Mining sector stuck in limbo
The redrafted Mining Charter has far-reaching implications for the country’s mining sector. Instead of bringing some much-needed certainty, it will just deter investors even further.
south African mining shares were roundly penalised on 15 June following the publication of the third Mining Charter, a redraft of the 2010 version, but which has far-reaching implications for the country’s mining sector; unanimously bad ones. According to Investec Securities analyst Andrew Snowdowne, mining shares may offer “near-term attractive buying opportunities”, but in the longer term it is almost impossible to make a case for holding them.
This is based on an expectation that the charter redraft won’t see light of day in its current form. At the time of writing on 20 June, the Chamber of Mines was preparing litigation to have the document taken on review, set aside and then interdicted. It may well be that given the lack of consultation with the industry, the courts will send all parties back to the negotiating table.
In addition, an application last year for a declaratory order by the Chamber of Mines on the principle of “once-empowered, alwaysempowered”, which had been held in abeyance, will be lodged with the High Court.
This is the question as to whether previous empowerment deals will be recognised in the event the black-owned partner company sold its shares or the transaction failed. The issue is yet more critical because the Mining Charter seems to indicate previous empowerment deals won’t be recognised; in fact, only direct BEE shareholdings will be considered for credits.
The outcome for mining stocks is potentially disastrous as it will require re-empowerment and shareholder dilution. In the case of Lonmin in particular, this is a clear case of government shooting itself in the foot considering the Public Investment Corporation (PIC) underwrote the platinum producer’s $4bn rights issue in 2015, which makes the PIC its largest shareholder with a 14% stake.
Nedbank Securities has run an analysis of which mining stocks are most exposed to dilution assuming that re-empowerment would have to occur, which, in terms of the charter redraft, has a new target of 30% of shares compared to 26% currently.
“Whilst there are numerous other demands outside of the direct BEE shareholding that could be significantly worse in terms of value destruction, this is the easiest way to try and quantify,” said Leon Esterhuizen, Nedbank’s mining analyst.
Of the gold producers, Gold Fields is the least affected by the charter redraft on the basis that only 16% of total production is located in South Africa set against a direct BEE ownership of 10%, which implies dilution of 3% in order to reach the charter’s ownership target. DRDGold is the most exposed with 100% of its output in SA and only 11% direct BEE ownership. The implied dilution for its shareholders would be 20%.
The list goes on. Very few counters escape having to absorb any dilution except existing blackowned companies such as Northam Platinum, which is 35% black-owned, and Exxaro Resources, which is restructuring its BEE ownership to 30% down from 51%. Royal Bafokeng Platinum is 52% black-owned. Nonetheless, all these mining firms have to meet other aspects of the redrafted charter, which make massive demands on procurement and employment equity targets.
In addition to the legal challenges which are bound to come the way of government, there’s division within the ANC as to the Mining Charter. For instance, its economic transformation committee requested a meeting to discuss the document with mines minister Mosebenzi Zwane.
Said Snowdowne: “Mining companies are possibly being caught in the cross hairs of local politics and posturing ahead of the ANC’s leadership conference in December. Supporting this view is the fact that despite a very long period in the making, the legal terminology used in this document is, in many cases, very vague. This results in a lot of ambiguity and provides the DMR [department of mineral resources] with significant subjectivity in any final decisions made.”
On the issue of terminology, one element that further deepens the political intrigue of the charter redraft is the way in which the ownership targets in the regulations are constituted, or mandated structures, as attorneys have described it.
This is the demand that ownership be divided equally between communities, company employees and black entrepreneurs. While communities and employees have long – and rightly – been beneficiaries of BEE, “black entrepreneurs” is a new, somewhat hazy term.
Jacinto Rocha, a mining industry consultant who was previously deputy directorgeneral at the DMR and helped write the first Mining Charter in 2002, said this element of the charter resembles “a disguised form of quotas which the courts frown upon. The distinction between numerical measures and quotas is the flexibility of the standard.”
Workers underground in Gold Fields’ South Deep mine in Westonaria, south-west of Johannesburg
Andrew Snowdowne Analyst at Investec Securities