Careful balance needed in new Mining Charter
INDUSTRY concerns about the content of the new draft Mining Charter gazetted on June 15 have been outlined in broad terms in the Minerals Council’s media statements and interviews over the past couple of weeks. We would like in this column to offer a deep and detailed examination of one aspect of the new charter – the third iteration of a Mining Charter since 2004 – and demonstrate how the choices that are made today will affect the long-term future of the industry.
The future depends on achieving an industry where internal factors facilitate and encourage both growth and transformation (global market factors being, of course, out of our hands).
In many respects, happily, there is no conflict between growth and transformation. On the contrary, transformation usually enhances growth. For example: It is many decades since it became obvious that a modernising, growing industry could not continue to be managed by only five percent of the population – its white, male part.
Diversifying our management ranks, and generally seeking to optimise productivity growth, has been achieved through significant skills training budgets.
Given the industry’s huge procurement programme, companies have used their leverage for close on 15 years to build empowered suppliers. Still, there are areas where a careful balance needs to be struck, not least in the sphere of black economic (BEE) ownership.
Shareholders in South African miners have long accepted that economic progress is dependent on a measure of restructuring of ownership patterns, the creation of a new generation of black mining entrepreneurs and a sharing of the benefits of mining with employees and communities.
These efforts led, by our last survey in 2016, to empowerment transactions worth about R200 billion which had seen by then the transfer of R159bn in value to a range of BEE partners.
This figure will naturally have increased over the last two years through further transactions and dividend flows.
The long-term future of the industry will depend on investment in new mining projects as current ones run through the cycles of their lives.
However, we fear that the latest draft charter, if implemented in its current form, would lead to a near-halt in investment in new mining projects. Without them coming into operation, South Africa would see only a continuing running down of output as existing operations get closer to the ends of their lives.
The vast bulk of investment in South African mining – and in mining around the world – is made by the financial institutions managing the retirement and other savings of ordinary people. The shareholders of companies mining in South Africa are part local, part foreign. They are able to invest elsewhere in the world, or in other sectors within South Africa. When we talk, as we repeatedly do, of the need for our industry to be competitive, it is because this is what investors require – a reasonable return on their investments, comparable to what they could earn elsewhere in South Africa and abroad.
How do they look at the new draft charter in this respect?
As has been well-reported, the new draft charter envisages that 30 percent of new mining rights should be held by BEE entities. Of that, 8 percent should go to each of employees and communities, and of that, 5 percent should be free carry shares in each case – a total of 10 percent free carry. The remaining 14 percent is allocated to BEE entrepreneurs.
Our assessment is that investors could live with the 30 percent target, even though it is higher than the 26 percent they have become accustomed to over the past 16 years.
However, the new formula means that it is no longer the case that the 30 percent of equity can be transferred through the use of vendor or other financing schemes through which costs can at least partially be recovered through dividend flows and capital appreciation over time. As already stated, these investors have accepted that these arrangements would come at some cost to them, but not the cost of the full allocation.
The new proposed “free carry” element, however, means that other shareholders would carry the full cost of the 10 percent of equity being transferred, before the costs of the remaining 20 percent are even taken into account. This means that any new mining project, to be considered feasible for investors, would require an additional 10 percent estimated profit margin over time. In a well-explored jurisdiction like South Africa, that is a huge ask.
It will mean that a very significant proportion of mining projects that would otherwise come to fruition will not do so under these circumstances. A regulation of this sort will likely discourage exploration, given that it will limit the number of successful feasible outcomes.
And that means not only a halt to many mining growth opportunities. It also means a halt to many transformation opportunities, be they BEE ownership opportunities, skills development, more black managers and executives in mining, and ultimately fewer jobs in the economy and less taxes.
Of course we understand the government faces political pressures from elsewhere, notably within the ruling party’s own constituency and its populist critics, to show that it is taking seriously the sorely needed transformation imperative.
Still, it has a very delicate social, economic and political judgment call to make. How does it strike the right balance between growth and transformation? Because anything less than finding the optimal balance means less of both, and of everything.