Charter a negative for mines — Moody’s
• It may now be too late for a declaratory order that historical deals should count towards empowerment credits
There are ample grounds to challenge the Mining Charter, but the legal route the Chamber of Mines has embarked on to secure a declaratory order on the “once empowered, always empowered” principle may have been overtaken by events, as Moody’s warned the policy document would be credit negative for some of SA’s largest mining companies.
There are ample grounds on which to challenge the Mining Charter, but the Chamber of Mines’ intended legal attempt at securing a declaratory order on the “once-empowered, alwaysempowered” principle may have been overtaken by its latest iteration, lawyers say.
That came as ratings agency Moody’s warned the document would be credit negative for some of SA’s largest mining companies. Lawyers agree the third iteration of the charter is a shambolic document that could be contested on many legal fronts, but will meanwhile leave the industry in a stalemate where no deals will be done because of confusion and onerous conditions inherent in it.
The document, which came into effect last Thursday, outlines the obligations on mining companies to qualify for mining and prospecting rights.
The document cut JSE-listed mining stocks’ market capitalisation by R51bn last Thursday.
Moody’s joined fellow ratings agency Fitch in warning of the negative consequences of the charter. Not only would the requirement for mining companies to top up their black ownership levels to 30% from the 26% target set for the end of 2014 be problematic, but the cost implications of the charter would have consequences for all mining companies because of reduced cash flows.
The need to raise empowerment ownership within 12 months “is credit negative because it will likely require miners to use cash or raise debt to facilitate the equity transfer. We expect that current shareholders are unlikely to support a further dilution of their equity interests,” Moody’s said.
At a seminar on the charter on Wednesday, lawyers at Fasken Martineau were openly divided on the issue.
While some argued mining companies should immediately approach the courts to oppose the charter and protect their rights, others said to wait until the Mineral Resources Department acted on existing mining rights under the new charter before launching legal action.
Lawyer after lawyer at the seminar pointed out legal problems with the charter, pointing to constitutional violations, vagaries in poorly drafted clauses and contravention of the Companies Act.
Mineral Resources Minister Mosebenzi Zwane and his department had also exceeded the powers provided to them in the Mineral and Petroleum Resources Development Act by positioning the policy document as a regulatory document that could be used to penalise mining companies, they said.
While the charter was in force, there would be no more deals in the mining industry, said Fasken Martineau’s Andrew Mitchell. The chamber was preparing to interdict the charter, meaning it would be suspended and the industry would return to the second iteration of the charter that has been in effect since 2010.
The industry would then try to conclude whatever deals it may have had planned. But Zwane, in his role as administrator, could decline to process them, said Fasken Martineau lawyer Nick Roodt.
All the company’s lawyers agreed the seeking of a declaratory order that historical deals should count towards empowerment credits may have been overtaken by the new charter.
The chamber claimed its members had achieved an average 38% ownership level, using credits accruing from past deals, including those in which previous empowerment partners had sold their shares. The declaratory order was important to secure, but Roodt said they had left the action too late.
The release of the Mining Charter last Thursday has brewed up strong emotions, with an angry Chamber of Mines reaching the end of its tether and now resorting to the courts. Foreigners regard the local industry with disbelief and deep scepticism as newly fledged political entities seek to take advantage of the disarray.
The outcry from mining companies and investors is well documented. The third version of the Mining Charter imposes stiff costs on an industry where nearly two-thirds of the platinum industry is unprofitable and the gold sector is a shadow of its former self.
The most irksome aspect is the high-handed attitude of Mineral Resources Minister Mosebenzi Zwane, who presented the charter as fait accompli. He has a take-it-or-leave-it attitude and berates the industry for wanting to take the matter to court.
The chance of the chamber securing an interdict to suspend the charter is not a given, but it is highly likely, say lawyers, pointing to flaw after flaw in the document and, critically, the lack of proper consultation.
Step into the fray the newly formed South African Federation of Trade Unions, which tore into the chamber’s rejection of the charter and the department’s handling of the document, leaving the way clear for it to call for the nationalisation of mines.
The last thing the local mining industry needs is to have more investors frightened by this kind of ideological talk, which is so damaging and has proved to be an absolute disaster in Zambia and Venezuela.
Investment company RECM and Calibre (RACP) believes its intrinsic fair value is growing at a rate well in excess of its accounting net asset value.
But there is a reticence to mark assets up to directors’ opinion of full value — “as the proof of value only really comes out in transactions”.
This was certainly the case when RACP so profitably exited its indirect investment in healthcare retailer Dis-Chem ahead of its JSE listing. The “don’t count your chickens before they hatch” attitude might not appeal to all investors, especially those eyeing the fast-growing alternative gaming operations in Goldrush. Still, in these tremulous investing times, erring on the side of caution is appropriate.
One investment that will be keenly watched in the next few years is RACP’s recent foray into struggling building supplies company Distribution & Warehousing Network (Dawn). Dawn’s shares are not trading too far away from a record low of 96c. But RACP appears optimistic that value can be garnered from this brittle situation. It notes Dawn is in a classic “platform” situation, “where management thought they could acquire multiple businesses and simply add them to the existing platform of corporate services”.
In other words, costs could be reduced and revenue synergies achieved. On paper, that is. New management now has the big task of restoring sustainable profits at Dawn.
Dawn’s share price peaked at about R18/share. When RACP was approached to underwrite a rescue rights offer, the share was 220c and the offer price a heavily discounted 100c/share. RACP now holds an influential 18% of Dawn (which cost R101m). Hopefully, the price of participation offers some protection to RACP if there is a prolonged twilight before the new Dawn emerges.