Zwane’s move will have dire effects ‘Break up wasteful Eskom’
Plan to impose moratorium will sabotage small miners and BEE deals, and damage trust between industry and state
Small companies at the fringes of the mining industry, along with empowerment transactions, will take the biggest immediate hit from Mineral Resources Minister Mosebenzi Zwane’s planned moratorium on all forms of mineral licensing. Zwane invited public comment this week about his “intention” to stop entertaining all new applications for prospecting and mining rights or permits.
More importantly, in the short term, he also plans to stop entertaining so-called section 11 applications – the approval needed for any change in ownership of a mining right.
This is the part of his plan that is most likely to be unlawful, according to the Chamber of Mines.
The Mineral and Petroleum Resources Development Act (MPRDA) does permit restrictions on most forms of licensing, but not expressly section 11, which governs the transfer of mining rights.
According to Warren Beech, head of mining at law firm Hogan Lovells, his team does about eight to 10 section 11 applications per month.
The volume of deals requiring ownership change can vary sharply, but at this one law firm alone it represents transactions worth anything from R100 million to R300 million a month. Depending on how long Zwane intends his moratorium to last, this could quickly affect billions of rands’ worth of deals.
Beech said the bulk of this deal flow came from medium-sized mining companies, not the giants and their occasional large divestment or merger.
“A lot of these – 70% to 80% – are empowerment transactions,” said Beech, adding that 90% of them require section 11 approvals.
“Section 11s used to be processed in three to five months. It takes nine to 12 months now,” he added.
Getting your section 11 from the department of mineral resources is a standard procedure in most mining deals – meaning the deal cannot otherwise go through.
Neva Makgetla, senior economist at Trade and Industrial Policy Strategies, said the effect of the decision would depend on how it was implemented and the length of the moratorium, but the constant change in policy certainly did not bode well for trust between industry and the state.
“Mining is a long-term commitment. The trust will definitely be affected. Even if the intention is right, the way in which it is being done is wrong. You cannot just spring such decisions on your partners,” she said.
Dennis Dykes, Nedbank’s chief economist, said the decision was “very bad” and would create reluctance among investors to pump money in the mining industry. “It makes it difficult for mines to take long-term decisions.”
“People will try to work around it,” Beech said. Companies affected by the promised moratorium would be advised to structure deals in such a way as not to trigger section 11, he explained.
The problem with this, apart from being a potentially unethical form of regulatory evasion, is that it would likely be costly to the companies as well.
Section 11 does not get triggered if ownership changes through sufficient levels of indirect ownership. Listed mining companies, for instance, do not need to get approval every time their shares are traded.
Likewise, you can avoid triggering section 11 if you sell or buy an interest in a mining right through three layers of indirect ownership. This would be a company that buys shares in a company which, in turn, has shares in the company that owns the right.
While stopping section 11s will have an immediate effect, the planned freeze on new prospecting and mining rights will have more delayed consequences.
“The burning issue is prospecting rights. The impact on mining rights will be felt two years or so later,” said Beech.
Prospecting rights are popularly associated with new and speculative ventures, but in reality, existing mines that expand need to make prospecting rights applications all the time. These are a prerequisite for getting a mining right for expansions that the industry calls brownfields.
According to the chamber, another immediate impact will be on the special mining permits for small-scale mines, which are different from fully fledged mining rights.
These permits last for only two years and can only cover 5 hectares of land. Thus, they get applied for on a shorter-term basis, and more frequently. That means the moratorium will stop activity in this part of the industry, inhabited by smaller companies, more quickly.
The chamber said the moratorium would probably also lead to marginal mines getting closed or put on care and maintenance instead of being sold, if that was an option. “This is because potential buyers would not easily take the risk of not getting approvals for application.”
COURT BATTLE NUMBER THREE
Zwane’s notice is to be challenged in court by the Chamber of Mines, making it the third concurrent court case about the new Mining Charter. The crux of the challenge is that Zwane is using section 49(1) of the MPRDA, which gives him power to restrict new rights – but that his plan affects many existing rights, especially through section 11.
“The minister’s notice is wrong in law, as existing rights cannot be dealt with in terms of section 49(1). He can therefore not refuse to deal with applications for renewals by relying on section 49(1),” said the chamber via email.
The notice, which appeared in the Government Gazette this week, dramatically escalates the standoff between the minister and the chamber. Zwane’s intention is evidently to freeze the issuing of mineral rights until it is clear which Mining Charter conditions will apply to it.
The public was given two weeks to comment on the move, which comes straight after the Chamber of Mines last week celebrated a small victory against the minister.
The chamber had gotten Zwane’s department to voluntarily suspend the new charter until the court case against it is heard in September.
Beech admits that Zwane’s strategy makes sense from the minister’s perspective.
“It is logical if you take the emotion out of it,” he said. Specifically, the minister would presume he has a chance of successfully defending his charter in court. This means he wants to close the window that exists for companies to lodge all their foreseeable applications immediately – before the court potentially affirms the new charter.
Potentially, this could let them escape the new charter’s infinitely more onerous conditions and apply those of the preceding charters of 2004 and 2010, despite the new charter coming into effect. This helps explain why the mineral resources department included a freeze on mining right renewals. This would be practically inconsequential for a long time as South African mining rights last for 30 years and rights under the current mineral regime only started getting issued in 2004.
Including these in a potential moratorium could, however, be a way to ensure that no one lodges massively premature applications now to avoid the new charter’s prescriptions. But, adds Beech, the minister’s decision simply goes too far. “Why go as far as the section 11s? It does not make sense. When the charter was suspended last week, there was a positive response.” Embattled power utility Eskom should be broken up and unbundled as it is wasting money.
These were the words of Imraan Valodia, professor at the University of the Witwatersrand, as he addressed a packed venue at the Wits School of Governance this week during the OR Tambo Debate Series event.
“What Eskom is doing is taking our money and throwing it down the tube,” he said.
“I think Eskom has to be broken up. You can’t have a large power utility, especially the size of the one that we have, that deals with both the generation of power and also the transmission of power,” Valodia said.
He also said government needed to think thoroughly about the role of state-owned entities, including the current structure of the SAA.
Last week, Eskom cancelledcanc its results presentations at the elevent eleventh hour, allegedly after auditors raised i irregularities at the power comp company.
S Some of Eskom’s controversies re recently include the R30 million payment it wanted to give its former CEO Brian Molefe as a payout after it emerged that he h had not actually resigned from th the company.
Last month, the Johannesburg Hig High Court set aside a R4 billion tende tender Eskom had awarded to Chinese firm DongfangDon to replace a boiler at the Duvha power station in Mpumalanga.
A recent report on the Gupta-linked Trillian Consulting found that Eskom paid it R266 million without invoices or proof that work was done.
Another Gupta company, Tegeta, was paid R600 million prepayment for coal – money that the company used to buy Optimum Coal mine with the assistance of Mineral Resources Minister Mosebenzi Zwane.
Valodia, who addressed the crowd that included former finance minister Trevor Manuel, former speaker of the National Assembly Max Sisulu, Economic Freedom Fighters MP Floyd Shivambu, and several academics, said he was not advocating for the privatisation of Eskom, but simply its unbundling.
In his input, Shivambu said the popular term “radical economic transformation” did not exist and was merely a term used by politicians at will. “Radical economic transformation means nothing. It means absolutely nothing. Malusi [Gigaba, the finance minister] came to the standing committee on finance and in his main presentation he said, ‘we are in pursuit of radical economic transformation’, and when we asked him what do you mean by that, he said the ANC was still going to resolve on it at the policy conference. The policy conference has come and gone and there is no resolution on what radical economic transformation is. It means nothing. It depends who woke up where, what day and how they feel that day. Different politicians in the ANC just call it whatever they want to call it. There is no such thing as radical economic transformation,” he said.
He likened the use of the term by the governing party for factional politics.
Gigaba was initially meant to attend, but pulled out at the eleventh hour, citing illness.