Why our struggle just won’t stop
We have had a very rough week. Mining executives and investors spent long days and nights trying to breathe new life into the South African mining industry, while the ANC’s new leaders also didn’t get much shuteye trying to convince President Jacob Zuma that his time was up.
This got me thinking about just how we got here in the first place. How did we end up with such a huge fight over transformation in mining that a high court has to decide our fate? How did a political movement with such a rich history get to the point where it has to negotiate exit terms with its president after the fair election of its new leadership? Self-interest.
Sadly, it is now acceptable that humans will always do that which serves their narrow interests, and not care about the costs. That is why the new Mining Charter fight between the Chamber of Mines and the Department of Mineral Resources continues.
However, there is one element of the industry that is supported by both the chamber and government, although it has clearly not had the desired effect: community development. That too remains unresolved because it serves the interests of mining companies and the government.
Both the miners and the government love the “warm and fuzzy” feeling they get when they dedicate paragraphs in documents to how they have enabled mining communities to own a share of South Africa.
Yet both know that, bar a few successful case studies such as the Royal Bafokeng, communities hardly see any benefit from BEE transactions in mining.
By his own admission — going by what Mineral Resources Minister Mosebenzi Zwane writes in the preamble of the contested charter — “Limited progress has been made in embracing broad-based empowerment ownership, in terms of meaningful economic participation of Black Persons. The trickle flow of benefits that ought to not only service any debt funding but also include cash flows directly to BEE
Partners is vastly limited. To this end the interests of mineworkers and communities are typically held in Trusts which constrain the flow of benefits to intended beneficiaries. As a result the mining and minerals industry has broadly been faced with increasing tensions with both workers and host communities.”
There isn’t much you can do about the inherent limitations of the commercial funding of BEE deals. The purchaser has to settle the price somehow, and that often means most of the cash flow received is used to pay for the shares.
The other commercial reality is that equity by definition carries risk. As a shareholder who, in this instance, would have borrowed money to buy shares in a mine, you carry a huge amount of risk.
The interest charge on your debt, whether from the company, a bank or a development finance institution, means your cost of purchase increases every day. However, the value of your investment, or its ability to generate positive cash flow, may decrease or grow slower than the debt, meaning you have what bankers call an “underwater” situation — think Sasol Inzalo.
Therefore, a community borrowing money to invest in a mine is probably the worst way the mining sector can contribute to the development of mining communities.
Communities are not generally in the business of assessing investments, raising capital, negotiating terms and driving the success of businesses. The stark difference between communities that have created value and those that have failed has been their ability to corporatise and employ bankers, lawyers and executives to run their investment companies.
In its 2016 review of compliance with the charter, the chamber does not deal with community development in the context of ownership but in relation to social and labour plans. These are between companies and local authorities and focus on socioeconomic impact and the sustainable development of host communities.
Surprisingly, this element is not measured by the 2010 charter, so the chamber came up with its own measure.
“The 2010 charter does not set universal spending targets in respect of mining
Humans will always do that which serves their interests
community development; spending budgets are set though engagement with the DMR. Outcomes should in any event be measured against impact,” the chamber says.
“However, locally and internationally, a target of 1% of net profit after tax [NPAT] is seen to be a reasonable target for corporate social investment. Of the 28 companies surveyed, 25 spent more than 1% of NPAT. Their total spending in 2016 amounted to R1.14-billion. The entire industry’s NPAT for the period amounted to R34-billion, of which 1% is R339-million. So, the 28 companies alone spent triple the total 1% of NPAT standard.”
There you have it. The mining companies have set their own targets, and naturally they believe they’ve surpassed these.
You may ask: why does the new mining charter not simply insist on targets for community development spend, and let mining entrepreneurs do the investing?
Self-interest.
Khumalo is chief operating officer of MSG Afrika and presents Power Business on Power 98.7 at 6pm, Monday to Thursday