SOUTH Africa mines minister, Mosebenzi Zwane, today briefed the Black Business Council on his vision for the Mining Charter claiming the document was a necessary push in the effort to achieve economic transformation.
You can read Zwane’s address here:Zwane Speech to BBE
As a response, former Anglo American lawyer and founder of Strata Legal, Brandon Irsigler, sets out why Zwane’s ‘vision’ is a nightmare for the deployment of private capital in South Africa’s mining sector. – David McKay.
THE revised 2017 Mining Charter blindsided the mining industry with many unexpected provisions which has left lawyers, miners, fund managers, and journalists spoiled for choice as to which aspects of the document to denounce first.
I focus on the provisions that I believe have direct effect on the allocation of capital and the cost of debt – all of which are far more detrimental than ownership targets, procurement, and Employment Equity representation.
1. Money for nothing …
Clause 126.96.36.199 of the 2017 Mining Charter is extraordinary in that that neither the company nor the ordinary shareholders are permitted to dilute the Black entities’ 30% stake. The BEE Partners may dilute their stake – provided they utilise the proceeds for ‘further development’.
The economic effect will be that BEE partner will enjoy absolute immunity from a cash call, resultant immunity from dilution, and retain their minimum 30% shareholding in all circumstances.
In essence, all cash calls will now be borne only by the ordinary shareholders (and investment funders) – a de facto 30% (albeit shared pro-rata by the ordinary shareholder) in addition in excess of the figure required.
Who would invest in a sector where the cash call (regardless of whether any ordinary shareholders investors / funds themselves are Black owned) must supplement by 30% the actual cash needs of the business?
2. Even more money for nothing …
It appears the Department of Mineral Resources (DMR) envisages that the BEE partner will pay for their 30% stake almost exclusively from dividends declared by the company over 10 years, and that no external loans will be necessary – for obvious reasons that follow below.
The distributions can only be issued if the company will be both solvent and liquid after each distribution. The board must:
“… considering all reasonably foreseeable financial circumstances of the company at that time … [and only make a distribution / dividend] if it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months following that distribution/dividend declaration”.
Every year, three percent of the total debt incurred when obtaining the 30% black shareholding must be paid to the BEE partner. If, at the end of ten years, the dividend payments have been insufficient, and the outstanding purchase price not fully discharged by dividend payments, the remaining amount must “… be written off by the Holder or Vendor of the shares to the Black Person, as the case may be.” See clause 188.8.131.52
This is untenable. Not only is such an action an effective expropriation, but a number of issues arise that could effect the commercial and operational survival of the operation. And finally: who would shoulder the tax on what amounts to a donation?
3. The cheque arrives – the commercial impact
a. Dividend declaration
Clause 184.108.40.206 requires the Holder, subject to the solvency and liquidity requirements of the Companies Act, to pay a minimum 1% of its annual turnover to its black shareholders, prior to and over above any distributions to the shareholders of the Holder. This is frankly a non-starter.
Additional dividends in which the DMR places such enormous faith, are far from guaranteed. The board may believe it to be in the best interests of the company to utilise the surplus cash to pay down debt, acquire key assets or retain an emergency cash reserve, but now may not have the flexibility to do so.
b. Effect of near-compulsory dividends on mine operations
With the ever-pressing need to issue a dividend – or face an expropriation, non-black shareholders represented on the board of mining companies (without expressly violating the their shareholders fiduciary duties) may be tempted to delay:
• acquire necessary equipment upgrades, open new shafts, or update processing equipment;
• invest in mining safety technology, environmental safeguards, emission reduction technology, co-generation plants and the like; and
• forego corporate activity that could lower their cost of production i.e. acquire adjacent assets that will dilute overhead costs and low COP.
Over time, this will affect the value of the entity. If sold at a bargain, the 30% BEE partners will lose as much as the rest. But not if they’ve been immune from cash calls.
c. “Preferential option to purchase”
Clause 2.1.3 provides that BEE Partners will have a “preferential option to purchase” on the sale of the Holder’s assets. Quite what “preferential” means is unclear. Does it mean preferential price, terms, vendor finance or a simple ROFR? Who can say?
d. Cost of fund rising – ability to model, debt covenants and risk appetite of investors
The introduction of BEE Partners immune from cash calls, enjoying a vague preferential right to purchase, enjoying the ability to dilute under a DMR regime that has made it clear the mining companies will always require black shareholding, will challenge even the most sophisticated modeling banking team.
Given our history, mining is a rightly emotive industry, and transformation, representation and fair ownership cannot be begrudged, delayed or denied.
However, neither should the Government ignore the significant achievements, not only in ownership and asset disposal by existing miners, but empowerment deals, as well as the huge strides in safety, HIV prevention and Employment Equity representation at senior levels.
Unfortunately the existing DMR appears to believe:
• South Africa has huge mineral resources (making it a risk free investment), which statement always fails to determine between a resource and a reserve;
• The needs of funders can be ignored because of our enormous mineral treasure chest; and
• an investment by a black shareholder should be guaranteed – not risked.
Starting from scratch, building on achievements, robust and honest debate with a solid understanding of markets and empowerment aims will result in legislation that secures investors stability, offers miners and funders real security, and black South Africans dignified, meaningful participation and economic benefit in mining.
This revised Charter allows for none of that.
Brandon Irsigler is the founder of Strata Legal: www.stratalegal.co.za