New charter could cause foreign capital flight - mines analyst

Jun 16 2017 05:00
Carin Smith

Cape Town - The new mining charter could lead to the exit of foreign investors in the industry, lower dividend payments and further unemployment, according to Hurbey Geldenhuys, a mining analyst at Vunani Securities.

The new charter may negatively impact the economy on a number of fronts, he explained.

Mineral Resources Minister Mosebenzi Zwane announced a new stringent law that will force mining firms to restructure their ownership to ensure they have 30% black ownership within 12 months.
"The new ownership requirements will result in potential dilution of existing shareholders, which may prompt them to exit their investments. This will negatively impact the current account if those investors were foreign," cautioned Geldenhuys.

"New investment in mines may be reassessed due to the additional turnover taxes payable to BEE shareholders. It is possible that the new legislation may result in lower dividend payments, which may impact total overall returns investors receive."

READ: Markets bloodbath as Zwane shocks mining sector

All in all the new charter may deter investment in new capacity and prompt current investors not to reinvest in their existing operations. This may lead to further unemployment, according to Geldenhuys.

The new mining charter appears to have arduous consequences for the mining industry and broader economy.

Economist Chris Becker is of the view that the new Mining Charter will mean that once global commodity prices and demand do eventually recover, South Africa will not benefit as much as it otherwise would have.

Other countries that are making it easier to invest in mining, like Argentina, are therefore likely to outperform SA on this front.

READ: The full Mining Charter

"I also suspect the local procurement law will put the existing mining services industry under tremendous pressure and lead to a shrinkage in this sector, making it even harder for mines to operate in the country," said Becker.

"A vibrant and competitive mining services and suppliers industry is necessary to keep prices and services competitive and increase ownership, but property rights restrictions in this industry are likely to be a hindrance on this front."

Earlier on Thursday Sanisha Packirisamy, economist at Momentum Investments, told Fin24 that a lack of clarity around economic policy direction in the mining industry has played a role in dampening investment spend in the sector. Mining investment has tracked largely sideways since the global financial crisis.

In her view, Thursday's announcement of onerous regulations imposed on the mining sector is unlikely to instill much confidence in the sector and as a result, she expects the recovery in mining investment and hiring to be slow.

She also pointed out that rating agencies have voiced concerns about a lack of progress on meaningful structural reform in SA.

"Though today’s announcement brings to an end more than a year of indecision around the revised charter, the lack of broader consultation and potential negative impacts on the mining sector and growth in the economy as a whole is unlikely to placate the rating agencies," said Packirisamy.

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