An already bad year for the controversial Gupta family got even worse today when the Constitutional Court ruled against its opportunistic attempt to secure 21.4% of the mineral rights at Kumba’s operating Sishen iron ore mine. To access a copy of Mr Justice Jafta’s full judgement, click here. The Guptas hail from a small town in India and have made their fortune in South Africa through computer company Sahara which sells mainly into the public sector. It has no connection to the Indian giant with the same name. The Guptas own a pro-Government daily newspaper The New Age and the mercilessly lampooned cable news channel ANN7. The family somehow managed to get SA’s Department of Mineral Resources to grant its family owned company ICT 21.4% of the Sishen mine’s mineral rights. Previous owner Arcelor Mittal SA (AMSA) had inexplicably failed to timeously renew the rights. What followed was a fallout of nuclear proportions as ICT was accused of skulduggery by Kumba and its parent Anglo American; while in a rather obvious attempt to buy them over, AMSA included the Guptas and other politically-connected elites as beneficiaries in a since aborted BEE transaction. The matter went through various courts. Because of the Gupta family’s close political ties specifically with SA President Jacob Zuma, many saw the court action as an acid test for the independence of South Africa’s judiciary. Today’s ruling in the highest court of the land is being interpreted as a blow for crony capitalism after the Guptas were kicked firmly into touch. The court ruled that Kumba’s SIOC is the only party allowed to subscribe for AMSA’s lapsed 21.4% mineral rights. This afternoon Kumba announced it will now restore the mine to full production. On CNBC Africa we discussed the judgement, and other investment news with market watcher Brigid Taylor. And at the bottom of the piece, mining lawyer Peter Loon offers his perspectives. – AH
ALEC HOGG: Today, we are joined by Brigid Taylor a Director at Dreadnought Capital. Brigid, we’re going to be talking quite a lot about Nelson Mandela. Did you have the privilege of meeting him?
BRIGID TAYLOR: I didn’t meet him personally, but it’s really drawn to mind…he’s going to be missed, for sure, but never ever forgotten. One of the things that makes you proud to be a South African and certainly a child of South Africa, is that he was our Tata Madiba and hopefully we can live the legacy that he’s left behind. Certainly, for each of us it is a big legacy to step into, but I think going forward people should ask themselves the question ‘what would Madiba do?’
ALEC HOGG: Yes, wouldn’t that be nice? The one thing I’ll never forget about him when shaking his hands…he had hands the size of soup plates and they were leathery. There’s a big breaking news story – I know you haven’t had a chance to really go through it – but let me just unpack it for you and for those who haven’t been following the story. Some years back, when ISCOR (as it used to be) was split up, Kumba went on the one side to do the iron ore mining and ArcelorMittal did the steel. They did a deal between the two of them – because ArcelorMittal took most of the debt – that ArcelorMittal would get iron ore at a very low price – at cost plus four percent – indefinitely. This was structured through the Mineral Rights at the main Sishen mine. When those mineral rights were due for renewal, Kumba renewed its rights. ArcelorMittal did not renew its rights. It was supposed to do it by a particular time. It forgot. The Guptas and their company ICT swooped in, somehow managed to get those mineral rights signed over to them, and a court case ensued. Today the Constitutional Court ruled that ICT and the Guptas have no rights whatsoever to those mineral rights. In fact, the only people who are entitled to them is Kumba, or Sishen Iron Ore Company (SIOC), so that’s all behind us. Kumba and ArcelorMittal have done their transaction. They will continue business as usual. Brigid that was a lot that I had to say, but for international investors who were concerned that there might have been skulduggery here – this is a very good decision.
BRIGID TAYLOR: It’s a very good outcome. That’s a huge relief, to be honest with you, especially as these are core sectors of our economy. Without a doubt, in terms of our foreign direct investments, that will definitely bode well and that is quite significant – good news. That is a great outcome.
ALEC HOGG: You’d wonder if it had anything to do with the resignation this week, as well, of the ArcelorMittal CEO, because it was negligence that they did not renew their mineral rights. I guess someone has to fall on the sword.
BRIGID TAYLOR: Well, that’s the thing. It’s a costly exercise if you don’t get it right. You’ve seen the kind of outcome that then ensues – and the cost implications are massive – as well as the sustainability of the operations. Yes, as I’ve said earlier I haven’t read the article and I haven’t seen the breakdown, but certainly, it bodes very well.
ALEC HOGG: So anybody who’s really excited about it can go and read what the official judgment is. From a broader perspective, it’s not going to have a direct impact on the South African rand, no doubt. How are you reading the rand at the moment?
BRIGID TAYLOR: The rand at the moment is pretty much range-bound, because we’re coming to that middle sector of the month with many people going on holiday. As we know, South Africans enjoy their summer holidays at this time of the year, so most people are leaving now, over this weekend, and they’re probably only returning in the middle of January. However, we do have FOMC, which is the US Federal Open Market Committee next week as well as our own NPC, which will keep expectations in terms of volatility relatively low. There’s a lot of uncertainty as to whether or not we will in fact see a Fed tapering in this next decision based on the great outcome with regard to the latest round of data. On the South African side, it looks as though the SAAB will probably remain a little bit hawkish. We saw our inflation figure yesterday had come back. However, the core inflationary issues still remain. We can talk about the e-tolls and all of the cost-push pressures that are impacting consumers. You saw it in the retail sales numbers. These kinds of things point to an economy that does need to sort itself out and restabilise. Certainly, the structural imbalances are a little bit of a concern, so the SAAB at the moment…very blunt tools, and I think the market’s just finding its feet. As I said to you before, unfortunately, if the tapering does come to the fore, we can expect further rand weakness.
GUGULETHU MFUPHI: You mentioned that the CPI data does highlight the structural issues that we have in the country, as well as the current account numbers that were out last week, so this is not something we can solve in a year, perhaps.
BRIGID TAYLOR: Not at all. What we have to keep in mind is that we’re in an economy right now that still remains as a net importer, and unfortunately, with the rand being the level it is and continuing to weaken, it does pose those upside risks for further debt etcetera. The government’s spending is going to continue, hopefully, and what you’re starting to see is that consumers are becoming more and more pressurised. I was reading an interesting article about disposable income with regard to the e-tolls in Gauteng particularly. That’s going to impact people’s disposal income, anything between R500.00 and R800.00 per month for people that use those roads regularly. That’s quite a significant impact.
ALEC HOGG: No, the maximum is R550.00. Remember.
BRIGID TAYLOR: Yes, well – if you have an e-tag. If you don’t have an e-tag, it could be much higher.
ALEC HOGG: According to OUTA, 85% of people don’t have e-tags.
BRIGID TAYLOR: That might be an inflated number.
ALEC HOGG: No, 85 don’t have it.
BRIGID TAYLOR: 85 don’t have it. That’s a concern. How many people live in Pretoria? How many people need to utilise those roads? What are the alternatives? We’ve seen what the impact has been on our traffic. What the big question really is that we’re not seeing income catch up with inflation, so we’re not seeing people getting those 5/6 percent increases annually, but the cost-push pressures continue. These are things that are definitely going to impact our economy if we do not create employment and start to create some other form of revenue.
ALEC HOGG: From a more specific thing, we saw another property listing on the JSE today – Accelerate – a six billion rand property trust that owns the Fourways Mall and many other properties in Fourways. I guess when companies from a particular sector come for listings, it tells us something.
BRIGID TAYLOR: Well, that is actually quite interesting. If you keep in mind…it depends on how the package was set up in terms of the fact that you’re still borrowing at almost an all-time low interest rate, so from that perspective funding is relatively cheap. If you can get investors to invest in your portfolio, and then you manage to off lay that debt into your retail sector, your rentals etcetera, you can generate quite good income. It’s not necessarily… If you’re talking about that type of property sector, it’s not a bad investment vehicle if you have a long-term view in terms of sustainability and the growth in South Africa. On the back of that, if we look at the US growth, the developed markets, particularly the UK, and even the Euro zone we’re starting to see slight upticks in terms of their growth trajectory. I was looking at numbers this morning, and the global growth projection outlook now improving to 3.4 percent next year, which is a little bit optimistic. Nonetheless, what it does show us is that our counterparts who will potentially grow our export sector, will be growing, so hopefully that starts to see some form of momentum in South Africa.
Peter Leon of Webber Wentzel on the Constitutional Court judgment:
Key points of the judgment are:
- The judgment ensures that a single entity is made responsible for the labour and social plans, especially in a case like this where two companies are mining the same land. It is important not only for the security tenure of mining companies but also for their employees and surrounding communities
- The court found that only Sishen (Kumba) may apply for rights to minerals under the MPRDA to explore, prospect or mine over land and minerals over which it already has a mining right
- The court’s judgment reaffirms the key principle of security tenure in the SA mineral regulator system
- According to the judgment, the Department of Mineral Resources must accept Sishen’s application whereas it was incorrectly rejected
- The judgment also clearly differentiates between the pre and post MPRDA legislative regimes applicable to mining regulation