Mining Charter gets more small mercies in final draft

CAPE TOWN — With other African countries rapidly becoming more attractive to global mining companies, the latest, probably court-induced, concession in the formerly Zuptoid-crafted SA Mining Charter is a significant small mercy. The principle of ‘once-empowered, always empowered,’ allows new owners credit for anything their predecessors did, avoiding a double-whammy to their bottom lines, already strongly eroded by other Charter provisions. These include a 5 percent free-carried interest and 3 percent financed interest each for workers and mining communities with another 14 percent for black investors. The caveat to the ‘once-empowered, always-empowered’ new provision is 26% black ownership, rising to 30% within five years. What this will do to South Africa’s competitiveness on the global stage, only time will tell, but it’s already a great deal better than former Minister of Mineral Resources Mosebenzi Zwane’s stiffer requirements which the industry predicted would cost the sector 100,000 jobs. There are also ‘buy local’ service and content provisions which, from an economic upliftment perspective, should be far less contentious. We’re not talking any capitulation here; the mining sector took the government to court over the previously unfair empowerment provisions – and won. – Chris Bateman

By Felix Njini and Paul Burkhardt

(Bloomberg) – South Africa will give mining companies credit for past black-empowerment deals even when the investors later sold their shares to whites or foreigners, removing a major concern for the industry.

The country’s new Mining Charter, which is aimed at distributing South Africa’s mineral wealth more widely, will apply the “once empowered, always empowered” principle as long they met the previous 26 percent black-ownership requirement. The minimum percentage will also be increased to 30 percent within five years of the new set of rules taking effect.

Mineral Resources Minister Gwede Mantashe. REUTERS/Siphiwe Sibeko

Mineral Resources Minister Gwede Mantashe has held months of talks with companies, unions and mining communities on an update to the regulations after a version published last year by his predecessor drew furious opposition and legal challenges from the industry. The Mining Charter, introduced in 2004, laid out rules and targets for areas such as black ownership to help to redress economic inequalities stemming from white-minority rule under apartheid. It was also updated in 2010.

South Africa has the world’s biggest reserves of platinum, and its mineral deposits also include gold, manganese, iron-ore, coal, chrome and zinc. Anglo American Plc, Glencore Plc and South32 Ltd. are among companies operating in the country.

For new mining rights, the minimum 30 percent black ownership requirement includes a 5 percent free-carried interest and 3 percent financed interest each for workers and mining communities, according to the draft, which was published for public comment before being finalized. The remaining 14 percent is for black investors.

Read also: Peter Leon: Here’s how SA should craft its new mining charter

The Minerals Council South Africa, a lobby group representing most producers, said it will take time to study the document but that it’s against the free-carry provision, which will hurt prospects for new investment in mining and reduce the profitability of future developments.

New mining right holders also must pay 1 percent of earnings before interest, taxes, depreciation and amortization to employees and communities. That’s a change from last year’s version, which required companies to pay at least 1 percent of annual revenue to black shareholders.

The recognition of the “once-empowered, always empowered” principal comes after the industry won a court ruling in April that the first two versions of the Mining Charter didn’t require producers to top up black-shareholding levels in perpetuity if they previously met the minimum level.

Read also: Mining’s BEE topping-up principle and why nobody likes it – Anthea Jeffery

“The recognition of continuing consequences shall include historical transactions concluded on units of production, share assets” including all historical black economic empowerment transactions which formed the basis upon which new order mining rights were granted, according to the draft.

The council said last year that the charter produced in 2017, drafted by previous Minerals Minister Mosebenzi Zwane, threatened as many as 100,000 jobs.

Tensions have eased between government and industry since President Cyril Ramaphosa, who appointed Mantashe in February, said he wants to resolve the impasse over the charter and convinced the lobby group to suspend its legal challenge to Zwane’s document.

Other points in the new charter include:

At least 50 percent of directors and 50 percent of top management must be black. At least 70 percent of the mining-goods procurement budget must be spent on South African manufactured goods, with a 60 percent local-content value. At least 80 percent of the money spent on services must be to South African companies.

Comments on Mining Charter III

by Peter Leon, Co-Chair and Partner, Herbert Smith Freehills LLP

More than R50 billion of the market value of mining company shares listed on the Johannesburg Stock Exchange was wiped out in the days immediately following the publication of erstwhile Minsiter Zwane’s draft Mining Charter in June 2017. While Gwede Mantashe’s new draft Mining Charter, released on Friday exactly a year later, is an improvement on his predecessor’s, many of its provisions remain problematic and it is unlikely to result in much needed investment in the already embattled South African mining sector.

On the positive side, the draft Charter appears to make a significant change in relation to the ownership element of existing rights. Although the thirty per cent Black ownership target of the 2017 Charter is retained, up from twenty six per cent (a fifteen per cent increase). existing right holders are afforded a period of five years, rather than one, in which to meet this target. Importantly, the continuing consequences of historical black economic empowerment transactions will be recognised and, although it is open to interpretation, it appears that existing right holders will be protected in circumstances where they met but subsequently fell below the twenty six per cent ownership requirement on the exit of their Black shareholders.

Peter Leon, Co-Chair and Partner, Herbert Smith Freehills LLP.

The holders of new mining rights will not be so fortunate. The composition of the thirty percent Black shareholding remains unchanged from the 2017 Charter: eight per cent to qualifying employees, eight per cent to host communities and fourteen per cent to BEE entrepreneurs. However a new requirement is introduced that at least sixty per cent of the shares owned by host communities and qualifying employees must be on a non-transferable free carried basis. This is likely to render marginal mining projects uneconomic and is a significant cost to shareholders. Although the requirement to pay one per cent of turnover to Black shareholders is removed from the current draft, mining companies will now, regardless of any economic considerations, be required to pay a trickle dividend of 1% of earnings before interest, taxes, depreciation and amortisation in circumstances where a dividend in not declared in any twelve month period.

The draft Charter has finally elaborated on the permitted beneficiation off-set of up to eleven per cent against Black ownership, a concept which was carried through all previous versions of the Mining Charter but never implemented by the Department of Mineral Resources as it lacked a mechanism for its application. The new provision permits a mining company to claim the equity equivalent of a maximum of eleven per cent against a portion of its Black entrepreneur shareholding based on certain listed beneficiation activities. That said, it remains to be seen how the actual off-set entitlement will be calculated.

The significant increases in the local procurement of mining goods and services targets contained in the 2017 Charter have remained largely unchanged and do not appear to comply with South Africa’s international trade law obligations as they continue to discriminate against foreign suppliers of goods and services. Similarly, there has been little reprieve for mining companies under the employment equity targets at board and executive management level with both still requiring fifty per cent Black  participation. The targets for senior, middle and junior management have been lowered marginally.

In what appears to have been more of an afterthought, junior mining companies will be afforded the ability to make representations to the Minister for a much needed reprieve from some of the provisions of the Charter. However, as the provision is vague, any reprieve will ultimately be subject to the Minister’s discretion.