Zwane’s money for nothing, and his cheques for free

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SA mines minister, Mosebenzi Zwane Pic: Martin Rhodes

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 2.1.1.4 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 2.1.1.6

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 2.1.1.7 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.

Conclusion

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

12 COMMENTS

  1. Brandon, thank you for a very insightful article. It will not make any difference though, this minister and his boss, Zoomer does not even understand basic grade 5 mathematics. To try and explain this to them is futile…

    • That’s mighty racist and stupid of you! Just because we don’t agree with your agenda of extracting our resources to fill your pockets doesn’t mean that we don’t understand economics. Yours are just not working for us.

      • The minerals belong to whomever invests in exploration and discovers the deposits NOT the country it happens to be in. If no one does the exploration the minerals will not mine themselves and enrich the local population. It will remain in the ground forever… and by the way,the fact that Zoomer and Zwane cannot do math has nothing to do with their race and everything to do with them being COMPLETE IDIOTS…That is why they were hand picked by the Guptas,it is much easier to manipulate idiots than it would be with intelligent black people…

  2. apart of journalistic opinions, it would be much more interesting to read a legal (!) opinion by the editor, being a legal adviser… is it in any ways clear, how the legal situation is? Does the mining charter violate the constitution and is the decision of the High Court previsible in any ways? THIS would be interesting …

    • Hi Matt – We’ve got a long read article coming up this week that will hopefully address the question you pose.

      Regards

      David

      • Thanks already, David. Guess I´ll definitely not be the only reader looking forward for this article. Would be interesting to also examine the legal arguments the two parties wrote to the High Court as the Chamber of Mines posted their last statement this friday

  3. I think you missed the point of the article. None of the issue raised were opinions, they were direct quotes in law from the charter with the most likely legal outcome under our law as its stands . The purpose of the article (given I was limited to 600 words) was to highlight legal provisions, so far overlooked, that should they be retained, would have an even greater negative commercial effect on the industry than the current empowerment focus. I hope that helps.

  4. Matt – thank you for your comments. The purpose of the article was to highlight critical legal issues that have a crushing commercial effect on further mining investment. Several legal and possible illegal provisions seem to have been overlooked in the outrage over the revised empowerment targets. Given I was allowed 600-800 words to highlight these critical failings, I wasn’t able to cite lengthy precedent, or delve into constitutional law.
    I rose these issues to attempt to make sure they are addressed in a much longer legal analysis. I hope that contextualize the article for you.

  5. I am shocked that in 2017, we still have a racially profiled business chamber. Assuming for one moment that this is necessary to address historic imbalances (I don’t buy into that at all, if anything it just further polarises the issues), the Minister and his advisors are clearly not technically equipped to address the issues of business management. He continues to make a fool of himself. As someone said; it is difficult to win an argument against a smart person, but it is impossible to win an argument against a dumb person. I am afraid Mr Zwane is ceating the impression that he falls into the latter category.

    • My Indian friend, you should not be surprised at all. Racism is here (and in the rest of Africa) to stay, forever. The black elite, and through their greed and irresponsible words and actions, want to grab ALL of the wealth for themselves. The easiest way of doing this is to blame all our woes on “the whites” (as if we are all the same), Apartheid (even though it has been dead for 24 years and no one can actually remember a time when it really affected them, and colonialism (which no-one alive can remember. This puts them in a position where they do not have to compete against whites, coloureds and Indians (except the Zuptas of course) and makes it easier for them to get contracts, jobs, tenders etc. and for getting the poor black person to vote for them and keep them in power. When Floyd Shivambu was still in the ANCYL he was once asked by a reporter; “how long do you envisage the ANC having a policy of Affirmative action and black economic empowerment in plce” he famously responded “until those white kids are as poor as our black kids”. So it is all about narrowing the “wealth gap” but not by creating business friendly policies and thereby uplifting the poor black majority, it is aimed at revenge and pulling the “rich whites” down into poverty so that we are all equal… I somehow do not think that was what Madiba had in mind when he set out to reduce inequality, but that can be the only outcome of what this government is doing right now. Unfortunately that has been the theme for all of Africa (except for the elites in government). The rich people (black and white) will leave and take their capital elsewhere in the world where capital is loved and used to create industry and consequently jobs. The tax base here will disappear and even grant recipients will not be receiving this for much longer.

  6. And while all of this is going on, SA will miss out on the cashing in during the current growth in commodity prices. O, yes but the honourable minister do not know about this; he still thinks the commodity prices are under pressure.

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