SA behind in exploration

BUDGET KEEPS FALLING AS SMALL COMPANIES BATTLE LAWS New Mining Charter can level the playing field, experts agree.

South Africa’s spending on exploration is “the lowest amongst leading mining countries”. Between 2009 and 2017, South Africa’s share of the global exploration budget fell from 1.6% to 1.1%, according to figures released by the Boston Consulting Group (BCG) at the Mining Indaba.

John Paul Hunt, senior exploration geologist at SRK Exploration Services, says it is clear South Africa has lagged behind the rest of the world. “Globally, about 10% of all capital expenditure in mining goes towards exploration,” Hunt says. “In South Africa, it’s about 2%. We are not really replacing the minerals we are mining.”

To a large extent, this reflects the lack of investor confidence in recent years. Extreme policy uncertainty, political risk and rising cost inflation have made companies wary of committing money into the local industry.

The lack of exploration in the country is not, however, only because of the broader environment. Exploration companies have faced particular challenges of their own.

Among these is that the legal framework in South Africa has been largely tailored towards the big mining companies that dominate the local industry. Smaller companies have had to meet the same level of compliance as their larger counterparts, which is a relatively heavier burden.

“Junior exploration companies have been overregulated,” says Greg Webber, co-head of mining and resources at Nedbank CIB. “They have had to comply with the same rules that operating companies comply with, which is a barrier to the freedom that they need to operate properly.”

Many specialist exploration firms simply lack the resources to deal with this situation.

“In a large company compliance comes more easily,” says Andrew van Zyl, partner and principal consultant at SRK Consulting.

“You have a large legal team and so being able to understand sophisticated rules is something you can deal with in-house. But if you are a single investor or a small group of investors, dealing with the legal intricacies hampers you more than in a larger company.”

There has been some relief in this regard, in that exploration companies are not included in the most recent Mining Charter. For some, this suggests there is an understanding that the requirements were too onerous.

“The fact that you’ve had this exclusion from compliance with the Charter means that there is a shift in thinking,” says Morne van der Merwe, head of Baker McKenzie’s corporate and M&A practice.

“Clearly there is an understanding that if you want to grow the sector there needs to be focus on that part of the value chain.”

But there is some debate as to whether not mentioning exploration companies in the Charter means they are fully exempt, since the document does not specify.

“By not mentioning exploration, it might free these companies from its constraints, but this should have been more explicitly stated to provide the certainty required,” Hunt says. “There was a missed opportunity with the charter: to engage with junior miners and deal with exploration more specifically to create a transparent framework.”

Jonathan Veeran of Webber Wentzel, agrees there is a need to create a specific legal framework.

“One has to recognise that the exploration space is a good capital raising ground for junior miners, particularly junior black miners.”

There is also a need for greater transparency in the mineral rights application process. Currently there is no online database that explorers can visit to see what land is available.

Junior exploration companies have had to comply with the same rules that operating companies comply with, which is a barrier. Greg Webber Co-head of mining and resources at Nedbank CIB