The revised Mining Charter fumbles and crashes

The withdrawal of the abortive 2017 Mining Charter, the election of Cyril Ramaphosa as President, and the replacement of Mosebenzi Zwane by Gwede Mantashe as minister of mineral resources created a false sense of optimism that the next version would be more investor friendly.

Unfortunately, the much anticipated revised edition is a ham-fisted, awkwardly worded document that will merely result in more confusion. It is unlikely to entice new mining investment or lead to growth in the mining sector, and is likely to fail to do anything for workers and communities.

There has been a slight relaxation of the 30% BEE shareholding requirement, and right holders now have five years to achieve this target. But has the charter successfully answered the question “once empowered, always empowered”? Past empowerment deals are now recognised in that they are deemed to be compliant. But are they deemed to have a minimum of 26% BEE shareholding? In other words, do they only have to top up to 30% from 26% in five years?

The charter asserts that the “trickle flow of benefits”, which went towards servicing debt and providing a cash amount directly to participants, was “wholly inadequate”. In a sweeping statement, the charter accuses “nebulous trusts” of constraining the flow of benefits to workers and host communities. The charter not only casts aspersions on the companies and their advisors who established the various BEE structures in order to arrange financing to enable black participation, but surely also on the Master of the High Court with whom the trusts are registered? No doubt this isn’t the end of this accusation.

The charter also introduces new definitions and concepts, some of which are confusing and difficult to comprehend. “Net value” is defined as the value of equity that accrues to black shareholders over a period of time, to be calculated as “the difference between the market value of shares held by black shareholders at the measured date, less the amount of loans relating to the acquisition of shares outstanding at the measured date”.

The definition of “effective ownership of black persons in the mining industry” erroneously includes net value as one of its determining components, together with voting rights, economic interest and management control of mining operations. This means that if the share price plummets, the net value, and thus the effective ownership, will be eroded. Will mining companies therefore be compelled to continuously top up the net value for the benefit of the black shareholders in a declining market?

The 2017 charter defined “meaningful economic participation” to include the fact that the “percentage of effective ownership must accrue to partners who are black persons”. However, in the revised charter this was replaced with a “percentage of unencumbered net value based upon the time graduation factor which has accrued to BEE shareholders”. It is fairly simple to comprehend the economic participation that will flow from, say, a 10% shareholding. Perhaps the authors of this document can provide a few examples to illustrate the “percentage of unencumbered net value based upon the time graduation factor”.

In addition, the rights of BEE shareholders to participate in meetings and exercise voting rights has been extended to include “exercising of voting rights in all aspects including but not limited to trading and marketing of the commodity herein affected and anything incidental thereto regardless of the legal form of the instrument used”. It is not clear what is meant by this. Does the mining charter intend to expand the rights of the shareholders to include the right to participate in the mining operations as well as the trading of the mining production?

“Trickle dividend” has been defined as a “fixed rate dividend”, which is “contributed to a trust for host communities and a structure elected by qualifying employees”, and is redeemable by a right holder when ordinary dividends are declared. In regard to BEE entrepreneurs, it is defined as a dividend that will constitute a cash flow to BEE entrepreneurs “throughout the term of the investment”. The cash flow is expected to service the funding of the structure as well as an amount payable to the BEE entrepreneurs. This is a new concept, a dividend that never stops giving. Unfortunately, it may also break the bank.

The trickle dividend is to be calculated at 1% of earnings before interest, taxes, depreciation and amortisation (Ebitda), and is payable from the sixth year of a mining right to qualifying employees and host communities, until dividends are declared. It will also be payable when dividends are not declared.

The charter does not directly address the life cycle of a mine: prospecting and exploration, development, extraction, closure, and rehabilitation. Nor does it address the possibility of mothballing, which will be necessary when the costs of mining exceed the market value of production, or when global production exceeds the demand.

All new mining rights must have a minimum of 30% BEE shareholding including economic interest plus a corresponding percentage of voting rights. These new projects will be hampered by the 10% free carry for communities and employees, which must be distributed within five years from the effective date of the mining right. The free carry will remain a source of contention.

Read: Minerals Council against 5% free carried interest

A major change to the 2017 charter is that the clause allowing naturalised citizens to benefit, by being included in the definition of black persons, has been removed. This was the clause that created much controversy in that it would have allowed the Guptas to benefit. However, the removal will deny African citizens who were only naturalised after 1994 to benefit, even if they had been living in South Africa before that. Should this not be amended to include citizens of SADC who only became naturalised after 1994?

The message to potential investors is that they have to help redress the plethora of shortcomings in the mining industry including procurement, employment equity, beneficiation, human resource development, mine community development, and housing and living conditions. Potential investors will no doubt consider all the other issues facing the mining industry such as possible financial responsibility for the community at the end of the life cycle of the mine, ongoing labour unrest, illegal ‘zama zama’ miners, low productivity and looming rehabilitation costs. Added to the responsibilities of the potential investor is the requirement to promote sustainable development and growth of the mining industry.

Mining operations will be further burdened by restrictive regulations governing procurement, local content, supplier and enterprise development, production sales, the BEE component of its workforce regardless of available skills or costs, research and development, analysis of mineral samples, submission of data of annual purchases, and the completion of detailed compliance scoresheets.

The charter is a sad reflection of South Africa’s inept leadership floundering in the face of a struggling economy – desperately trying to grab a slice of what is left – taking no heed that they will be destroying any possibility of growth. The charter is no friend of labour or the mining communities, the very people it should be protecting.

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