By Charles Young, partner and head: Mining Sector Group; Claire Tucker, partner and head: Public Law & Regulatory Practice; and Wandisile Mandlana, senior associate, at Bowman Gilfillan Africa Group (South Africa)
The news that regulatory and policy certainty in the mining sector is a top priority for the South African Department of Mineral Resources (DMR), as stated in Minister Zwane’s speech at the launch of the South African Mining Indaba in February, has been welcomed by mining industry stakeholders.
Industry players are looking forward to the finalisation of all outstanding mining regulatory and policy pieces, including the passing of the revised MPRDA Bill; the coming into force of all provisions relating to environmental management in the mining sector; the repeal of obsolete regulations; as well as the completion of the process of aligning the Mining Charter with the BEE Codes of Good Practice. Although regulatory uncertainty is not responsible for the current state of the industry, regulatory certainty will go a long way towards stabilising it.
The South African mining industry is resilient. Despite the challenging times, we are seeing that the current environment is acting as a catalyst for merger activity and unbundling. A number of companies are selling their non-core operations to new players who have different operating requirements and who are banking on an upturn in commodity prices in the medium-term. The success of these on-going deals will save some of the jobs which would have been lost if the affected operations were placed on care and maintenance. From an empowerment perspective, the recent deal activity presents the industry with the opportunity to reflect on past deals and consider innovative new ways to create even better empowerment structures.
Many BEE transactions undertaken in the first wave of BEE deals had a 10-year lock-in for black investors, with most of the acquisition loans finally repayable at the end of this period. The loans were often based on an assumption of share growth and dividend yields, which did not materialise. As a result, some of these deals are now underwater. The earlier transactions were also often undertaken on an assumption that come 2014/5/6 there would no longer be a need for black ownership and the principle of “once empowered always empowered” would apply. In his opening speech, Minister Zwane intimated that the requirement of mining companies being 26% held by historically disadvantaged South Africans would continue beyond 2016. This statement is not new and is consistent with the DMR’s approach to the “once empowered always empowered” notion, which has led to aspects of the principle being challenged in court by the Chamber of Mines. The locking-in of black investors for protracted periods stops them from realising the capital value of their investments and has given rise to a continuous need to undertake new BEE transactions once the lock-up periods have expired.
The lack of sustainability of some of the earlier deals is now leading to a new wave of BEE deals and the restructuring of existing shareholding within the sector. Future BEE deals in the mining sector will need innovation in order to ensure sustainability. Practically, this will require new ideas around how the BEE deals are funded to ensure maximum ownership recognition and no perceived dilution of equity from the funding mechanics. The alignment of the BEE Codes of Good Practice and the Mining Charter should be finalised as soon as possible so that there is clarity on how this ownership element will be measured in future.
This is especially the case if the approach to calculating “net asset value” in the BEE Codes is incorporated into the revised Mining Charter. The “net asset value” calculation measures the extent to which acquisition loans have been paid down, as well as the value of the holding compared to the acquisition loans. This approach has the potential to cause problems for black ownership holdings in the mining sector, especially those that have seen a sharp decline in the share price since acquisition, hence the need to find new ways to keep these deals sustainable.
South Africa’s mining sector is also seeing the entry of private equity type structures in the black shareholding space. The BEE Codes take a fairly generous approach to black private equity when it comes to measuring black ownership. This approach is not formally recognised in the mining context but with private equity players becoming more interested in the sector, clarity on the manner in which such structures are measured is long overdue.
The possibility of increasing the 26% BEE ownership threshold in the revised Mining Charter can also not be ruled out. There have been political indications that this increase has been contemplated. For example, the former Minister of Mineral Resources has made statements in the past that he would like to see the BEE ownership level of 26% increased. This appears to have been the Minister’s personal view because there is currently no policy proposal in place to increase the BEE ownership level of 26%. Any such policy proposal is likely to be widely consulted.
Outside of the Mining Charter context there have been policy pronouncements by State owned entities, which in effect require a greater percentage of black ownership. The coal sector has been particularly affected by this. As a result, there has been a lot of restructuring in this sector in South Africa recently. In this case, Eskom has communicated that its strategic coal suppliers should be 51% owned by black people. This is currently not a Mining Charter requirement, but Eskom is emphasising this requirement when contracting with strategic suppliers.
For some time now, there has been talk of the State playing an increasing role in the mining sector in future. More recently, this talk manifested in the publication of the draft Bill seeking to establish the African Exploration Mining & Finance Corporation as a stand-alone State owned company. This company will own the State’s interests in exploration and mining operations. The Bill focuses on institutional arrangements, and the details regarding the focus areas and day-to-day operations of the company will be set out in the regulations to be published at a later stage. This leaves some questions unanswered. For example, how will the potential conflict between the State’s regulatory function and its role as a player be managed? It also leaves it open as to whether the company can play a role in becoming an empowerment partner to mining companies. It will be interesting to see how this plays out in the coming year.
For the long-term prosperity of the mining industry as well as the benefit of its stakeholders there also has to be a change in the existing approach to local community development. Government and the mining industry need to coordinate their efforts in order to have a meaningful impact.
If one looks into individual mining companies’ sustainability reports, it is clear that many of them participate in different Government infrastructure programmes, especially those in relation to housing. However, it does not appear that these efforts are coordinated. The State will have to exercise political leadership in coordinating the input of the mining companies on a regional and national basis in future.