisfied with the deracialisation of the mining industry," mines minister Susan Shabangu said after the Mining Summit in March.

"We can only be satisfied when we reach a point where the economy of our country can create fair play for everybody. That’s the key issue."

A number of empowerment deals struck in the past five years have floundered as the markets turned sour and access to finance dried up during the financial crisis that started in late 2008. At the same time commodity prices fell hard, curtailing the flow of money to empowerment partners and leaving the deals under water, an oft-repeated criticism of the way BEE deals were structured.

The two key themes that the sub-committee found in their deliberations was that there needed to be greater clarity about what is needed and that there had been “insufficient true value creation for BEE participants to date.”

The findings and proposals of the sub-committee are contained in an early draft of a discussion document for participants at the Mining Summit held in March. Miningmx has a leaked copy of that document, which also identified constraints that cost the mining sector billions of rands in lost opportunity during the 2001-2008 commodity bull run. It also deals with transformation of the sector.

“The sub-committee believes that one..., if not the main, criticism on the achievement of the objective of black ownership in the mining industry to date is that there has been a shortage of real value created for BEE participants,” sub-committee said.

OF GREAT CONCERN

“This is of great concern as it brings into question the efficacy of the Mining Charter in achieving the very first and basic objective of black ownership,” it said. “Addressing this issue in a revised framework was therefore a core focus of the committee and led to the introduction of the concept of ‘facilitation value’.”

Everyone Miningmx spoke to in the mining sector about this proposal declined any comment, saying it was a work in progress. It’s not clear yet if this will become a new requirement for mining companies in structuring BEE deals but work on the matter must be completed by June, according to a deadline set by mines minister Susan Shabangu.

The Ownership and Funding Sub-Committee used as a starting point the suggestion that mining companies were not obligated to stump up the full 26% to prospective empowerment partners, but had to contribute something because BEE players had little to contribute towards such a transaction.

“Companies are not expected to donate or facilitate the full 26% to their BEE partners, but a lower value,” their document said, pointing out “the only way a BEE partners can achieve 26% ownership is to fund the shortfall (between the cost of the 26% and the value of the company’s ‘donation’/facilitation) with debt.”

Given the vagaries of the markets in the direction of share and commodity prices as well as managerial abilities of mining companies, the only part of the empowerment transaction that could be controlled by legislation is how the deal is structured from the start, the sub-committee said.

PRESCRIBE A MINIMUM VALUE OF FACILITATION

“If we prescribe a minimum value of facilitation that the empowering companies have to provide to the BEE partner at the outset of the transaction, we can capture the required economic impact of all possible variables in a transaction in a single measurable guideline,” it said.

This facilitation could be either a percentage of the market capitalisation of the company, or, for those companies headquartered outside South Africa, a proportion of the total value of the South African operations.

“The value of facilitation is equal to [the] economic cost of the BEE transaction to the company,” it said.

It laid out examples of how the value of facilitation or cost would be quantified. It used an example of a BEE partner receiving discounted shares, the value of the facilitation value would increase by the value of the discount. Similarly, if companies provided vendor financing at rates cheaper than the going market rate.

The value of guarantees put up by the company for debt incurred by BEE partners in the transaction would also be added to the facilitation value. The value of preferential dividend terms for BEE partners would also be counted, it said by way of example.

“The sub-committee has not specified such a percentage at this stage, believing that his critical measure will have to be determined by the Migdett principals,” it said.

Migdett is the Mining Industry Growth, Development and Employment Task Team comprising representatives from the government, labour and mining companies.

The sub-committee proposed that subject to a number of considerations, companies should try to accommodate the “BEE partner’s wishes on whether a transaction should be structured as a physically funded transaction, or with notional vendor finance.”

The sub-committee also proposed that there be cash flow to the BEE partners a certain number of years into the transaction, addressing the concern that repayment of debts out of dividend flow in some of the current structures meant partners did not receive any proceeds for years on end.

It defined ownership as “economic participation” made up of voting rights, capital growth and asset yield or returns in the form of dividends for example.

Importantly, it said it proposed "there be no change to the status quo of companies that complied with the ownership requirements as stipulated in the Mining Charter for 2009 and as adjudicated by the DME at the time and according to which new-order mining rights were granted."

It gave an example of how this could work. Say a company has completed 15% black ownership by 2009 and needed 11% more by 2014. Officials would divide the 11% by 26% and multiply by the minimum facilitation value, regardless of the amount of facilitation value provided in the 2006 transaction.

Shabangu said after a mining summit where the tripartite partners met at the end of March that all work recommendations on how to remove bottlenecks preventing the mining sector from growing and being competitive as well as the charter review must be completed by end-June.

Her Department of Mineral Resources wants to push through a raft of amendments to all legislation governing the mining sector late this year or early 2010 to clarify, change and improve the laws to encourage growth, leaving mining companies no excuses on why they cannot operate effectively, she said.

The other key aspect is bringing along other government departments, like transport and energy for example, to ensure there are no constraints on the mining sector that rail, ports and electricity are having currently.