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The revised Mining Charter fumbles and crashes

No friend of labour or mining communities, and likely to discourage investors.
Minister of mineral resources, Gwede Mantashe. Picture: Moneyweb

The withdrawal of the abortive 2017 Mining Charter, the election of Cyril Ramaphosa as President, and the replacement of Mosebenzi Zwane by Gwede Mantashe as minister of mineral resources created a false sense of optimism that the next version would be more investor friendly.

Unfortunately, the much anticipated revised edition is a ham-fisted, awkwardly worded document that will merely result in more confusion. It is unlikely to entice new mining investment or lead to growth in the mining sector, and is likely to fail to do anything for workers and communities.

There has been a slight relaxation of the 30% BEE shareholding requirement, and right holders now have five years to achieve this target. But has the charter successfully answered the question “once empowered, always empowered”? Past empowerment deals are now recognised in that they are deemed to be compliant. But are they deemed to have a minimum of 26% BEE shareholding? In other words, do they only have to top up to 30% from 26% in five years?

The charter asserts that the “trickle flow of benefits”, which went towards servicing debt and providing a cash amount directly to participants, was “wholly inadequate”. In a sweeping statement, the charter accuses “nebulous trusts” of constraining the flow of benefits to workers and host communities. The charter not only casts aspersions on the companies and their advisors who established the various BEE structures in order to arrange financing to enable black participation, but surely also on the Master of the High Court with whom the trusts are registered? No doubt this isn’t the end of this accusation.

The charter also introduces new definitions and concepts, some of which are confusing and difficult to comprehend. “Net value” is defined as the value of equity that accrues to black shareholders over a period of time, to be calculated as “the difference between the market value of shares held by black shareholders at the measured date, less the amount of loans relating to the acquisition of shares outstanding at the measured date”. 

The definition of “effective ownership of black persons in the mining industry” erroneously includes net value as one of its determining components, together with voting rights, economic interest and management control of mining operations. This means that if the share price plummets, the net value, and thus the effective ownership, will be eroded. Will mining companies therefore be compelled to continuously top up the net value for the benefit of the black shareholders in a declining market?

The 2017 charter defined “meaningful economic participation” to include the fact that the “percentage of effective ownership must accrue to partners who are black persons”. However, in the revised charter this was replaced with a “percentage of unencumbered net value based upon the time graduation factor which has accrued to BEE shareholders”. It is fairly simple to comprehend the economic participation that will flow from, say, a 10% shareholding. Perhaps the authors of this document can provide a few examples to illustrate the “percentage of unencumbered net value based upon the time graduation factor”.

In addition, the rights of BEE shareholders to participate in meetings and exercise voting rights has been extended to include “exercising of voting rights in all aspects including but not limited to trading and marketing of the commodity herein affected and anything incidental thereto regardless of the legal form of the instrument used”. It is not clear what is meant by this. Does the mining charter intend to expand the rights of the shareholders to include the right to participate in the mining operations as well as the trading of the mining production?

“Trickle dividend” has been defined as a “fixed rate dividend”, which is “contributed to a trust for host communities and a structure elected by qualifying employees”, and is redeemable by a right holder when ordinary dividends are declared. In regard to BEE entrepreneurs, it is defined as a dividend that will constitute a cash flow to BEE entrepreneurs “throughout the term of the investment”. The cash flow is expected to service the funding of the structure as well as an amount payable to the BEE entrepreneurs. This is a new concept, a dividend that never stops giving. Unfortunately, it may also break the bank.

The trickle dividend is to be calculated at 1% of earnings before interest, taxes, depreciation and amortisation (Ebitda), and is payable from the sixth year of a mining right to qualifying employees and host communities, until dividends are declared. It will also be payable when dividends are not declared.

The charter does not directly address the life cycle of a mine: prospecting and exploration, development, extraction, closure, and rehabilitation. Nor does it address the possibility of mothballing, which will be necessary when the costs of mining exceed the market value of production, or when global production exceeds the demand. 

All new mining rights must have a minimum of 30% BEE shareholding including economic interest plus a corresponding percentage of voting rights. These new projects will be hampered by the 10% free carry for communities and employees, which must be distributed within five years from the effective date of the mining right. The free carry will remain a source of contention.

Read: Minerals Council against 5% free carried interest

A major change to the 2017 charter is that the clause allowing naturalised citizens to benefit, by being included in the definition of black persons, has been removed. This was the clause that created much controversy in that it would have allowed the Guptas to benefit. However, the removal will deny African citizens who were only naturalised after 1994 to benefit, even if they had been living in South Africa before that. Should this not be amended to include citizens of SADC who only became naturalised after 1994?

The message to potential investors is that they have to help redress the plethora of shortcomings in the mining industry including procurement, employment equity, beneficiation, human resource development, mine community development, and housing and living conditions. Potential investors will no doubt consider all the other issues facing the mining industry such as possible financial responsibility for the community at the end of the life cycle of the mine, ongoing labour unrest, illegal ‘zama zama’ miners, low productivity and looming rehabilitation costs. Added to the responsibilities of the potential investor is the requirement to promote sustainable development and growth of the mining industry.

Mining operations will be further burdened by restrictive regulations governing procurement, local content, supplier and enterprise development, production sales, the BEE component of its workforce regardless of available skills or costs, research and development, analysis of mineral samples, submission of data of annual purchases, and the completion of detailed compliance scoresheets.

The charter is a sad reflection of South Africa’s inept leadership floundering in the face of a struggling economy – desperately trying to grab a slice of what is left – taking no heed that they will be destroying any possibility of growth. The charter is no friend of labour or the mining communities, the very people it should be protecting.

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Good read with the last paragraph pretty much summing up the ANC, government in general and the country overall

And it needn’t be

Exactly. The socialists and communists are now fast running out of other people’s money. This will not end well.

I have given up on SA. It’s just another failed African state. Forget about long term views here. 5 year view max. That is why its impossible to invest in any mining company here. They have a 10-20 year view. Anycase, I now have to figure out where to invest my money outside SA. Investing on the JSE or any other SA exchange is one sure way to financial ruination.

The ANC Government is out of touch with everything around it. It struggles to find cohesion in society and drives the economy down a muddy road which can only end in a massive hole. Investors are talking with their feet. Even Zimbabwe now looks attractive as it has obviously turns for better. RSA is continuing on its downward spiral.

Excellent summary. Any hopes that the ANC would realize that their Stakeholder policies are killing the industry and change course have been dashed. Instead they try doing the same thing and expect a different outcome.
Absolutely no idea how to run an economy.

ANC believe there are pots of money everywhere and that they must just grab as much of it as possible. Broken people with broken ideologies!

One cannot comprehend how cowtowing to populism is in anyones long term interests.

If you want to impose new taxes and disguise them as mining charter compliance so be it. But then the royalties and company tax rate must come down to compensate.

If you as the venerable government and ANC are admitting your shortcomings and that you cannot actually facilitate taxes to flow through the fiscus and actually arrive at communities, lets accept this fact and work together. Every mining company would gladly, setup a local governance office, and provide the services of a local government to host communities, this comes at a cost through, so drop corporate tax rates or give it as 100% tax deductible expenditures (audit the snot out of any claims) and let the private sector do your job for you…

Thats the only way I can see this working, wanting to grab more, just erodes any incentive to anyone to participate in this market. Lets redirect the flow of the current taxes, as the ANC clearly cannot develop mine communities or workers as their allocation framework (taxes and fiscus) is ineffective and being looted. Hell if you guys allow some rationality, Im sure all the mines will even let you co-brand their delivery of services, so you wont lose the votes that this is so clearly all about.

Well, that effectively kills off the mining industry. What will the communists tackle next?

Thanks for the informative article.

Private health and then probably private schools. Governments idea is to get everyone equal, no matter how low that bar is.

Once NHI gets further down the road (say + 2 years) SA will be in freefall.

Doctors will just flee; specialists 1st to go. Other well qualified employees in a variety of professions and commerce generally, tired of waiting in queues with subsidized free lunchers will finally take the plunge and E.F.F. off. Replacements, already of inferior quality, will be even lower calibre. It will be like a snowball gathering detritus as it rolls over the cliff.

Then I fire the maid and the already reduced time garden guy goes completely too. In 2018 tax year we have R53 000 medical expenses that the medical aids do not pay. At best get back 1/3 via tax a year later. On 2nd thoughts better get rid of her asap as she is getting an effective monthly R5500 = R66000pa plus extras.

Socialism does not work because it cannot work.

The other day on the plane, coincidentally, I sat next to one of the top guys from the SA Communist Party. He is currently acting as an advisor to the Minster and is helping to sort out the mess in the Northwest province. We got into a conversation and when I told him that Communism failed everywhere it was implemented e.g. Russia, East Germany, Vietnam, Angola , Mozambiqe, Cambodia etc his response was that the idea was good but the implementation still needed to be refined (clearly the 100 million who died from Communist oppression needs “refining”) . His view was that his domestic also “wants to have nice things and capitalism says it is her own mistake for not having nice things.” In his view we need full scale socialism to which I responded that we already have one of the most distributive societies in the world where more people are on social grants than those who actually work. Add to that: free healthcare, free education and free university tuition to boot. However, in his view we still have a long way to go to “improve” on this. With respect, heaven help us with these types of advisors for the Minister. Fools who are blind leaders leading their blind followers to nowhere.

Makes the decision to leave easier I guess….Thuma mina

I see two paths,
1. Should mining be left alone so that shareholders benefit, so we leave foreign firms alone, but South Africans benefit via pension funds. The downside is that outside of the dividends, the operations are run by foreigners, foreign equipment and potentially destruction of local communities; or
2. Mining firms in SA are run and owned by locals, possibly destroying the industry but potentially allowing 100% of the benefits to accrue to South African manufacturers and communities.

I see pros and cons of both approaches, I think SA is on path 2 with severe uncertainty as to whether the industry will recover. If I didn’t live in SA I would far prefer path number 1 since I only really care about getting a good return, but living in South Africa I personally would like to see the majority of South Africans having a lifestyle more akin to other developing markets in Asia/LatAm than the abject poverty of Africa. I just don’t know if path 2 is feasible.

At a time when places like the UAE are removing local ownership requirements to better for compete with the rest of the world, sa is busy making a struggling industry less desirable. Really don’t understand this government.

End of comments.

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