Zupta Zwane’s BEE mining charter mess: A comprehensive analysis

JOHANNESBURG — Mineral Resources Minister Mosebenzi Zwane dropped a bombshell last week that the mining sector is seemingly just not recovering from this week. Mining shares have been in the red this week after Zwane bulldozed through Mining Charter III, which seeks to dramatically up BEE participation in the sector. Zwane, clearly, failed to properly consult the sector and the Chamber of Mines is planning to launch legal action. In this probing piece, the likes of Peter Leon carefully analyse the new charter, unpacking its implications for an industry that is increasingly struggling to take off. – Gareth van Zyl

By Peter Leon and Patrick Leyden*

1. Introduction

Much controversy has surrounded the Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining Industry (“Mining Charter III”). Since a draft was published for public comment in April last year questions have arisen as to the lack of meaningful consultation by the Department of Mineral Resources (“DMR”) with the organised mining industry and other stakeholders and indications by the DMR that it would significantly increase the Charter’s black economic empowerment (“BEE”) ownership, procurement and employment equity requirements.

Mosebenzi Zwane, South Africa’s mineral resources minister, speaks on the opening day of the Investing in African Mining Indaba on February 8, 2016. Photographer: Waldo Swiegers/Bloomberg

After months of speculation regarding the nature and content of Mining Charter III, the DMR finally published it on 15 June 2017 (“the Charter date”), when it also came into effect.[1]

In contrast to suggestions by the Minister of Mineral Resources (“Minister”) that Mining Charter III is a “win-win” for all,[2] the Chamber of Mines (“Chamber”), within hours of the Charter’s publication observed that:

[it] rejects the unilateral development and imposition of the DMR’s Charter on the industry, and is of the view that the process that was followed by the DMR in developing its version of the Reviewed Mining Charter has been seriously flawed.[3]

Chamber of Mines CEO Roger Baxter

The Chamber indicated that it would approach the High Court for an urgent interdict to suspend its implementation, pending the launch of judicial review proceedings,[4] and that it intended reviving its previous application for a declaratory order, which had been temporarily suspended pending discussions with the DMR.

In this earlier application the Chamber sought a declaratory order from the High Court on the interpretation of various provisions of Mining Charter II, particularly in the context of the continuing consequences of previous BEE transactions and the ‘once empowered, always empowered’ principle.[5]

The ruling African National Congress’s (“ANC”) economic transformation committee has likewise criticised the DMR’s decision to publish Mining Charter III without further engagement with the mining industry, observing that “the mining industry has shed about 60,000 jobs in the last five years” and that this position should not be aggravated further.[6]

In addition to the concerns relating to the process and content of Mining Charter III, its validity and enforceability remains a key concern. The Minister published Mining Charter III under section 100(2)(a)[7] of the Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”) which empowers him to develop a policy, rather than a set of binding rules, and to do so only once, within six months of the MPRDA’s promulgation date (1 May 2004). This, in fact, occurred on 13 August 2004.[8]

It is thus doubtful whether the Minister is empowered to introduce Mining Charter III at all (whether viewed as a new Charter or an amendment of the first Charter), and accordingly debatable whether it is legally binding on the mining industry. The MPRDA Amendment Bill, 2013 aimed to address this by elevating the Charter to the status of legislation while giving the Minister the power to amend it, but this Bill is still before Parliament and unlikely to pass this year.

Deeming this change (among others) “likely unconstitutional”, President Jacob Zuma referred the Bill back to Parliament in January 2015, where the process of correcting this and other identified deficiencies is still underway, two and a half years later. The legal position thus remains, in our view, that the Minister can neither amend the Charter nor make it binding on the industry.

South African president’s radical economic transformation. More magic available at www.zapiro.com

As South Africa continues to slip down the rankings of the Fraser Institute’s Annual Survey of Mining Companies (principally as a result of regulatory uncertainty),[9] it is unfortunate that the DMR has missed the opportunity to enhance regulatory certainty and promote investor confidence.

If the Chamber (or other interested and affected parties) proceeds with the threatened litigation, Mining Charter III will likely be the subject of years of protracted litigation.

In the remainder of this note we discuss the new obligations imposed by Mining Charter III under the headings Ownership, Sale of Mining Assets, Procurement, Employment Equity, Establishment of Mining Transformation and Development Agency, and Social Contributions.

2. Material changes

Ownership

  • New prospecting rights

Applicants for new prospecting rights must have a minimum of 50 per cent plus 1 Black Person shareholding, which shares must have voting rights attached to them. The rationale for this significant increase in ownership by Black Persons is unclear given that prospecting is generally capital intensive with no revenue generated during the prospecting phase. It is therefore difficult for exploration companies to obtain funding for prospecting operations.

  • New mining rights

Applicants for new mining rights must have a 30 per cent Black Person shareholding which must be held in a separate entity from the holder of the right and must be made up of a minimum of:

  • o   8 per cent of issued shares owned by ESOPs;
  • 8 per cent of issued shares owned by Mine Communities; and
  • 14 per cent of issued shares owned by BEE Entrepreneurs.

It is not clear who is responsible for the formation of the empowering entity and the costs associated with its formation. In the absence of any prescribed requirements, the responsibility and costs are likely to fall on the mining company. Furthermore, the shareholding of Mine Communities must be held in a trust which must be created and managed by the Mining Transformation and Development Agency (“MTDA”) which is yet to be established by the Minister. It is not clear how applicants for new mining rights will address this requirement prior to the formation of the MTDA.

Black Person shareholders may only sell their shares to Black Persons who fall in the same category as they do. Whilst the purpose of this clause is clear (i.e. to prevent a dilution of Black Person ownership), it is likely to prejudice communities and ESOPs who are effectively locked in and may struggle to find other communities and ESOPs to purchase their shares. This restriction does not appear to apply to existing rights which suggests that mining companies with existing mining rights will need to continually re-empower if Black Person shareholders dispose of their shares to non-Black Persons.

The holder of a new mining right is to pay a minimum of 1 per cent of its annual turnover (in any financial year) to the Black Person Shareholders over and above any distributions to shareholders. It is not clear whether this is intended to be a “distribution” under the Companies Act, 2008 or a form of tax or royalty. If it is the former it appears contrary to the provisions of the Companies Act which require the equal treatment of shareholders holding the same class of shares. If the latter, it is clear that the Minister has no fiscal powers under the Constitution (which are reserved to the Minister of Finance in the form of a money bill which only he may introduce to Parliament).[10]

If vendor loans to Black Person shareholders are not repaid through dividends after ten years, the outstanding balance must be written off by the mining right Holder. This arguably violates the constitutional prohibition on the arbitrary deprivation of property.[11] The Constitutional Court has held (albeit in different context) that, where a law extinguishes a debt, this constitutes a deprivation of property, which will be arbitrary (and thus unconstitutional) if it does not employ a mechanism that is procedurally fair and proportionate to the ends being pursued.[12] In principle, such a mechanism must permit consideration of the reasons for deprivation in the specific circumstances of each case. The blunt and blanket deprivation envisaged in Mining Charter III does not appear to meet these constitutional requirements.

  • Existing prospecting and mining rights

Historical BEE Transactions (BEE transactions concluded prior to the Charter date that achieved a minimum 26 per cent Black Person shareholding) are “recognised” for reporting purposes. This includes the recognition of historical transactions concluded on units on production, share asset transactions and all historical transactions on which the original rights were granted.

An existing Holder[13] which has maintained a minimum 26 per cent Black Person shareholding is required to Top Up its Black Person shareholding to 30 per cent within twelve months (of the Charter date) by increasing pro rata the shareholding of its existing Black Person shareholders.[14] This could be extremely costly to mining companies and their shareholders.

A Holder is not required to restructure its Black Person shareholding (in terms of the new mining right requirements) for the purposes of a Top Up in circumstances where a Historical BEE Transaction is recognised.

The Black Person shareholders must directly and actively control their equity interest in the empowering entity, including the transportation, trading and marketing of their proportionate share of mine production. The obligations imposed by this provision are vague and appear to be contrary to the general principles of company law. The mining company (and not its shareholders) is the owner of the mine production. The shareholders cannot ‘actively control’ a pro rata portion of the assets or decisions of the mining company.

The recognition of Historical BEE Transactions will not apply to (i) applications for new rights, (ii) renewals of rights or (iii) applications in terms of section 11 of the MPRDA, which suggests that existing Holders will need to comply with the requirements for new mining rights in these circumstances. This would mean that mining companies that may already be “compliant” with the 30 per cent ownership requirement would need to restructure their existing Black Person shareholding completely (in accordance with the structuring requirements for new mining rights), for any renewal of existing rights or to acquire existing rights from other companies.

  • Beneficiation off-set

A Holder may off-set up to 11 per cent of its Black Person ownership requirement provided that the beneficiation activities are ongoing and that the DMR has approved the proposed activities. There is still no method or manner of calculating the off-set fifteen years after this principle was first introduced in the originalMining Charter.

Sale of Mining Assets

A Holder who sells its mining assets (not defined) must give Black Owned Companies a preferential option to purchase them.

Procurement

  • Mining Goods: a minimum of 70 percent of mining goods procurement spend must be spent on South African Manufactured Goods, of which at least:

     21 percent must be sourced from Black Owned Companies;[15]

     5 percent must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and / or owned by female or youth Black Persons; and

     44 per cent must be sourced from BEE Compliant Manufacturing Companies

  • Services: a minimum of 80 per cent of services spend must be sourced from South African Based Companies, of which at least:

     65 percent of services must be sourced from Black Owned Companies;

     10 percent of services must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and owned by female Black Persons; and

     5 percent of services must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and owned by youth Black Persons.

  •       In addition, foreign suppliers are from now on required to contribute a minimum of 1 per cent of their annual turnover generated from local mining companies towards the MTDA (discussed below).
  •       The requirements imposed by Mining Charter III in relation to the procurement of goods and services may violate South Africa’s obligations under the General Agreement on Tariffs and Trade (“GATT”) and the General Agreement on Trade in Services (“GATS”).[16]
  •       Under the GATT, South Africa is obliged to afford imported products “treatment no less favourable than that accorded to like products of national origin”, and thus not to apply any regulatory measures that afford preference or protection to domestic products over imported products.[17] Under Mining Charter III, Holders will be allowed to procure no more than 30 per cent of their mining goods from foreign suppliers, which clearly gives domestic producers a significant advantage over foreign competitors. Similarly, under the GATS, South Africa is obliged to accord foreign service providers “treatment no less favourable than domestic suppliers”.[18] UnderMining Charter III, Holders will not be permitted to procure more than 20 per cent of their services from foreign suppliers, who must, in addition, contribute a minimum of 1 per cent of their annual turnover generated from local mining companies towards the MTDA. The imposition of quotas of procurement from domestic suppliers with specific empowerment profiles potentially also violates the GATS’ specific prohibitions on measures that limit foreign capital participation in service sectors,[19] and measures that restrict or require specific types of legal entities or joint ventures through which a supplier may supply a service.[20]
  •       While a breach of either the GATT or GATS will not directly impact Holders, it could make South Africa vulnerable to challenges by other member states of the World Trade Organisation (“WTO”).  If the implementation of Mining Charter III causes South Africa to act in breach of its obligations under the GATT and GATS, it will have to negotiate a modification of its obligations under the GATT and GATS or face the risk of a referral to the WTO’s Dispute Settlement Body (“DSB”). In the case of the former, South Africa will have to tender necessary “compensatory adjustments” for its failure to extend the necessary protection to investors from other member states which could result in other sectors of the economy being deprived of protections afforded by the GATT and GATS.[21] If the matter is referred to the DSB, some or all of South Africa’s rights under the GATT and GATS could be suspended until the dispute is resolved.[22] Predictably, such a suspension will have a detrimental impact on the entire economy and not simply the mining industry.

Employment equity

  •       Board: a minimum of 50 per cent Black Persons, 25 per cent of which must be female.
  •       Executive Management: a minimum of 50 per cent Black Persons, 25 per cent of which must be female.
  •       Senior Management: a minimum of 60 per cent Black Persons, 30 per cent of which must be female.
  •       Middle Management: a minimum of 75 per cent Black Persons, 38 per cent of which must be female.
  •       Junior Management: a minimum of 88 per cent Black Persons, 44 per cent of which must be female.
  •       Employees with disabilities: a minimum of 3 per cent of all employees.

Establishment of Mining Transformation and Development Agency

The MTDA will replace both the Social Development Fund and the Ministerial Skills Development Fund and be responsible for skills, enterprise and supplier development, and managing community trusts.

Social Contributions

Human Resources

A Holder must invest 5 per cent of the leviable amount (as defined in the Skills Development Levies Act, 1999) on essential skills development as follows:

  •       2 per cent on essential skills development activities;
  •       1 per cent to South African Historically Black Academic Institutions for research and development initiatives; and
  •       2 per cent to the Mining Transformation and Development Agency.
Community Development

A Holder must contribute to Mine Community development by identifying priority projects in accordance with the municipality’s approved Integrated Development Plans, in terms of which:

  •       the Holder’s contribution must be proportionate to the size of its investment and in accordance with its Social and Labour Plan (“SLP”) which must be published in English and other languages used by the community; and
  •       all project management and consultation fees incurred shall be capped at 8 per cent of the total budget.
Housing and Living Conditions

A Holder is required to submit a housing and living conditions plan which must be approved by the DMR after consultation with the Department of Housing and Organised Labour and the Department of Human Settlements.[23]

Sustainable Development

Holders must implement elements included in the “Stakeholders Declaration on Strategy for the Sustainable Growth and Meaningful Transformation of South African Mining Industry” of 30 June 2010, including:

  •       improvement of the industry’s environmental management;
  •       improvement of the industry health and safety performance; and
  •       research and development spend.

Applicability of Targets

All targets stipulated in Mining Charter III are applicable throughout the duration of the mining right (including prospecting rights), unless a specific element specifies otherwise.

Non-compliance

If a Holder fails to comply with the ownership, mine community development and human resource development elements and falls within level 5 and 8 of the Scorecard, the Holder will be regarded as non-compliant and in breach of the MPRDA. As mentioned above, this provision attempts to elevate the Mining Charter to the status of legislation.

3.    Comparison of Mining Charter II and Mining Charter III

ELEMENTSMINING CHARTER II (2010)MINING CHARTER III (15 June 2017)
OWNERSHIP
·       BY WHOM?

 

“HDSA”: any SA citizens disadvantaged by unfair discrimination before 1994.

 

 

 

Black Person” means “Africans, Coloured and Indians –

(a)   Who are citizens of the Republic of South Africa; or

(b)   Who became citizens of the Republic of South Africa by naturalisation:

(i)     Before 27 April 1994; or

(ii)   On or before 27 April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date;

(c)   A juristic person which is managed and controlled by person/s contemplated in paragraph (a) and / or (b) and the person/s collectively or as a group own and control all issued share capital or members’ interest, and are able to control the majority of the members’ vote.

This notably excludes white women and white disabled people.

·       HOW MUCH?At least 26 per cent HDSA ownership in mining companies to enable meaningful economic participation of HDSAs by 2014.New prospecting rights

Applicants for new prospecting rights must have a minimum of 50 per cent plus 1 Black Person shareholding, which must have voting rights attached to them.

 

New mining rights

Applicants for new mining rights must have a 30 per cent Black Person shareholding which must be held in a separate entity from the Holder of the right and must comprise a minimum of:

·      8 per cent of issued shares owned by ESOPs;

·      8 per cent of issued shares owned by MineCommunities (through a community trust); and

·      14 per cent of issued shares owned by BEE Entrepreneurs

The Black Person shareholders must directly and actively control their equity interest in the empowering entity, including the transportation, trading and marketing of their proportionate share of mineproduction.

Black Person shareholders are effectively locked in and may only sell their shares to other Black Persons who fall in the same category. Black Entrepreneurs are however allowed to dilute a maximum of 49 per cent shareholding in the mining right holder, provided they use 100 per cent of the proceeds from such dilution to develop another asset.

 

Existing prospecting and mining rights

An existing prospecting or mining right holder (“Holder”) which has maintained a minimum 26 per cent Black Person shareholder is required to Top Up its Black Person shareholding to 30 per cent within twelve months (from 15 June 2017) by increasing pro rata the shareholding of its existing Black Person shareholders. This could be extremely costly to miningcompanies and their shareholders.

·       PERMITTED OFFSETSMining companies may offset the value of beneficiation against a portion of its HDSA ownership requirements not exceeding 11 percent.A Holder may off-set up to 11 per cent of the Black Person ownership requirement provided that the beneficiation activities are ongoing and that the DMR has approved the proposed activities. There is still no method or manner of calculating this off-set.
·       ONCE EMPOWERED, ALWAYS EMPOWEREDContinuing consequences of all previous transactions concluded prior to the MPRDA included in calculating credits/off-sets in terms of market share measured as attributable units of production.

 

No specific requirement to re-empower after the exit of HDSA shareholders.

All targets stipulated in Mining Charter III are applicable throughout the duration of the mining right (including prospecting rights), unless a specific element specifies otherwise. The ‘once empowered always empowered’ principle accordingly falls away.

 

In addition, although Historical BEE Transactions may be recognised, applications for new rights, renewals of existing rights and section 11 applications will be obliged to comply with the requirements for “new mining rights” (as identified above).

·       ADDITIONAL PAYMENTS TO BLACK SHAREHOLDERSNot ApplicableThe Holder of a new mining right must pay a minimum of 1 per cent of its annual turnover (in any financial year) to the Black Person Shareholders over and above any distributions prior to any other distributions to its shareholders.

 

PROCUREMENT
·       FROM WHOM?‘BEE entities’: entities having 25 per cent plus 1 vote of share capital directly owned by HDSA.‘Black Owned Companies’: entities having at least 50 per cent plus 1 of the total shareholding, with specific requirements in relation to youth and female Black Persons

 

‘BEE Compliant Manufacturing Companies’: a company that manufactures goods and has a minimum BEE level 4 of the DTI Codes and minimum 26 per cent black ownership

Multinational suppliers contributing at least 0.5 per cent of annual income from local mining companies to a social development fund.

 

‘Foreign Supplier’ contributing at least 1 per cent of annual turnover from local mining companies to the Minister’s Social Development Trust Fund.
·       HOW MUCH?
–      capital goodsAt least 40 per cent from BEE entities.At least 70 per cent South African Manufactured Goods (comprising capital goods and consumer goods elements).
–      consumer goodsAt least 50 per cent from BEE entities.
–      servicesAt least 70 per cent from BEE entities.At least 80 per cent from South African Based Companies
–      sample analysisNo obligationSouth African Based Companies for all sample analysis (or obtain the Minister’s consent to use foreign based facilities).
 

EMPLOYMENT EQUITY

·      FOR WHOM?HDSA“Black Persons” (defined above) of which 3 per cent must be employees with disabilities
·      HOW MUCH?
–      boardn/a

 

50 per cent Black Persons, 25 per cent of which must be female
–      executive management40 per cent50 per cent Black Persons, 25 per cent of which must be female
–      senior management40 per cent60 per cent Black Persons, 30 per cent of which must be female
–      middle management40 per cent75 per cent Black Persons, 38 per cent of which must be female
–      junior management40 per cent88 per cent Black Persons, 44 per cent of which must be female
–      core & critical skills40 per cent60 per cent Black Persons
SOCIAL CONTRIBUTIONS
·       HUMAN RESOURCESInvest 5 per cent of annual payroll in essential skills development.Invest 5 per cent of the leviable amount (as defined in the Skills Development Levies Act,1999) on essential skills development as follows:

·       2 per cent on essential skills development activities;

·       1 per cent to South African Historically Black Academic Institutions for research and development initiatives; and

·       2 per cent to the Mining Transformation and Development Agency.

·       COMMUNITY DEVELOPMENTContribute to community development “proportionate to the size of the investment”.Contribute to Mine Community development by identifying priority projects in accordance with a municipality’s approved Integrated Development Plans
·       HOUSING & LIVING CONDITIONSFacilitate home ownership options.Required to submit a housing and living conditions plan which must be approved by the DMR after consultation with the Department of Housing and Organised Labour and the Department of Human Settlements.[24]
·       SUSTAINABLE DEVELOPMENTMust implement elements included in the “Stakeholders Declaration on Strategy for the Sustainable Growth and Meaningful Transformation of South African Mining Industry” of 30 June 2010
PRECIOUS METALS AND DIAMOND SECTORNo specific requirements in the Charter although the Diamonds Act, 1986, and Precious Metals Act, 2005, requires the Regulator to have regard to the requirements in the Charterbefore issuing a licence.The targets and elements of the Mining Charter shall apply to licences granted under the Diamonds Act, 1986, and Precious Metals Act, 2005
SANCTIONS FOR NON-COMPLIANCENon-compliance with the provisions of the Charter and the MPRDA shall render the miningcompany in breach of the MPRDA and subject to the provisions of section 47 read with sections 98 and 88 of the Act.A Holder who has not complied with the ownership, Mine Community development and human resource development requirements and who falls between level 5 and 8 of the Scorecard will be regarded as non-compliant with the provisions of the Mining Charterand in breach of the MPRDA and will be dealt with in terms of section 93 read in conjunction with section 47, 98 and 99 of the MPRDA.
  • Peter Leon is Partner and Co-Chair of the Africa Group at Herbert Smith Freehills, and Patrick Leyden is Director at Herbert Smith Freehills.
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