Charter renders mining sector ‘uninvestable’
• Empowerment ownership must be 30% within 12 months • Investors warn of potential exodus of companies
The imposition of a contentious new Mining Charter by Mineral Resources Minister Mosebenzi Zwane on Thursday slashed the value of JSE-listed mining stocks R50.69bn, making the sector “uninvestable” and subject to a spate of legal challenges.
Far from creating the soughtafter certainty and investorfriendly policy document guiding racial transformation of the mining industry many had hoped for, the third version of the charter created anger, confusion and uncertainty, with foreign investors warning of repercussions and a potential exodus of companies from one of the world’s mineral treasure troves.
The charter, which includes the demand for companies to top up empowerment ownership holding to 30% within 12 months, from the 26% target for end-2014 among a host of controversial clauses, made “South African miners uninvestable to a large segment of the market and it will be very tough to attract fresh capital to an already unloved sector”, Investec said in a note to its clients.
Nicola Jackson of Fasken Martineau said: “It is highly arguable that this new top-up provision is constitutional as it attempts to impose retrospective obligations on already existing mining right holders.”
The continued uncertainty around the charter, which is likely to be mired in legal challenges, was massively damaging for SA.
JP Morgan Cazenove said: “We believe a protracted and antagonistic time line is likely, which we expect will be negative for SA risk premia and corporate and institutional investment in SA’s mining sector.”
The Chamber of Mines, whose members produce 90% of SA’s annual mineral wealth, reacted with fury at the charter, saying none of its submissions appeared in the document and that it would approach the courts on two fronts, seeking an interdict in coming days to freeze the implementation of the charter as it launches a judicial review of the document. It will resume its declaratory order process to ask the court to declare whether past empowerment deals where partners have sold their shares count towards empowerment targets or whether companies have to perpetually enact new deals to maintain ownership levels.
Chamber president Mxolisi Mgojo said the industry was prepared to take the matter all the way to the Constitutional Court, but hoped to reopen talks with the department to renegotiate the document on a more inclusive and co-operative basis.
Judging from Zwane’s comments on Thursday at the release of the charter, it could be a fruitless endeavour. “The button has already been pressed, so there is no turning back,” he said.
“We consulted more than 60 stakeholders. It is reasonable for us to assume that no single stakeholder will actually want all its views to be reflected in this charter. This charter balances all the views of our stakeholders.”
The chamber claims its members have on average 38% empowerment, counting past deals, something the department disputes. The department’s
assessment of compliance with the 2014 targets, stipulated in the second charter on an unweighted basis, showed only 6.3% of the 442 companies out of 962 mineral rights holders met the 26% ownership requirement. On a weighted basis to take account of the sizes of the companies, this figure rose to 20%.
Law firm Malan Scholes launched a court case in 2015 to declare the mining charters null and void, unconstitutional, vague and contradictory, something director Hulme Scholes said was even more applicable to the third charter.
“I’m consulting my legal team on how this charter impacts on the litigation we’ve instituted and we will decide if there is a good prospect of us interdicting the charter until our review application is completed.” Mining lawyers were unanimous in their view that while the chamber and Scholes were likely to be successful in interdicting the charter, preventing it from being applied, and then, on the chamber’s side, instituting a review of the document, the true scale of the problems of the charter would be seen as mining companies started litiga- tion, contesting vague and problematic clauses in each of the seven elements of the charter if it was applied.
Singling out the clause that gave 30% empowerment partners the right to transport, trade and market their proportional share of production on top of securing a 1% revenue stream from annual turnover and dividend payments, Peter Leon of Herbert Smith Freehills said this amounted to expropriation and was reason enough to contest the charter in court.
The 1% payment to empowerment shareholders was contrary to the Companies Act, said Warren Beech, head of mining at Hogan Lovells. “It’s an extremely poorly drafted document. Even if the big ticket items aren’t taken through the courts by the chamber, there are going to be plenty of court cases surrounding interpretation and application….
“This is a form of greater economic interest being obtained through the back door of this charter. It’s not legal. It’s too prescriptive and it’s unconstitutional on many levels, making it the subject of many court battles going forward,” Lovells said.