South Africa’s mining sector: Procurement mafia and extortion

Post-Covid, South Africa has found itself facing colossal economic contraction that has spiked inflation, unemployment and public administration collapse. The mining sector, however, has served as a rare silver lining in the international sphere. Yet the biggest mining companies document major battles with syndicates who incite local communities to disrupt operations. The relatively new, violent extortionist phenomenon is said to be driven by gangs wanting to make some quick profits. This "procurement mafia" essentially mobilises the community for their own agenda – seen by many as blunt extortion. Read the article below for more on this extortion mafia. – Carmen Mileder.Extortion 'Mafia' Hits South Africa's $55 Billion Mining Sector.By Felix Njini and Antony Sguazzin.A threatening letter, a derailed train, blocked roads, burned vehicles, workers locked up. That's what some of the world's biggest mining companies say they're battling in South Africa: Extortion..Covid plunged Africa's most-industrialized country — home to the biggest deposits of metals ranging from platinum to chrome and manganese — into the deepest economic contraction in more than a quarter century, and its aftermath has left it with soaring inflation, one of the world's highest unemployment rates and a collapse of local government services. Mining firms, riding a boom in the global commodities market, have been a rare bright spot, making companies like Anglo American Plc, Glencore Plc and Sibanye Stillwater Ltd. targets for groups they say are demanding as much as 30% of their lucrative procurement contracts, often with little to offer by way of skills and services. Non compliance brings threats to executives and disruptions in operations.."The procurement mafia mobilizes the community for their own devices, which is really very straightforward extortion," Paul Dunne, chief executive officer of Northam Platinum Holdings Ltd., the operator of the world's deepest mine for the metal, said in an interview..While some groups say they are fighting for social justice or Black economic empowerment and demanding a bigger piece of the pie from the predominantly White-run mining companies, even the government concedes that much of the relatively new, violent extortionist phenomenon is being driven by gangs out to make a quick buck. Mining companies and even Black-owned contractors say they're increasingly confronting syndicates who incite local communities to disrupt operations..Bloomberg interviewed more than a dozen mining executives, contractors, government officials, politicians and protesting groups, and reviewed threats received by firms to show why extortion — coming on top of onerous local-ownership rules, fractious labor unions and erratic power supplies — is turning South Africa into a less attractive destination for investment. The country's Department of Mineral Resources, which this year began efforts to revitalize the sector, listed "community unrest" as a reason for "decreased appetite by private investors.".Already last year, Canada's Fraser Institute's Annual Survey of Mining Companies, a global industry benchmark , ranked South Africa at 75th out of 84 jurisdictions, compared with 60th in 2020 and 40th in 2019. Few new mines are being dug and little exploration is taking place, hitting the sector on which the country's economy was built — South Africa's $55 billion mining industry accounts for 8% of gross domestic product, about half of exports and employs almost half a million people. ."The industry is under attack," said Hennie Flynn, head of the North West Province wing of the Hawks, the South African police services' directorate that targets organized crime, economic misconduct, corruption, and other serious illegal activities. The syndicates "are creating their own mafia-type groupings that exert pressure." .In November, a train derailed on the main export route for coal miners, with the state-owned logistics firm Transnet SOC Ltd. saying the incident occurred "against a backdrop of threats and disruptions to the company's operations by disgruntled groupings seeking business opportunities." Efforts to restore normal services were blocked by the Ulundi Business Forum, which demanded contracts from the company, Transnet said, adding that the group resorted to "violent, extortion efforts." .Musa Ngqulunga, chairman of the Ulundi Business Forum, denied it had anything to do with the derailment, but said the group had been angered by contracts awarded to a business from outside the region, saying "we can't be spectators in our area."."We told Transnet that if you don't give us a chance to work, we are going to close the site," he said in an interview. "We have only one weapon. We just stop the site, you can't continue working. If you don't give us a piece of the cake, that's the solution. We just stop the site, that's the way of making somebody understand better…. the best way is to stop you until you cooperate.".At Sibanye's K3 platinum shaft, about 15 workers with a mining contractor were locked up in May for 12 hours by a local politician who gathered about 100 youths to demand jobs at the mine, a spokeswoman for the company said. A radial road network in and out of a web of mines in the metals-rich Bushveld Complex in northern South Africa used by producers including Northam Platinum, Anglo American Platinum Ltd., Glencore and Samancor Chrome Ltd. has been blocked more than 140 times this year by groups asking for everything from contracts to jobs, said Northam's Dunne.."What they are demanding is to be awarded contracts from the mines at any price, irrespective of their effectiveness or ability," Neal Froneman, CEO of platinum, palladium and gold producer Sibanye, said in an interview. "In the worst case, they demand part payment from people that have honest contracts, otherwise they disrupt their ability to deliver goods and services. Anyone that steps up to intervene is intimidated.".The mounting attacks by gangs, which have also afflicted the construction industry, are quickly becoming an indictment of the inability of President Cyril Ramaphosa's government to ensure the rule of law in the conduct of business. ."This is definitely the final nail in the coffin of investment," James Lorimer, the main opposition party Democratic Alliance's shadow minister for mineral resources, said in an interview. "I have no faith that the government is going to act coherently over time to bring down these problems. There's no political will, that's quite obvious.".Ramaphosa is fighting for his own political life after an independent panel's report said he may be guilty of violating the constitution and questioned his handling of the theft of at least $580,000 at his game farm in 2020, disputing his assertions that he'd done nothing wrong. The scandal may further weaken his hand in tackling the country's law and order problems..Groups like the Ulundi Business Forum and Banaef, an organization that represents 72 Black-owned companies, say they are legitimately seeking a fairer distribution of contracts. Companies at the receiving end of their demands don't see it that way. Consider a letter Impala Platinum Holdings Ltd. received late last year from a firm representing Banaef. Executive Outcomes, headed by an apartheid-era defense forces officer, said it had been hired by Banaef to conduct an audit of Impala's procurement processes because the world's third-biggest producer of platinum was "suffocating some Black-owned companies." .The letter was sent "to put pressure so that they can know that we cannot just be the affected host community and 50 years down the line, there's nothing we can show for it,'' Letlhogonolo Mogopodi, who was Banaef's secretary-general until mid-November, said in an interview..To top managers at Impala, the letter — a copy of which was obtained by Bloomberg — was an effort to get it to redirect some contracts to Banaef members via a veiled threat from Executive Outcomes, which in the 1990s helped governments in Sierra Leone and Angola fight armed rebels. .Mogopodi said Banaef hired Executive Outcomes because it wanted to see "if management at Impala benefits from the contracts meant for locals. Impala claims it's spending money on local businesses. We have no mechanism to test that.".Executive Outcomes's website carries an image of a combat-geared man in a tank and makes no mention of audit services; its chief, Eeben Barlow, declined to comment. Banaef officials said they were not aware of Executive Outcomes's militia background.."Are we using cartel-like behavior in enlisting the services of mercenaries to get companies to implement transformative policies? I can equivocally say 'no,'" said Ditebogo Diale, the group's deputy secretary, adding that Banaef also took its case to a major Impala shareholder. Did all the pressure work? "Yes, you could say there has been progress, but whether that progress is worth the paper that it was written on, that can only be seen by the numbers Impala puts out," she said..Impala declined to comment on the Executive Outcomes letter. Often, groups demanding business want to provide products like diesel, explosives or uniforms, which the mining companies can get directly from the manufacturers at a much lower cost, said Johan Theron, an Impala spokesman. ."Most of the business practices are fronting," Theron said. "If we buy from them we are not adding value to the economy in the communities, we are just making one person rich for doing nothing.".The activity characterized as extortion by its targets often draws on the hopelessness of desperately poor people struggling to get by in circumstances exacerbated by the pandemic. Many mines are located in some of the poorest parts of the country, and the syndicates are tapping into the resentment of impoverished communities plagued by collapsed services and joblessness. There's little economic activity other than mining in the North West Province, where much of the country's platinum and chrome lies. Roads are dusty and potholed and settlements are ramshackle, often boasting little more than a church, a liquor store and a pawn shop. The government — which faces a party election this month and a general vote in 2024 — is pushing mining companies to buy more goods and services from firms owned by Black South Africans..But little progress has been made in promoting Black South Africans to the upper echelons of management. Of the eight South Africa-based mining companies included in an index of the top 40 stocks traded in Johannesburg only one, Exxaro Resources Ltd., has a Black CEO..While Black-owned companies' participation in the sector has increased, many smaller firms are still excluded because they just can't afford the machinery and equipment required, said Jonathan Leso, executive director of African Sun Mining, a Black-owned contractor. That said, Black businesses are also often targets of the gangs, he said.."The environment is little bit leveled-up, the reason being that people are no longer looking at who are you, they just want to know do you have the machines," he said. "The biggest thing now is that if you're not from that local area, it's difficult to get any type of the job because the local communities are fighting that. If you're not from the community, they block the roads, they burn the tires because they are forcing you to go into a joint venture with them.".About 90% of people or entities demanding business from mining companies aren't registered, said Tseliso Maqubela, a deputy director-general at the Department of Mineral Resources and Energy, acknowledging that the increase in such activities is a problem. ."Some of them think they can just go to a mining house and demand to be given a contract," he said. .We are "picking up additional costs to do business," she said in an interview. These are needed to ensure "stable operations and to make sure that we can run our businesses uninterrupted," she said..Security costs have surged and Impala alone has about seven ban orders against various groups interfering with its business, a person familiar with the situation said, asking not to be named for fear of being attacked. One group is currently threatening to burn buses used to ferry employees to the mine unless it is awarded contracts, the person said. Security guards have been hospitalized after being beaten up, vehicles and guard cabins have been set on fire and procurement staff have resigned after being threatened, mining companies said. ."This is as bad as it has ever been," said Roger Baxter, CEO of the Minerals Council South Africa, which represents most mining companies operating in the country..Gold Fields Ltd. had to cordon off its assets after groups that had asked for 30% of the value of some projects were turned away, said Sven Lunsche, its spokesman.."We had to erect fencing around our tenement to keep people away," Lunsche said. "We provided security to our procurement teams. We had to make sure they had bodyguards when they went home. Some of our senior managers were also threatened. Some are personal threats and you don't take that lightly.".Rio Tinto Group found out just how real such threats can be when the general manager of operational services at its Richards Bay Minerals unit, Nico Swart, was shot dead on the way to work last year. The motive for the killing isn't known and those responsible have not been found. The company said its mine is still subject to intermittent harassment, with sporadic shootings at buses carrying workers or the stoning of vehicles.."All our leadership still have to travel and live under very heavy protection, including myself," Werner Duvenhage, managing director of the unit said in an interview. "You can't really move around. Normal little things like going to shops or just going out for dinner, those are not normal things anymore.".For now, producers have higher metal prices to help them shoulder the additional costs, but that may not last, Sibanye's Froneman warned.."When the commodities cycle changes, it obviously impacts our margins," he said. "We put jobs at risk because we now have taken on burdens that we've already paid for in terms of taxes and royalties.".Read more:.SA mining sector under siegeTransnet collapse costs mining R50bnMining maven Major: gold is offering great relative value.With assistance from Tom Hall, Gina Turner and Jeremy Diamond..© 2022 Bloomberg L.P.

South Africa’s mining sector: Procurement mafia and extortion

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