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Jan de Lange

BEE's festering sore

Jan de Lange | Mon, 29 Jun 2009 11:43
[miningmx.com] -- There's a festering sore in the business world that is causing increasing distress, but nothing is being done about it because it is simply "not fitting" to discuss it.

It concerns the levels of debt that have been incurred to achieve the objectives of black economic empowerment, and which are becoming unsustainable in the current financial crisis. Unease in this regard permeates the entire economy, but it is particularly serious in the mining industry.

In fact, this is where the boil could burst at any minute. The first indications of something being seriously amiss were given at the annual Mining Indaba in Cape Town in February this year by Cliff Zephyrine, head of investment banking at Absa Capital and Barclays Capital.

Government needs to assist BEE deals funded by debt, because the country's banks simply cannot carry this indebtedness. In most of these transactions, credit was advanced on the basis of future earnings, future dividends, or in future share prices, but all these sources of income have dried up since the global credit crisis began to take its toll in September last year.

"The year 2009 will be BEE's (black economic empowerment's) year of truth in the mining industry... I don't want to use the term "toxic assets", but you are of a course welcome to do so," Zephyrine warned. Banks have since remained mum regarding the indebtedness of BEE transactions.

Major players in the mining industry have even more disquieting things to say in informal discussions.

At the minerals department (DME), a crisis that no-one knows how to handle is looming regarding the funding of BEE transactions that have dried up, with creditors wanting their money back. Government, which virtually forced banks to finance BEE transactions, will have to accept responsibility, but the National Treasury is not interested. The infrastructure development programme itself will be exerting too much pressure on the fiscus.

Some banks have apparently already converted the debt they advanced into shares and taken over control of certain new mines. The chief executive of a coal company tells the story of how a banking group approached his company with a request for it to consider buying such mines from the bank.

The Mineral and Petroleum Resources Development Act, which regulates the mining industry's BEE prescriptions and demands, together with the Mining Charter, has certain weak points and obscurities.

During the 2002 charter negotiations, it was agreed to publish within five years a 'Codes of Good Practice' aimed at obviating these legislated ambiguities and weaknesses, in consultation with the industry.

But virtually no consultation has taken place. We will probably never know why, but the election fever and uncertainty over future mining policy in the Zuma administration probably had much to do with this omission.

And then, on April 29, just before the inauguration of the new government, the Code of Good Practice was published - with the stipulation that BEE partners' 26% shareholding in mining companies by 2015 should be debt-free within two years, or the mining company concerned would not receive recognition for a BEE transaction.

This is a cheap way of extricating oneself from the debt crisis, and entirely inconsistent with the Act. At its worst, it is furtive nationalisation of mining assets.

Ten days ago, on June 19, the SA Mining Development Association (Samda), which is regarded as the junior or black chamber of mining, expressed serious discontent. Some rather derogatory things were said about the DME: Government did not know what it was doing, it was stupid. Samda had been in no way consulted, it said.

According to Samda chairman, Clyde Johnson, the association had previously even recommended to the DME that BEE companies should get guidelines about the possible dilution of the 26% shareholding, so these companies could gain access to funding in the current difficult market conditions.

A day after reports in this connection appeared, Samda published a second press release, stating that, upon reflection, Samda should have first spoken to the DME before broadcasting its press release worldwide.

It had had a long history of constructive involvement with the DME, and had always reached a compromise on key policy issues, it said. It also regretted not having again adopted this route, and apologised for not first attempting to consult the DME.

Crucially, however, it stood by the issues it had raised. This means that Government, probably the new mines minister, Susan Shabangu, and/or director-general Sandile Nogxina, had given Johnson a dressing down. They probably forced him to make a public apology should Samda wish to continue representing the emerging mining industry.

In other words, the BEE beneficiaries most impacted by the global financial crisis who were complaining about the clumsy way in which Government had handled the crisis, have been humiliatingly silenced.

Why?

Because BEE has assumed a strong ideological and emotional character, rather than being a neutral economic growth strategy. Or that is what it was supposed to be. Any criticism of Government's way of doing things is regarded as high treason against the economy, which could again unleash the economic disaster following the leak of the Mining Charter in 2001.

This is also why the banks are keeping their tongues about the unserviced debt for BEE deals since Zepheryne's remarks at the February Mining Indaba. But the problems will not evaporate just because no-one dares speak about them.

Indeed, the canker is spreading and becoming increasingly toxic.

- Sake24

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