SOUTH African mining shares were roundly penalised on June 15 following the publication of the third Mining Charter, a redraft of the 2010 version but which has far-reaching implications for the country’s mining sector, unanimously bad ones.
According to Investec Securities analyst, Andrew Snowdowne, mining shares may offer “near term attractive buying opportunities”, but in the longer term it is almost impossible to make a case for holding them.
This is based on an expectation the Mining Charter redraft won’t see light of day in its current form. Already, the Chamber of Mines has set out its legal stall to have the document taken on review, set aside and then interdicted while the High Court considers the merits of the review. It may well be that given the lack of consultation with the industry, the courts will send all parties back to the negotiating table.
In addition, an application last year for a declaratory order by the Chamber of Mines on the principle of ‘once-empowered, always-empowered’, which had been held in abeyance, has been lodged with the High Court.
This is the question as to whether previous empowerment deals will be recognised in the event the black partner sold its shares or the transaction failed. The issue is yet more critical because the Mining Charter seems to indicate previous empowerment deals won’t be recognised; in fact, only direct BEE shareholdings will be considered for credits.
The outcome for mining stocks is potentially disastrous as it will require re-empowerment and shareholder dilution. In the case of Lonmin in particular, this is a clear case of the South African government shooting itself in the foot considering the Public Investment Corporation (PIC) under-wrote the platinum producer’s $4bn rights issue which sees the PIC has its largest shareholder with a 14% stake.
A similar observation can be made for Transnet. Although the state-owned entity calls for private public partnership totalling some R280bn over the next 10 years, it’s already fair to say Transnet’s business is already a vibrant confluence between government and business monies. Harming the mining sector, harms Transnet’s balance sheet which relies heavily on the take-or-pay contracts business is willing to sign.
WHO HURTS THE MOST
Nedbank Securities has run an analysis of which mining stocks are most exposed to dilution assuming that re-empowerment would have to occur which, in terms of the Mining Charter redraft, has a new target of 30% of shares compared to 26% currently.
“Whilst there are numerous other demands outside of the direct BEE shareholding that could be significantly worse in terms of value destruction, this is the easiest way to try and quantify,” said Leon Esterhuizen, Nedbank’s mining analyst.
Of the gold producers, Gold Fields is the least affected by the Mining Charter redraft on the basis that only 16% of total production is located in South Africa set against a direct BEE ownership of 10% which implies dilution of 3% in order to reach the charter’s ownership target. DRDGold is the most exposed with 100% of its output in South Africa and only 11% direct BEE ownership. The implied dilution for its shareholders would be 20%.
The list goes on. Very few counters escape having to absorb any dilution except existing black-owned companies such as Northam Platinum which is 35% black-owned and Exxaro Resources which is restructuring its BEE ownership to 30% down from 51%. Royal Bafokeng Platinum is 52% black-owned. Nonetheless, all these mining firms have to meet other aspects of the redrafted charter which make massive demands on procurement and employment equity targets.
In addition to the legal challenges which are bound to come the way of the South African government, there’s division within the the African National Congress (ANC) as to the Mining Charter. For instance, its Economic Transformation committee has said it plans to discuss the document with mines minister, Mosebenzi Zwane.
Said Snowdowne: “Mining companies are possibly being caught in the cross hairs of local politics and posturing ahead of the ruling ANC’s leadership conference in December. Supporting this view is the fact that despite a very long period in the making, the legal terminology used in this document is, in many cases, very vague. This results in a lot of ambiguity and provides the DMR with significant subjectivity in any final decisions made”.
On the issue of terminology, one element that further deepens the political intrigue of the Mining Charter redraft is the way in which the ownership targets in the regulations are constituted, or mandated structures, as attorneys have described it.
This is the demand that ownership be divided equally between communities, company employees and Black Entrepreneurs. Whilst communities and employees have long – and rightly – been beneficiaries of BEE, Black Entrepreneurs is a new, somewhat elastic term.
Jacinto Rocha, a mining industry consultant who was previously deputy director-general at the DMR and helped write the first Mining Charter in 2002, said this element of the charter resembles “… a disguised form of quotas which the courts frown upon. The distinction between numerical measures and quotas is the flexibility of the standard,” he said.
One assumes Black Entrepreneurs are analogous to Black Persons described in the document which, in its definitions, are described as “… a generic term which means Africans, Coloureds and Indians” and includes citizens who have been naturalised before 27 April 1994 – the day South Africa’s constitution was voted in – or “… on or after 27 April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date”.
The suspicion that Zwane has presided over a Mining Charter redraft that would be sympathetic to additional exploitation by the Gupta-linked companies cannot be overlooked. Nor, too, the closing off of new business in South African mining to foreign capital.
This is by dint of new regulations relating to applications for prospecting permits which can only be claimed by 50% plus one share black South Africans whilst another new regulation in terms of ownership sees a requirement for a 1% revenue levy paid first to the controlling empowerment partner.
“In our view this is likely to be a major deterrent to future investment rather than have an immediate impact on the miners as the Charter suggests this only applies to new mining rights, not existing rights,” said Snowdowne.
However, another element of the Mining Charter on the issue of ownership states that mining companies selling shares to black partners will be required to write-off the cost of the transaction if it is not repaid through dividend flow after a 10-year period.
