Without investor support, mining charter doomed to fail

Confusing and prescriptive changes will not help attract investment, technology and people the sector needs

Anew version of SA’s Mining Charter came into operation last Thursday. Before considering its details and likely effects, we should ask what South Africans should expect of its mining industry. A useful set of expectations was set out in the vision contained in the first Mining Charter, which became law in 2004: “… a globally competitive mining industry that draws on the human and financial resources of all SA’s people and offers real benefits to all South Africans.”

This statement combines two imperatives. The first is a transformation in who participates and benefits from the mining industry. The ownership of mineral rights in SA was, prior to 1996, largely shaped by the Roman Dutch law precept that linked the ownership of minerals to ownership of land.

As the 1913 and 1936 land acts, together with the subsequent effects of the Group Areas Act, largely confined land ownership to white South Africans, this had the effect of concentrating minerals ownership in white hands.

Clearly this had to change. The Mining Charter of 2004 proceeded from the understanding that SA’s mineral wealth was a national patrimony and the benefits should be fairly shared by all. On ownership, the objective was set for companies to achieve the inclusion of 26% of historically disadvantaged South Africans — blacks, coloureds, Indians and women — within 10 years. So transformation was the first goal of the first Mining Charter.

There is a second truth about mineral resources. When they are left in the ground they can benefit no one but extracting them requires significant financial, technical and human resources.

SA’s mining industry, using local and foreign resources has developed a globally competitive industry, exploiting deep-level, narrow-vein gold and platinum deposits in ways that have made South African miners world leaders in this kind of mining.

We need to continue to attract key inputs to mining in the decades ahead.

Progress against the original charter was reviewed by the government in 2009, 2014 and 2015. The changes introduced last week are presumably intended to fix that which was found broken in these three reviews.

The new charter raises the target for what is now simply called black ownership (this excludes white women) to 30%.

In a market economy, ownership is achieved through people and companies investing in the share capital of a business.

The boards and management of the businesses use this share capital to acquire and operate assets in a way that achieves profits for the business and enables the business to reward its owners through the payment of dividends.

In 2016, about R49bn was invested in capital expenditure to sustain mining.

The challenge with transforming ownership distorted by a racist history is how to make capitalists (or owners of the means of production) out of people without capital.

The Mining Charter of 2004 recognised this problem by committing the existing owners of mining companies to “assist historically disadvantaged South Africans in securing finance to fund participation in an amount of R100bn within the first five years”. This amount was calculated to enable companies to meet the five-year historically disadvantaged South Africans ownership target of 16%.

Two problems were experienced in regard to this transformation of ownership. Often ownership by historically disadvantaged South Africans was financed by debt and the capital debt was secured against the value of shares.

When both commodity prices and exchange rates worked against mining, this often led the new owners to have no concrete financial benefits from ownership, where dividends went to the providers of debt. The asset they owned became a liability when share prices retreated below that used to secure the debt.

A second problem became evident as new historically disadvantaged South African owners wanted to exercise that fundamental right of ownership — to sell their shares to someone else. If they sold to a nonhistorically disadvantaged South African owner, what happened to the original transformed ownership credit?

The problem of debt and dividends is tackled by a new requirement that a mining company must “pay a minimum 1% of its annual turnover in any given financial year to the black person shareholders, prior to and over and above any distributions to the shareholders of the holder”.

This requirement seems in direct conflict with the Companies Act, which requires that all shareholders be treated equally and also charges the board with the duty of balancing the distribution of resources of the company between debt, investment and dividends.

It also does not tackle the relationship of the black owners and those who provided them with the money to buy their shares.

The new charter tackles the conundrum of the right of new owners to sell their shares, though again in a confusing and ambiguous way. It appears to recognise past deals where companies have achieved the 26% goal of past charters. These companies therefore need to increase black ownership 4% to 30%. The language of the charter is not clear. What does seem clear is going forward, black shareholding can only be sold to other black owners.

Whereas the 2004 charter required companies to prepare their own employment equity plans (also required by the Employment Equity Act), the 2017 charter sets prescriptive targets for board level, executive, senior, middle and junior management ranging from 50% to 88% black and 25% to 44% women.

The 2004 charter required companies to develop a social and labour plan, which had to be agreed by trade unions active in the company and by the Department of Mineral Resources. The new charter creates a Mining Transformation and Development Agency, reporting to the minister of mineral resources.

If mining is to play the developmental role envisaged both by the National Development Plan and the Mining Phakisa, then two things have to happen. Mining will need to attract investment, technology and people to further turn to account SA’s considerable mineral resources.

Without these resources, our mining sector will decline. Tens of thousands (over time hundreds of thousands) of workers will lose their jobs. Exports will decline drastically, as will the tax paid by this major sector of our economy. Equally, if this sector is to command the support of the nation its benefits will need to flow to all South Africans.

The 2004 charter was the product of six months’ work by a small task team representing the government, unions and the mining industry. The 2017 charter appears to be the product of a single government department, with little meaningful authorship of other stakeholders. Without the support of those who supply investment funds to mining, this new charter appears doomed to fail.