Time for a lekgotla

Aug 03 2017 10:51
Jonathan Veeran and Rita Spalding

A few high-profile moves of late have succeeded in widening the trust deficit in the mining sector, with the department of mineral resources (DMR) and minister of mineral resources, Mosebenzi Zwane, in one corner, and industry and stakeholders in the other.
First came the publication of the controversial Mining Charter 3, on 15 June. This upped ownership targets for historically disadvantaged individuals to 30%, among other changes.

It created more onerous ownership requirements for suppliers to the industry and also demanded that research and development be focused locally, ideally at previously disadvantaged universities. 

Transformation numbers within management have been increased, as have targets for previously disadvantaged employees, disabled people and women across all levels.
The goals behind these moves are, make no mistake, laudable. But imposing a three-year time frame in which to achieve complicated targets is commercially and practically short-sighted.
Lack of consultation

While the Mining Charter is the core document for transformation in the industry, these goals cannot be achieved without the full buy-in of the mining industry.

The mining sector’s major gripe is that there has been insufficient meaningful consultation. If there is lacklustre consultation with key stakeholders, then it becomes impossible to implement these changes in a commercially viable fashion.

Little thought has been given to how the policy can be practically implemented or the pressure it might bring to bear on a sector that has been seeing mass retrenchments and has yet to recover from the recent global commodity downturn.

The best solution to overcome this impasse would be to sit down, formally agree on the vision and then approach the practicalities of how this can be achieved.

When the Chamber of Mines brought an urgent application to prevent the implementation of the charter on 14 July, and the minister provided an undertaking that he would not implement the charter, the hope was that this would bring all parties to the table. 

This did not happen. Rather, on 19 July, Zwane gave notice in the Government Gazette of his intention to place a moratorium on the granting of new rights, the renewal of rights and applications for ministerial consent to transfer rights and shares in companies that hold rights.

This moratorium would apply to all minerals throughout South Africa for an indefinite period. He only asked for comment and hasn’t acted on this and, as we know, the chamber has approached the court for urgent relief.
Industry standoff

While this plays out in the courts, what is plain for all to see is that Zwane has exceeded his powers in publishing this notice. One can only assume that this is a shot across the bow: if the industry refuses to play ball and give the minister what he wants, then he’ll play tit for tat.

The standoff will ultimately create more disinvestment, further damage sentiment and erode what fragile trust remains.
We can only speculate about the motives behind the scenes, although it would be naïve to assume that politics do not come into play. We’ve just seen an ANC policy conference during which some opposition was expressed towards the implementation of the charter, and there is an ANC elective conference in December.

If politicking is behind this action, then this is a dangerous and irresponsible move that plays fast and loose with the livelihoods of millions of South Africans.
If new licences are held up, if miners can’t get consent to do transactions – be it a transfer of a share or a mining right – that is hugely problematic.

Financers certainly aren’t going to wait forever for the DMR to give clarity, and if you can’t get new rights you can’t explore, can’t mine and can’t create jobs.

Unfortunately, it will be the poorest of the poor who suffer, and who will suffer the most.
SA is not the only country in the world with minerals and many investors are already opting to rather invest in other countries in Africa, like Botswana, Mozambique, Namibia and Zambia.

While we have historically been welcoming, compliance is becoming increasingly onerous, expensive and tangled.
Certainly the mining industry is heavily associated with the country’s dark past and mining continues to be penalised far more aggressively than other sectors, without the value it brings to the economy being recognised in a holistic manner. 

That said, it is imperative to appreciate how the legacy of apartheid continues to impact the mining sector today. It is perhaps the industry’s biggest stumbling block. But as the Mining Charter fiasco shows, addressing the imbalances of the past cannot be achieved without setting aside historical divisions.

Some of the charter’s laudable goals should be supported, but the state’s heavy-handed approach may only succeed in crushing the industry.
Policy vs the realities on the ground

Much of this failure to communicate hinges on a fundamental lack of understanding of how the industry works. Take, for example, the charter’s introduction of a problematic 1% of annual turnover payment to BEE shareholders.

This payout may not be used to settle debt and would have to be paid before dividends and based on turnover, not profits. Thus, a mining company could find itself in a position where it is obliged, under the Mining Charter, to pay out large sums of cash regardless of whether or not such payment is commercially viable.

Again the objective behind this move is admirable and designed to get money flowing into the hands of BEE shareholders now. Not tomorrow, or in a decade’s time. 

This is indeed in the spirit of transformation, but basing it on turnover is yet another example of a failure to understand the financial inner workings of mining companies.
Similarly, the proposal of a Mine Development and Transformation Agency, run under the auspices of government but funded by the industry as part of a new levy, creates more questions than answers.

With respect, this is a patriarchal and patronising move, which assumes that communities cannot manage their own affairs.

Furthermore, it would give a single agency a say on every single mining company, which opens up competition law issues and confidentiality issues, as well as concerns around how the agency would be staffed.
If you want to increase black ownership in the mining industry, then locking black shareholders into these trusts is not the way to go. This prevents the flow of assets and forces black shareholders to sell to a closed pool.

If the point of transformation is to put money into the hands of black citizens, then this approach offers no flexibility.
Again, this highlights the tensions between realities on the ground and policy. In developing policy in SA we often forego proper economic analysis. 

We don’t assess what markets can withstand and what investors are looking for. We devise policy in a vacuum, divorced from the work being carried out in other government departments and in ignorance of the real-world pressures on the economy and business.

Right now the industry is poised on a knife’s edge. So much depends on what the DMR does in the weeks and months ahead. Right now is the time for level heads, not posturing.

It is vital that all stakeholders appreciate that the country faces a far more daunting future without a healthy mining industry. Labour has to appreciate the impact of very real cost constraints.

Mining companies must accept that there is a historical cost of doing business in South Africa; yes, it is expensive and BEE compliance is essential. Government, too, needs to play ball, not politics. With apologies to Winston Churchill, we should not let this crisis go to waste! 

Jonathan Veeran and Rita Spalding are partners at Webber Wentzel, specialising in mineral and mining law.

This article originally appeared in the 10 August edition of finweekBuy and download the magazine here.

mines  |  mosebenzi zwane  |  mining charter  |  mining