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.

Finweek English Edition - - THE WEEK - By David McKay

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.

Share­holder di­lu­tion

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

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