The third revision of the Mining Charter gazetted on June 15 sent shock waves through South Africa’s mining industry. The onerous set of new regulations may be dead in the water, but mining is once again caught in the crosshairs of a bruising ANC leadership battle ahead of the ruling party’s elective conference in December.
IN the months leading up to the ANC’s 53rd national conference in Mangaung in 2012, there were calls to nationalise South Africa’s mines. Although the prospect of this ever being accepted as government policy was dim, it dealt a significant blow to investor confidence.
At the end of the Mangaung conference, the ANC struck a conciliatory tone after the preceding months’ calls for radical policy changes. The state interventions mooted extended to the beneficiation of certain minerals and plans to consolidate state mining assets into a single state mining company, which has still not come to full fruition.
It’s five years later and the ANC is heading towards its 54th national conference where a new party leadership will be elected and the battle lines have been clearly drawn. Mining has once more emerged as a target in the latest proxy battle – this time not in the form of nationalisation proposals, but a deeply damaging Mining Charter, which many believe could spell the death of the industry.
Minister of Mineral Resources Mosebenzi Zwane, an ardent supporter of President Jacob Zuma and by implication the grouping aligned with presidential hopeful Nkosazana Dlamini-Zuma, launched the Mining Charter two weeks after South Africa entered a technical recession and unemployment figures reached a record high.
Since Zwane’s surprise appointment to the mining portfolio in September 2015, trust between the mining sector and government has plunged to new lows. Jeffrey Schultz, an economist at BNP Paribas, noted there has been a clear breakdown of communication and a rise in animosity between the Department of Mineral Resources (DMR) and big mining companies as represented by the Chamber of Mines.
“Minister Zwane has been deeply implicated in the Public Protector’s state capture report and his name has come up in a number of e-mail leaks showing that he has ties with the notorious Gupta family,” Schultz said. This has raised questions as to who will truly benefit from the new provisions in the revised Mining Charter.
Political commentator Max du Preez went as far as to question if the Guptas had a hand in the drafting of the new document. From the outset, the ANC questioned the prudence of the new Charter and its potential impact on jobs in an industry that has shed 70 000-odd jobs over the past five years.
Days after the release, a party delegation headed by ANC secretary general Gwede Mantashe met with the Chamber of Mines to listen to its concerns. This followed an announcement that it will launch an application to interdict the implementation of the Charter.
Deputy President Cyril Ramaphosa, who is set to challenge Nkosazana Dlamini-Zuma for the ANC presidency in December, has spoken out against the Charter, saying on a number of occasions that the DMR and the Chamber should go back to the drawing board. Minister of Finance Malusi Gigaba has also expressed hope that stakeholders would settle their differences outside the courts.
Zwane, on the other hand, is adamant that the new provisions are a necessary instrument to transform the economy. Zuma also came out in defence of the new Charter when he answered questions in Parliament, saying that the Charter would lead to the necessary transformation in ownership and would not adversely impact the industry.
Miniser of Small Business Development Lindiwe Zulu, another close Zuma ally, who at the ANC’s July policy conference lauded the new Mining Charter as a progressive piece of regulation, said she wished everyone could see that it was progressive.
However, the Mining Charter, in its current form, did not get a nod at the end of the ANC’s June policy conference. The party’s head of economic transformation, Enoch Godongwana, said there are concerns about the “design” of the new Charter, indicating that implementation in its current form is unlikely to succeed.
Historically, the ANC-led government has tended to hit the market hard with the “crazy case” and then move to deliver a more workable case further down the line, said analysts Leon Esterhuizen and Arnold van Graan of Nedbank Corporate and Investment Banking in a company note. “Although we don’t see this Charter in its current form ever taking full effect, we believe this will lead to the early demise of our mining industry.”
Although we don’t see this Charter in its current form ever taking full effect, we believe this will lead to the early demise of our mining industry – Nedbank Securities
Schultz agreed, saying the ANC tends to veer back to its more conservative roots “when the going gets tough”. He pointed out though that noise levels around radical economic transformation, constitutional change and market-unfriendly policies “are a lot higher and riskier than before”.
Claude Baissac, strategy, risk and development expert at consultancy firm Eunomix, said the government has been warned for more than a decade that its heavy-handedness in dealing with the mining industry was rendering it progressively less attractive, and that corrective action was needed before potentially lasting damage was done.
From the onset of democracy, it was agreed that fundamental changes were needed to redress the horrid abuses of the past and their continuing legacy, he said. “However, it has long become clear that the balance between achieving transformation and maintaining competitiveness has been lost. It has become clear that only a few are now benefitting: the politically connected, the crony capitalists, the gatekeepers in the public sector who abuse their office for personal gain.”
TO understand the deeply damaging effect the Mining Charter in its current form will have on the sector, it is worth considering the current state of affairs. The mining industry, which was once the heart of the country’s economy accounting for a fifth of GDP, contributed just over 7.3% in 2016. The decline in GDP contribution goes hand-in-hand with a decline in fixed investment, which contracted by 1% in 2015 and by 3.8% in 2016. Over a five-year period, industry profits before tax dipped by 48% and dividends paid to investors fell by 52%.
In the global arena, mining companies are starting to show signs of recovery as commodity prices start rising again. The world’s biggest mining companies, however, have largely focused on shedding debt and consolidating balance sheets at the expense of exploration activities and mergers and acquisitions.
The little activity that did take place, according to PricewaterhouseCoopers’ Mine 2017 – an annual review of global trends in the mining industry – was in safe jurisdictions.
For a number of years, South Africa has not counted among the list of so-called safe mining jurisdictions.
The country’s ranking as a mining investment destination has dropped considerably on the Fraser Institute’s Policy Perception Index – from 68th position in 2011/12 to 78 in 2015.
High input costs, a volatile currency and labour unrest have taken their toll on mining investment. But the number one deterrent cited among investors and industry stakeholders has been policy uncertainty.
The Minerals and Petroleum Development Amendment (MPRDA) Bill, which is supposed to provide a legal framework for contractual terms for exploration and new investment, is
still stuck at Parliament’s National Council of Provinces (NCOP).
John Kane Berman, policy fellow at the Institute for Race Relations (IRR), warned in February this year after the conclusion of the Mining Indaba in Cape Town that South Africa might lose out again if there was to be another commodities boom, as it did during 2002 and 2012 as a result of an increasingly hostile political environment in which mining companies had to operate. The Department of Mineral Resources appears not to appreciate the damage it is doing to the mining industry, he said.
The announcement of the Mining Charter has since dwarfed these concerns and although the Charter in its current form is unlikely to see the light of day, the legal cases that will ensue could last for years, putting investment on hold even longer. In the immediate aftermath of the Charter’s gazetting, mining companies shed R51m of their value and bond yields rose.
The Chamber of Mines, which in the past had been cautious to comment out of fear of jeopardising negotiations with government about a workable Charter, issued a strong-worded statement, rejecting the “unilateral” development and imposition of the final Charter, calling the process flawed and the set of new regulations nothing short of a disaster.
It subsequently approached the High Court for an urgent interdict to suspend the implementation of the new Charter. The Chamber also intends to revive its previous application for a declaratory order on the interpretation of previous BEE transactions and the “once empowered, always empowered” principle. The DMR has since agreed to hold back on the implementation of the new Charter in any way, pending judgment in the interdict application, according to a statement issued by the Chamber.
The Deputy Judge President of the High Court will set a court date for the hearing in September, while the application for a declaratory order will be heard on 9 and 10 November 2017. This has sparked hopes that Zwane and the industry may reach a compromise and start afresh with negotiations around a more investor-friendly and practical document.
THE new Charter, which was initially supposed to come into effect on the date it was gazetted, would repeal the 2004 and 2010 Mining Charters. At a media conference where the announcement was made, Zwane opined that the new Charter will provide much-needed regulatory certainty and remove ambiguities in respect of interpretation, but it did exactly the opposite.
“In our view this document falls very short of achieving this goal,” said Investec in a sector research paper released shortly after the gazetting of the Charter. “In particular, significant ambiguity still exists around the key principle of once-empowered, always-empowered. By our understanding, Minister Zwane is in favour of not upholding this principle [which means] miners would need to re-empower if previous black shareholders had exited their stakes.”
The new Charter has also upped black ownership targets from the previous 26% to 30%.
Most notably, past black economic empowerment (BEE) deals are not acknowledged, unless they currently reflect in full in the company’s share register, said Van Graan and Esterhuizen. This means a mining company must currently have an active BEE shareholder level at 26%, irrespective of whether previous black partners had sold their shares. “Whatever deals the company may have done in the past, unless its current shareholder split shows BEE shareholders specifically receiving cash flows, the company is seen as not having done any BEE equity distribution yet.
Elevating the status of the Charter would arguably not pass constitutional muster and would be ultra vires. – Fasken Martineau
“In effect, the new Charter simply makes all BEE now a 30% free-carry requirement that continues indefinitely. Most companies always try to tie in BEE shareholders for a minimum period,” they added.
“In the past these lock-ins were essentially designed with the hope that there would be clarification of the once empowered, always empowered principle before these expired. Now, not even a lock-in will offer some cushion against perpetual dilution. In particular, the new Charter states the need to write off all BEE debt after 10 years.”
Besides the practicalities around the increased black ownership target, the DMR could be confronted with a legal challenge in this respect.
In a presentation to clients, legal firm Fasken Martineau pointed out that the top-up requirement from 26% to 30% could be challenged on constitutional grounds. If mining companies need to restructure existing shareholding to meet the new 30%-requirement, it could lead to a reduction of the remaining shareholders’ equity who are not black persons in proportion to their respective shareholding in a particular company.
Should the transaction be structured to achieve this outcome without the non-black shareholders being compensated for their shares, it could constitute an expropriation and therefore be rendered unconstitutional. In addition to a 30% black ownership target, the new Charter stipulates that mining companies will be required to pay 1% of their turnover as a special dividend to those BEE shareholders.
In its June quarterly update, the Chamber of Mines pointed out just how unsustainable this new requirement would be. Data from 2016 showed that total dividends paid to mining shareholders equalled R6bn. “One percent of revenue was R5.7bn. Once the R5.7bn is paid preferentially to the 30% BEE holders, it would leave R300m for the remaining shareholders. That would hardly be an incentive for new investment.”
Fasken Martineau said this provision in itself could be a legal pitfall and be ruled unconstitutional. The 1%-requirement could arguably be interpreted as a tax levy and the Constitution stipulates that a Money Bill must be passed by the National Assembly before any taxes can be levied. Only the finance minister is allowed to initiate a tax bill.
Similarly, the imposition of a 5% levy of a mining company’s wage bill towards skills development may also amount to a tax, which again may only be introduced by the finance minister. In a legal analysis of the implications of the new Charter, law firm Webber Wentzel stated that the DMR is potentially acting ultra vires by imposing this levy. “Although the additional levy is portrayed as a levy to develop skills, the impact is effectively that of a tax in that it entitles the state to a percentage of the net profit of an enterprise.”
Another onerous requirement in the new Charter is the rule that no company will be allowed to enter into South African mining through exploration unless the company is 50% plus one black-owned. This is likely to stop new exploration initiatives in their tracks. “This discounts the incentive or availability of expansion in the sector,” said emerging market economist Peter Attard Montalto of Nomura.
DA spokesperson on mining James Lorimer noted that this will mean the “virtual death” of prospecting. “The BEE sector is perennially short of cash, particularly for speculative actions like prospecting. The amount of prospecting will plummet. Even if there are new finds, capital will be extremely difficult to raise.”
According to Webber Wentzel the new prospecting right provision is an “onerous requirement”, that would dampen prospecting, which is inherently a “risky business”. “This is likely to have an inhibiting effect on prospecting which will not promote mineral resource development in South Africa.”
The Mining Charter also imposes new requirements in relation to the procurement of goods and services. A minimum of 70% of mining goods procured must be spent on South African manufactured goods, and a minimum of 80% of services must be sourced from South African-based companies.
Nedbank’s Van Graan and Esterhuizen argued that the procurement targets will add additional layers of costs and inefficiency in mining companies’ supply chains, which have already been affected by previous Charter requirements. “Input costs will therefore increase.”
Investec is of the view that the limited availability of appropriate and cheap manufactured goods in South Africa will be an obstacle for mining companies if they are to ensure that a minimum of 70% of total mining goods procured are locally manufactured. Similarly, it would be difficult to spend 80% of total spend on services sourced from South African-based companies.
These provisions also leave the DMR open to legal challenges.
Peter Leon and Patrick Leyden of Herbert Smith Freehills argued that these stipulations may violate South Africa’s obligations under the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). Under these agreements, South Africa is obliged to afford imported goods no less favourable than that accorded to like products of national origin.
Under the new provisions, mining companies will be allowed to procure no more than 30% from foreign suppliers. “[This] clearly gives domestic producers a significant advantage over foreign competitors,” said Leon and Leyden. The same obligation applies to services – foreign service providers and domestic suppliers need to get equal treatment.
PERHAPS a more serious question is if Zwane has the authority to transform the Mining Charter into law as he intends to do under a particular clause in the Mineral and Petroleum Resources Development Amendment (MPRDA) Bill that is currently before the National Council of Provinces (NCOP).
A number of legal experts argue that the DMR is not entitled to elevate the Mining Charter into law. “We must be reminded of the purpose of the original Charter,” Fasken Martineau said. “It is a non-binding guideline or statement of policy – nothing more. Elevating the status of the Charter would arguably not pass constitutional muster and would be ultra vires. ”
Webber Wentzel went a step further and questioned whether Zwane in fact has the power to alter the Charter. It argues that section 100(2) of the MPRDA only empowers the mines minister to develop the Charter. It does not grant the minister the power to alter, vary and revise such a Charter.
“Had the legislature intended to bestow such powers on the Minister, it stands to reason that such powers would have been specifically conferred on the Minister in the MPRDA. Needless to say, not providing the Minister with such powers was probably a conscious step in the minds of the legislature to create regulatory certainty.”
The Chamber of Mines’ interdict application that will be heard in September is likely to succeed, especially if the process was as unilateral and flawed as the Chamber claimed.
The success of the declaratory order, which is set for November, to get a decisive answer on the once-empowered, always-empowered principle, is, however, less clear.
It will depend on arguments for and against the rationality of the principle, Investec said: “We believe however that the courts will consider the sustainability of the mining industry, despite the legacy issues around mining in South Africa.”
Nomura’s Montalto, however, was of the view that the chances of success of an outcome in the Chamber of Mines’ favour are slim: “In our view the Constitution allows the government to place burdens on companies and capital holders to correct historical injustices.”
In the unlikely event that the Charter is implemented in its current form, it leaves the door open for a number of interpretations and transactions due to its ambiguous nature.
It also leaves analysts guessing as to how to make investment decisions going forward.
Said Investec: “A firm investment view would in our opinion be dependent on the terms finally decreed by the courts and a further revision of the Charter. It is still not clear if any subsequent required and implemented empowerment deals would indeed be value dilutive for the mining companies.”
Possible value dilution may occur if a mining company that sells its mining asset gives black-owned companies a preferential option to purchase, according to Investec.
Nedbank’s Esterhuizen and Van Graan believed companies with more offshore bases are better protected against value dilution.
“The implied production-weighted dilution due to the effect of the transaction on shareholder value, that the industry is facing immediately, is around 14%,” they estimated.
Implied dilution however is inevitable. “Either the shareholders will see significant share issuance for overpriced assets outside South Africa or they will face infinite dilution inside South Africa.”
Some companies may have lower levels of implied dilution, which will be proof that they see the only way to get around dilution is to either be black-owned or to be entirely offshore-based. Whichever way, the impact of the Charter’s new black ownership targets, in their current form, is drastic, Van Graan and Esterhuizen said. “The new Charter adds additional demands and costs on the struggling industry with the hurdle rate for mining in this country probably taking yet another step up and eager eyes focusing more on offshore destinations for capital investment.
“We believe every effort will now be made to find a mining future that is not entirely linked to the future of South Africa.”
BNP Paribas’s Schultz said although he doesn’t perceive South African mining as a sunset industry yet, policymakers certainly seem to be doing a good job of scaring off investment and growth in the industry. “Sadly, this is in spite of South Africa’s strong terms of trade thanks to more favourable industrial commodity prices from a year ago.”