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Latest draft of the Mining Charter still needs work

Soria Hay from Bravura does not see the industry investing happily into the current form of the charter.

NOMPU SIZIBA:  Mineral resources minister Gwede Mantashe has extended the time for public consultation on the Third Mining Charter from July 27 to the end of August. At a mining summit held over the weekend the minister said it was clear that more time was needed for this process, and it was one that shouldn’t be rushed. The plan is to finalise the charter by October or November at the very latest.

Read: Mines minister delays finalisation of draft Mining Charter

To talk through the charter and the noise that’s associated with it I’m joined on the line now by Soria Hay, the head of corporate finance at Bravura. Thanks very much for joining us, Soria. So the time to comment on the charter has been extended and there is quite a bit of interest about it. What are some of the criticisms or problems being raised by the industry on the one hand, and the worker and community side on the other?

SORIA HAY:  Good evening. The industry, interestingly enough, and the communities both feel that they haven’t been consulted enough. The communities came out and said that they want more time, so I guess that has partly led to this additional delay. But the industry was quite perturbed about some clauses.

For example, there is the “free carry” to employees and communities, which obviously we haven’t had in South Africa before. The 30% empowerment percentage that is necessary from an ownership perspective is not actually the issue. But it’s the free carry.

And then very specifically they are very perturbed about the “trickle dividend” as they call it, as well as the 5% of payroll that needs to be paid as a levy, in addition to the 1% which is normally paid. This is whether a company is profitable or not, or is cash-flow-positive or not.

NOMPU SIZIBA:  Just explain, Soria, if you will, this “free carry” concept. What does it mean exactly? The Mining Charter is providing for 10% of free carry for both workers and the community. What does it mean?

SORIA HAY:  Yes. What South Africa has never prescribed in the BEE codes before is that a percentage must be given away for free to any participant. That has never been a requirement. Previously it was always [the requirement to] help black participants to buy a stake, and that was done through either vendor finance or bank third-party financing, or a combination thereof. This is the first time that BEE legislation in South Africa prescribes that this carry, or part of the carry for the communities and the employees, must be free.

What that means is that they must get the percentage participation but they don’t have to pay for it. And that, for instance, means that, say, a mine costs R1 billion to develop, then R100 million of that these participants will in essence get for free, and the 90% shareholders need to pay the full R1 billion, not only the proportionate amount. That’s really what that means.

NOMPU SIZIBA:  Okay. So as much as their argument about the fairness or non-fairness of it, you are saying that workers and the community have issues with this particular clause? Is that what you are saying?

SORIA HAY:  Well, the communities feel that that has been consulted [about] enough, and I think they want to talk about whether the percentage is correct and whether it should be higher. For example, one of the comments that they have made was that 14% to entrepreneurs is too high, and that their participation of 8% is too low. So that is one of the comments that they are making.

NOMPU SIZIBA:  What’s happening with the issue of “once empowered, always empowered”? There still seems to be quite a bit of confusion around that one.

SORIA HAY: Once empowered always empowered – that’s obviously been ruled on by the court. The court ruling was actually quite nuanced in the sense that it said that if the right itself has a requirement that says you must remain empowered, then you must do so. If the requirement itself doesn’t say that, then previous transactions can count. When that came out, I wasn’t actually very surprised or impressed because most of the mining rights that I see actually have that requirement in them. As for the other rights.

Now in this charter the charter seems to take that principle on board, although for more limited points, and not for C-compliance, and under very limited circumstances. So what they say is if your transaction has benefited in a certain way that there was net equity value, so unencumbered ownership, but not owned to a certain percentage, and that was in place for at least a  third of the mining rights life – now these mining rights are 30 years so, say, a minimum of 10 years – then certain points could be carried forward.

NOMPU SIZIBA:  Now the mining industry doesn’t seem to have a problem with the idea of the 30% black ownership – I think you touched on that earlier. That doesn’t seem to be in dispute. But are there any issues that have been raised by the industry about the time frame, because it said or proposed that it be done within five years of the charter being approved?

SORIA HAY:  I don’t think people are particularly sensitive about that. Many of the other codes for the other industries actually prescribe different percentages as well, different to the 26%. So it’s not difficult for a mining company to get up to the 30%, regardless of what the time frame is. I think the dividend yield is rather how you do it in an economic way if there is this free carry that is required.

Remember, the second part is, in addition to the free carry you have the other 20% which you also have to fund in some or other way, because very few black participants have the kind of capital to contribute their proportionate share in what is a very capital-intensive industry like the mining industry. So they have I think of two headaches on top of each other. The first one is the free carry, and the other is just the normal headache of how you ensure sustainable funding around the transaction.

NOMPU SIZIBA:  The Mining Charter, as it stands now, stipulates that a minimum of 70% of total mining goods must be procured from local firms, with  21% of that being sourced from black manufacturers. In reality, how possible is this going to be, given current ownership patters?

SORIA HAY:  That is actually quite difficult. Most of the mining equipment in South Africa that we use is imported. Obviously the Germans build much of this equipment, the Chinese export much into South Africa, and we don’t really have let me call it a local capital group industry. So that will really be very difficult for companies to comply with. When I say “difficult”, it’s really difficult to impossible. So from that perspective, I think the mining communities are also quite perturbed. But if they are not compliant with this, in terms of the prescriptions, then their mining rights can lapse or they can be withdrawn or not be compliant. And all of those things, obviously, require huge amounts of capital and spend to build mines. So it is quite concerning.

NOMPU SIZIBA:  Minister Mantashe says that there are a number of processes afoot and one of those will be to ensure that the finalised charter aligns with BEE policies. This is where your expertise comes in. At this stage of the game, to what extent do you think this charter does align with black economic empowerment policies?

SORIA HAY:  I think it aligns better than the previous charter because they do look at some of the commonalities that we have seen in the BEE codes of good practice. However, these concepts are 5% of payroll in addition to the normal 1%, whether the mine is already cash-flow-positive or not. Those things are all new, and actually all very problematic.

NOMPU SIZIBA: Now, overall, assuming the Mining Charter does go through at the end of the year or by October/November, and hopefully finality on the mining legislation also happens, are you hopeful you’ll be more active in organising finances for investment in our local mining sector?

SORIA HAY:  No. I think it will put a damper on investment. Now 50% of our gold mines and almost 60% of our platinum mines are currently battling to survive, and I do not see the industry investing a whole lot of money on the back of what is currently in the charter. So I think it won’t be good for mining in South Africa. If you take into account, mining in South Africa from 1994 has gone down to a 7% part of the GDP of the country compared to north of 15% in 1994. It is really a sunset industry and it is a problem because it’s one of the industries that can actually create a whole lot of jobs if we can get the policy right here.

NOMPU SIZIBA:  Alright, Soria. We’ll talk to you further as things unfold.

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