Charter may sink new development

The biggest threat posed by South Africa’s new mining charter may be to mines that haven’t been dug yet.

The draft rules lay out requirements for new mining rights, including that nearby communities and employees each get a 5% free-carried interest in either the asset or the company that owns it. The charter is aimed at distributing the industry’s wealth more widely among South Africans to make up for racial discrimination during apartheid.

New mines are already scarce and the industry argues that the free carry – which means the groups don’t have to buy their shares or pay their way – will make new developments even less likely.

“We consider much of the resource base to be in sunset,” analysts at Morgan Stanley said.

Many potential projects have marginal economics to begin with and “higher hurdle rates could equate to lower future mining investment”, they said.

The free-carried interests for new mining rights are included in a mandatory 8% each to be held by workers and communities, while a further 14% must be owned by black entrepreneurs, according to the draft charter which was published for public comment.

Another requirement for new rights is that the workers and communities be paid 1% of earnings before interest, taxes, depreciation and amortisation in years when a regular dividend isn’t declared.

While existing producers have an easier time, they will still have to increase their black ownership percentage from the current minimum of 26% to 30% within five years. – Bloomberg