Banks balk at risk of funding Mining Charter’s black-ownership deals
The government’s plan to force mining companies to give the black majority a bigger stake in mineral wealth faces a major obstacle: convincing banks to back billions of dollars of fresh deals in an industry in decline.
On June 15, Mineral Resources Minister Mosebenzi Zwane said local mines should be at least 30% owned by black people, up from the previous requirement of 26%.
The mining companies need banks to help fund transactions that transfer the stakes to black investors who often do not have the capital to invest due to their marginalisation during white rule. Companies often use dividends or divert cash flows to pay off the debt on behalf of the black empowerment partners, which means full ownership only vests years later.
“The [Mining] Charter will have an effect on our ability to finance the mining industry in SA,” said Ursula Nobrega, a spokeswoman for Investec, one of SA’s five biggest banks. “We already exercise caution as to who and what projects we finance.”
The introduction of the latest version of the charter triggered a sell-off in mining stocks and a drop in the rand amid concerns the new rules will deter investment when SA is already in recession.
The sector, once the economy’s bedrock, now accounts for only 7.3% of GDP, while fixed investment into the industry hit a 10-year low in 2016, according to the Chamber of Mines. SA holds the largest reserves of platinum, chrome and manganese and mining companies operating in the country include Anglo American, Glencore and AngloGold Ashanti.
The new rules do not give credit for deals already concluded and from which black shareholders have since divested. They also impose a community development tax equal to 1% of revenue and expand quotas for buying goods and services from blackowned companies.
The chamber said it would challenge the new rules in court, while Deputy President Cyril Ramaphosa called for the charter to be reconsidered and the ANC said the legislation may cause job losses. With mining companies using diminishing cash flows to finance empowerment deals, “there could be fewer bankable transactions”, said Sandile Mbulawa, head of resource finance for Rand Merchant Bank.
If the charter is implemented, fewer companies would meet the bank’s measures for funding approval, said Business Development director Henk de Hoop. Moody’s Investors Service said the proposals were credit negative for mining companies because they would probably require miners to use cash or raise debt to facilitate the equity transfer.
“We expect that current shareholders are unlikely to support a further dilution of their equity interests,” Moody’s said in a report on Wednesday.
By 2014, all member companies of the Chamber of Mines had complied with legislation requiring them to have 26% black ownership, according to the organisation.
At that stage, black investors held stakes equivalent to 38% of the industry, according to the chamber. “The availability of bankable opportunities will determine whether our exposure to the sector will grow or shrink,” said Nedbank Group CEO Mike Brown.
While Nedbank remained committed to funding the mining industry, it would “carefully assess the risks of every client and transaction”.
Last week in Parliament, President Jacob Zuma said he supported the charter.
The current version of the charter was “clumsy, inconsistent and lacks clarity”, Brown said. There was going to be a lengthy legal process and a long period of uncertainty, all of which was “bad news for the mining industry and investment, growth, jobs and the South African economy”.
WE EXPECT THAT SHAREHOLDERS ARE UNLIKELY TO SUPPORT A FURTHER DILUTION OF THEIR EQUITY INTERESTS