MARK Cutifani, CEO of Anglo American, one of South Africa’s most important companies, once commented that empowerment deals ought to be allowed to fail, just as in any sector or walk of commerce, businesses fail.
There are examples of this having happened. Afripalm Resources was forced to close its offices after it handed shares in Northam Platinum to lenders because the dividend flow used to finance them had dried up. Countless other empowerment deals were refinanced as mineral prices corrected on the back of a reduction in Chinese economic growth.
For reasons one assumes are ideological, and perhaps even pernicious, the redraft of South Africa’s Mining Charter on June 15 would appear at heart to seek indemnity against failure of black economic empowerment through a subversion of the normal rules of business. Moreover, it wants local and international shareholders, including pension funds and retail investors, to provide guarantees for this politically- and ideologically-driven diktat.
Take Section 2 of the redrafted Mining Charter which deals with ownership. Its clause numbered, 22.214.171.124 makes the point that in the event of a rights issue, the holder of the mining right “… shall not reduce the Black Person shareholding distribution …”. This interprets as a free-carry for the black economic stake – now increased to 30% from 26% – in the event of a public fund-raising. It’s a you-before-me without the altruism.
Another clause – 126.96.36.199 – requires that after a ten-year lock-in period for the empowerment partner, the right-holder (company) must write-off the balance of the debt if it hasn’t been fully repaid through dividend flow. In addition, that dividend flow will be supplemented with 1% of revenue paid in the event of a distribution before either lenders or other shareholders.
There’s also a clause – numbered 188.8.131.52 – which seems to pave the way for state-owned beneficiation at the expense of shareholders. This is the item which says that the empowerment partner must also be allowed the right to the “… transportation as well as trading and marketing of the proportionate share of the production”; that is, 30%.
The mind boggles as to how Anglo American Platinum (Amplats) or Impala Platinum would countenance a situation where 30% of their production could be smelted in, say, a government-owned facility. The fact that beneficiation creeps into a section dealing with ownership also supports the suspicion that the Mining Charter is a mish-mash of its design, which was to court more than 60 stakeholders, looking for different ideas – all compiled without the oversight of the industry required to implement it.
It’s hard to know exactly how this marries with commercial law, specifically South Africa’s Companies Act, but one can hear the shattering and splintering of trade deals from here. As a piece of industry regulation, the latest version of the Mining Charter is so far out of control, it’s hard to absorb.
It now falls to the Chamber of Mines to take the matter to court. Ostensibly, the industry’s beef is to win a declaratory order in the High Court in its favour which says the Mining Charter recognises the standing of empowerment transactions even if the counter party has ‘sold out’ or the deal collapsed under commercial pressure. Practically, however, winning such a declaratory order puts a spoke in the wheels of the Department of Mineral Resources and returns it to the negotiating table.
But it may take time, and while the Mining Charter is also subject to an interim interdict, there’s the slow drip as confidence ebbs from an already trampled sector. As Steve Phiri, CEO of the black-owned Royal Bafokeng Platinum said, the mining sector in South Africa has been in crisis for at least the last five years.
“We believe South Africa will become less attractive as a destination for capital investment as a result of the revised Mining Charter,” said Andrew Snowdowne, an analyst for Investec Securities. In its current form, the Charter would “act as a powerful re-rating catalyst in our view”, he said.
Evidence of this is apparent in the share prices of some of the country’s best known mining stocks. The Mining Charter in its current form makes no sense. Crimping profits to make new empowerment targets inviolably successful only hurts the ability of the mining sector to sustain itself, much less grow. And that will mean jobs. Some 70,000 jobs have been shed in the sector in the last five years, according to Roger Baxter, CEO of the Chamber of Mines. Expect that figure to grow even whilst lawyers, courts, governmental departments and mining companies haggle over this latest ideological impost.