Free shares, empowerment funding a sticking point in Mining Charter 3
Draft charter outlines need for trade-offs
● The draft of the third Mining Charter may have answered the contentious question about transformation in mining, but some industry pundits still believe there are a number of sticking points that need to be addressed.
These include the 10% free-carry option, the issue of funding for BEE entrepreneurs, and the inclusivity of small or junior miners.
The sector has been calling for policy certainty in the Mining Charter after Mosebenzi Zwane, the former mineral resources minister, released a charter last year that was regarded by the industry as hostile to investment.
The latest iteration of the charter, released as the revised draft charter by the Department of Mineral Resources in June, has been praised for its clarity and recognition of the “once empowered, always empowered rule”.
Ajay Lalu, director at Black Lite Consulting, said it was a balanced charter and it was clear that substantial compromises had been made on both sides during negotiations. He added, though, that the issue of the free-carry option was now creating an expectation that when a BEE company concluded any BEE transaction, it would automatically earn a return, which was not the case.
“I’m sympathetic with community schemes and if we are honest, very little has changed in the communities in which mines operate — just look at the levels of poverty in North West and Limpopo, where the platinum belts are. Mines have a responsibility to host communities, but we cannot deviate from the principles of a free market and risk and reward,” Lalu said.
The charter stipulates that the 30% BEE ownership will be distributed by giving a 14% shareholding to a BEE entrepreneur, 8% to employees and another 8% to the communities. Of the 8% distributed to employees and communities, each will receive 5% as free carry — which means the shares are distributed for free.
Lalu said the free-carry option in the charter was creating a dependency on a distressed industry. “Are we not confining people to further poverty and dependency?”
However, Ndavhe Mareda, chairman of the Makole Group, the holding company of Black Royalty Minerals, said the free-carry option was not a big percentage to give to communities and employees. “Free carry, which goes to the employees or the communities, is a good initiative and to question that means that you are greedy and want to take everything.”
Mareda said that for him, the issue of funding for BEE entrepreneurs still needed to be strengthened in the charter to avoid past mistakes. This would remain the biggest challenge if the charter was published in its current form, because the 14% equity to the entrepreneur was still a loan.
“Truth be told, mining is not cheap and the funding of 14% of the shares is not a small amount of money and, given the economic position of the group that needs to be empowered, to fund this on their own is going to be a challenge,” Mareda said.
After climbing mountains to get funding for 14% of the shares, the mine might need recapitalisation from shareholders, and when that happened the BEE entrepreneur would have to jump through hoops again to help fund the recapitalisation, and this would not be easy or cheap.
Another problem with the recapitalisation of a mine was how communities and employees were going to chip in when required, given the fact that they had been given the shares for free and probably would not have funds.
The Minerals Council South Africa (formerly the Chamber of Mines) said that although the charter was an improvement on the previous one, the council did not support the 5% free carry for communities and employees.
“A 10% total free-carry interest on new mining rights will materially undermine investment by pushing up investment hurdle rates and ensuring that many potentially new projects become unviable,” it said in a statement.
An analyst, who did not want to be named, said the Mining Charter was basically big government talking to big mining companies. “A mining permit is not a mining right. The charter applies to mining rights and pending mining rights, not mining permits or prospecting mining rights, and there is no mention of exploration miners,” he said. The only mention of prospecting rights was that the full charter applied to them too, he added.
Mining permits relate to companies that mine in areas of land of about 2.5ha to 5ha, such as companies that mine sand for building, or clay for bricks, or small diamond miners.
The analyst said it would not make sense for the charter to apply to mining permits because such companies probably did not even have full-time employees, so to ask them to have an employee representative and a community representative sitting on the board did not make sense.
Some of the Mining Charter mandates require employees and community representatives to sit on the boards of the companies.
Mareda said South Africa should not worry too much about mining permits because those miners with permits were too small for the charter to focus on.
“I don’t see small-scale mining taking centre stage in the next few years because they are start-ups. The big-scale miners will still run the show and it is the junior miners who will grow, in which case the junior miners’ and the bigger miners’ requirements [will become] the same.”
Mareda said there would never be a charter that made everyone happy, but the difference was that this charter was reasonable and “it bites when you don’t comply”.
The draft third charter is now open for further consultation.
The final charter will be gazetted after the charter summit hosted by the department next week.
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● A new, inclusive pact involving all stakeholders about the future of the mining industry is fast emerging. On taking office, Minister of Mineral Resources Gwede Mantashe embarked on a rigorous process to bring calm to the industry following a period of unease and animosity. Uppermost was the engagement of social partners and all stakeholders to create trust, and to ensure policy and regulatory certainty in the sector.
The draft Mining Charter, gazetted by the minister for public comment on June 15, is a result of this broad and extensive consultation with mining communities in all provinces and all industry stakeholders.
The charter recognises both national and industry challenges and, therefore, the need for trade-offs to build social capital and achieve social cohesion.
One of the necessary trade-offs is the 10% nontransferable free-carry interest to mining communities and qualifying employees over five years, which also provides communities and employees with representation on the board or advisory committee of a miningrights holder. Free carry is when companies give shares to shareholders without any financial obligation to pay for the shares.
The nontransferable free-carry interest, whereby mine owners buy 5% of shares for communities and 5% for workers so they can feel and see the benefit of mining, will address ownership and worker-community empowerment. We must be courageous enough to pay any price that needs to be paid so the promises of our constitution can be realised for the majority of South Africans.
An obvious temptation we must guard against is to take a dogmatic stance against this free-carry element and only see the cost factor, traditionally regarded as a risk. The all-or-nothing dogmatism about a deep and complex economic inequality that our society is trying to address is myopic. We dare not be ensnared by dogmatism when poverty and inequality grow astronomically.
The numbers, looked at dogmatically, do not reveal the full extent of the risks our country faces. Risk should be contrasted with long-term sustainable returns to investors. Hence the need for a more pragmatic stance on this free-carry interest, which reveals that buying 10% of the 16% BEE shareholding intended for communities and workers is indeed a powerful investment in employees and affected mining communities.
How the remaining 6% is to be financed will be determined by mining companies.
The draft charter stipulates that the community benefit, of which 5% is free carry, will be administered by properly constituted community trusts, the modalities of which are dealt with outside this transformation instrument. Yet it is common cause these trusts will be governed by the Trust Property Control Act of 1988.
The return on investment of the free carry is quantifiable. It purchases the long-term coexistence, survival and sustainability of the company. Business productivity benefits positively from loyal employees who are producers of wealth and creators of value. The social licence to operate, elusive for so many years, is engendered. And lastly, it gives mining companies greater public legitimacy among their communities and employees.
The nominal impact on investors’ return on their investment, when weighed against the social impact, will be offset in the long run by the much-needed tangible social licence to operate, and the guaranteed longterm high returns which are shared.
The argument, often advanced, that affected mining communities and employees must equally share the risk is flawed. It overlooks the burden of risk they carry, which is a consequence of the negative impact of mining on the lives of workers and the livelihood of communities over the years.
Mining companies are admittedly becoming more socially responsive and make serious efforts to minimise these risks. However, the huge residual historical negative impact and its deficit will take a long time to eliminate through philanthropy alone.
A strong pact to share in the economic benefits of mining activity is critical. Risk must be countervailed by national interest. We should avoid the unimaginative reactions resonant with those echoed after the release of the draft charter. A new dawn for the mining industry includes a compact to transform while achieving competitiveness and inclusive growth.