By Roger Baxter
The mining industry is the foundation of South Africa’s modern economy. It was the reason for the development of most other economic sectors, from the steel industry to construction, forestry, and financial services, including the Johannesburg Stock Exchange.
The country’s economy has diversified over the decades, and while the role of some sectors – such as gold – have declined, the mining industry remains a central part of the economy, its contribution being well over 15% through direct inputs and through its supply chain.
In 2017, the mining industry contributed R312bn (US$21bn) to GDP and R93bn (US$6.3bn) to fixed investment; paid R16bn (US$1.1bn) in taxes and R5.8bn (US$396 million) in royalties; employed 465 000 people who in turn supported some 4.5 million dependents; paid wages of R126bn ( US$5.8bn), and spent R300bn (US$20.5bn) on goods and services. Yet these numbers should be significantly higher.
Mismatch in outcomes
The international economic slowdown which began in 2008 had a dampening effect on the mining industry the world over.
And local economic issues, such as rapid increases in mining input prices, particularly electricity and labour costs, have exacerbated those trends. In addition, a combination of policy and regulatory uncertainty largely froze new investment, with net investment down by 57% since 2008.
The Fraser Institute Investment Attractiveness Index ranks South Africa in the top quartile for mineral potential, assuming best practice, but way below that insofar in insofar as policy, legislation, regulation and operating environment. This helps explain the mismatch between potential and current outcomes.
It is within this context that the Minerals Council’s response to the revised draft Mining Charter should be read. To begin with, this draft is a material improvement on the 2017 Mining Charter.
But the Minerals Council believes that much more work needs to be done to create a Mining Charter that promotes competitiveness, investment, growth and transformation in the mining industry, and that will support growth and prosperity for South Africa as a whole. Without growth and competitiveness, meaningful transformation will not be achieved.
The Minerals Council supports a 30% black ownership target on new mining rights, with shares allocated for communities, organised labour and black entrepreneurs. Where the Minerals Council is disappointed in the revised draft is where elements of the Charter undermine the competitiveness of the industry.
Without competitiveness, investment in new exploration and mining will be limited, and the mining sector will continue to decline, to the detriment of all citizens. This is directly contrary to President Ramaphosa’s stated intention to attract $100bn in foreign investment into South Africa in five years.
Keep it viable
The Minerals Council does not support the free carried interest of 5% for each of labour and communities. It is our experience that the interests of communities and employees are not well served through equity stakes (which brings with them exposure to the markets which are uncertain and over which employees, communities and, indeed, companies have no influence).
Most importantly, given that South Africa’s mining industry is mature, a 10% total free carried interest on new mining rights will materially undermine investment, by pushing up investment hurdle rates and ensuring that many new projects become unviable.
This would be compounded by the proposed 1% EBITDA trickle dividend to community and employees shareholders, which would effectively disadvantage 90% of shareholders. And remember that the majority of shareholders of mining companies are pension funds held on behalf of millions of South Africans.
We recognise that the imposition of a free carried interest is a public policy choice, but we contend that this must be weighed against the critical need to attract investment for growth and employment creation. There are other measures to ensure benefits to communities and employees that would not undermine the viability of mining in the future.
The mining industry already has large financial and social obligations way beyond any other sector: Social and Labour Plans determine significant community and employee-related expenditure, skills development requirements and existing royalty payments.
Phase it in
The lack of recognition of the need to phase in or graduate the Charter’s requirements for junior and emerging mining companies is disappointing.
We support transformation of the exploration and mining value chain, but the application of a 30% black ownership target to greenfields prospecting rights will result in a continuation of limited exploration, the lifeblood of new projects for the industry. It is at the exploration stage that significant investment is needed, and where returns are not guaranteed.
The Minerals Council will continue to engage with the DMR and other stakeholders, and will make a comprehensive submission on the key issues that need to be resolved to achieve competitiveness, growth and transformation.
We urge the DMR and other stakeholders to take on board the significant need to improve the competitiveness of the industry. Ultimately, we are all seeking a Mining Charter that all stakeholders can support and defend. The challenge, however, is to balance new transformation targets and competitiveness to ensure new investment.
*Roger Baxter is CEO of the Minerals Council South Africa