New mining charter: More uncertainty?
Allan Reid
MINERAL Resources Minister Gwede Mantashe published the long-awaited draft of Mining Charter III (Draft Charter) for comment on June 15, claiming that this charter will bring about the stability so desperately required by the mining industry.
However, a review of the Draft Charter indicates that aspects thereof are potentially unconstitutional, conflict with the Companies Act 2008 and are mired in uncertainty. It does little to raise hopes that South Africa will once again become a mining jurisdiction that will attract foreign investment, particularly with a free carried interest of 5 percent to each of the employees and host communities.
The Draft Charter is stated to apply to pending mining right applications, existing and new mining rights. It is also stated to apply to prospecting rights as contemplated in s17(4) of the Mineral and Petroleum Resources Development Act, 2002 (MPRDA).
Section 17(4) merely states that the minister can request an applicant for a prospecting right to comply with the object in s2(d) (meaningfully expand opportunities for historically disadvantaged South Africans to participate in the mining industry). The definitions of “Right holder” and “Existing right holder” in the Draft Charter refer specifically to holders of mining rights.
The application of the Draft Charter to prospecting rights is thus unclear. The Draft Charter does, potentially, provide some relief to junior miners, who can make representations to the minister regarding the extent to which the Mining Charter elements shall apply to them. However, “junior miner” is not defined and the relief that may be granted is entirely discretionary.
The ownership element, set at 30 percent BEE shareholding, is ring-fenced and requires 100 percent compliance at all times, other than as set out in the Draft Charter. The 30 percent BEE shareholding must be distributed as to:
A minimum of 8 percent (of which 5 percent is non-transferable free carried interest) to qualifying employees within a period of five years from the effective date of a mining right. Note that “qualifying employees” excludes employees who already own shares in the company as a condition of their employment, except where such holding is a “Mining Charter” requirement.
A minimum of 8 percent (of which 5 percent is non-transferable free carried interest) to host communities (in the form of a community trust as prescribed) within five years from the effective date of a mining right.
A minimum of 14 percent shareholding to a BEE entrepreneur.
A holder can claim a maximum of an 11 percent offset credit against the BEE entrepreneur allocation for beneficiation on the basis of a Department of Mineral Resources (DMR) approved “equity equivalent plan”. However, the baselines for beneficiation are still required to be determined by the minister.
A pending application accepted prior to the coming into operation of the Draft Charter shall be processed and granted in terms of the requirements of the Mining Charter, 2010, with a minimum of 26 percent black person’s shareholding, and the holder will be required to increase the BEE shareholding to 30 percent within five years of the effective date of the mining right. Whether such 30 percent will be required to reflect the stipulated distribution to employees, communities and black entrepreneurs is not clear.
In similar vein, the holders of existing mining rights also have a five-year period within which to increase their BEE shareholding to 30 percent and have partially benefited from the judgment obtained by the Minerals Council SA in regard to the “once empowered, always empowered” principle.
The recognition of continuing consequences includes historical transactions concluded on units of production, share assets including all historical BEE transactions which formed the basis upon which new order mining rights were granted. However, the recognition of continuing consequences will not apply to new applications, or to renewals of existing mining rights and will lapse upon the transfer of a mining right or any part thereof.
Where a BEE entrepreneur’s shareholding is disposed of, the empowerment credentials of an otherwise compliant right holder will continue to be recognised on the continuing consequences basis for the duration of the mining right, provided that the BEE entrepreneur must have held the empowerment interest for a minimum period equivalent to a third of the duration of the mining right and unencumbered value must have been realised, and the BEE entrepreneur must re-invest a minimum of 40 percent of the proceeds from the disposed equity in the mining industry.
The Draft Charter also sets deadlines by which the BEE entrepreneur shareholder must vest, namely 15 percent in the first quarter, 50 percent in the second quarter, 70 percent in the third quarter and in full in the last quarter of the duration of a mining right.
Again, how this would work in practice where, for example, only five years of the duration of a mining right remains is uncertain.
In addition to the proposed free carried interest, employees and communities are set to benefit from having representation on the board or advisory committee of right holders and the entitlement to receive a trickle dividend equal to a minimum of 1 percent of Ebitda from the sixth year of a mining right until dividends are declared. This trickle dividend is stated to be “redeemable” by a right holder when ordinary dividends are declared.
Trickle dividend
This, according to Mantashe, allows the trickle dividend to be repaid from normal dividends so that other shareholders are not prejudiced. This raises several company law and practical issues. What would be the position where the “normal dividends” were less than the trickle dividend? Can the “normal dividends” due to employees and communities be withheld in total to repay the trickle dividends received? The implications for employee and community relations could be disastrous.
In relation to BEE entrepreneurs, the trickle dividend refers to “a dividend with a cash flow to BEE entrepreneurs throughout the term of the investment where a percentage of such cash flow should be used to service the funding of the structure while the remaining amount is paid to BEE entrepreneurs”. These trickle dividends do not appear to be “redeemable”.
In regard to Employment Equity, a right holder must achieve a minimum threshold of black persons which is reflective of the provincial or national demographics as follows:
Board – a minimum of 50 percent black persons, 20 percent of which must be black women.
Executive/top management – a minimum of 50 percent black persons at the executive directors’ level as a percentage of all executive directors proportionally represented, 15 percent of which must be black women.
Senior management – a minimum of 50 percent black persons proportionally represented, 15 percent of which must be black women.
Middle management – a minimum of 60 percent of black persons, proportionally represented, 20 percent of which must be black women.
Junior management – a minimum of 70 percent black persons proportionally represented, 25 percent of which must be black women.
Employees with disabilities – a minimum of 1.5 percent employees with disabilities as a percentage of all employees, reflective of national or provincial demographics.
Core and critical skills – a right holder must ensure that a minimum of 60 percent black persons are represented in the right holder’s core and critical skills by diversifying its existing pools. Core and critical skills must include science, technology, engineering and mathematical skills representation across all organisational levels.
Levy
An additional tax is also being raised for human resource development. A right holder will be required to pay 5 percent of the “leviable amount”, being the levy payable under the Skills Development Act, 1999, (excluding the mandatory statutory skills levy) on essential skills development by way of paying 3.5 percent of the leviable amount on essential skills development activities such as science, technology, engineering, maths skills as well as artisans, bursaries, literacy and numeracy skills for employees and non-employees (community members) and 1.5 percent of the leviable amount towards South African Public Academic Institutions, Science Councils or research entities for the development of solutions in exploration, mining, processing, technology efficiency (energy and water use in mining), beneficiation as well as environmental conservation and rehabilitation.
Foreign suppliers to the South African mining industry must contribute a minimum of 0.5 percent of their annual turnover generated from local mining companies towards development of suppliers to be directed to the Mandela Mining Precinct for research purposes.
There is a stronger focus on mine community development in the Draft Charter
than was previously the case. A right holder must meaningfully contribute towards mine community development with “biasness” towards mine communities both in terms of impact, in keeping with the principles of the social licence to operate. A right holder must develop its social and labour plan (SLP), in consultation with relevant municipalities, mine communities, traditional authorities and affected stakeholders, and identify developmental priorities of mine communities. The identified developmental priorities must be contained in the SLP.
Mining right holders operating in the same area, may collaborate on identified projects. An SLP must be published in English and one or two other languages commonly used within the mine community. Any amendments/variation of SLP commitments, including the budget, shall be approved in terms of s102 of the MPRDA and in consultation with mine communities. The Draft Charter also sets new targets for Inclusive Procurement, Supplier and Enterprise Development. To achieve compliance, a mining right holder must identify all goods and services that will be required in its operations and ensure that its procurement policies adhere to the criteria set out in the Draft Charter. New criteria have also been set for Housing and Living Conditions. CDH will be releasing a comparative study between the current Mining Charter and the Draft Charter covering such criteria which will be available shortly.
In order to compel compliance, the Draft Charter states that right holder who has not complied with the ownership element and falls between levels six and eight of the charter scorecard will be regarded as non-compliant with the provisions of the charter and in breach of the MPRDA and will be dealt with in terms of s93 read in conjunction with sections 47, 98 and 99 of the Act. Interested and affected parties can submit written representations on the draft Mining Charter before July 15.
Mantashe’s new Draft Charter aims to bring about more equity in all tiers of the industry, from the ownership to management and all levels of workers.