One day, and it is inevitable, South Africa is going to have to get serious about turning its mining sector around because, whether we like it or not, mining will have to play a significant role in our country – it’s the geology that determines that. By DIRK DE VOS.
Despite a century and a half of mining, South Africa still has the largest mineral reserves of any country. Yet, for some time now, South Africa has performed poorly as a mining destination.
The Fraser Institute makes an effort to quantify and rate different jurisdictions and it puts South Africa’s attractiveness near the bottom. The poor ratings are more significant for South Africa than they are for many other poorly rated jurisdictions because for the most part, although South Africa has abundant mineral reserves, they occur in relatively low-grade ores that are often only found deep underground.
South Africa has some of the deepest mines anywhere in the world. This means two things: significantly higher amounts of capital must be invested to build new mines, and mines must be operated over significantly longer periods of time.
On this measure, our mining sector has been going backwards. A paper produced by Graham Schwikkard of Datta Burton & Associates, a management consulting firm, shows that capital expenditure in mining is now half what is was in 2008.
On a measure that plots capital expenditure against depreciation, South African companies are now running down their assets. Basically, we are going backwards in absolute terms – we are seeing disinvestment.
On a relative basis, South Africa’s mining sector has been in decline for some time. According to Jim Rutherford, a non-executive director of Anglo American, South Africa’s mining industry is now just 4.4% of all global mining shares which is down from 18% in 2000 and had once stood at 47% in 1980. South Africa largely missed out on benefiting from the last commodity boom driven by Chinese demand and there is every likelihood that we’ll miss out on the next one.
One cannot but be struck by the recent announcement by Sibanye Gold that it was to acquire a platinum mine and smelters in Montana, USA. Sibanye Gold, it bears mentioning, was established in 2012, as a South African-focused mining company by acquiring the South African based assets of large and now foreign-domiciled multinational mining companies. While Sibanye under the leadership of the highly capable and straight-talking Neal Froneman retains its South African focus, it took just 5 years for it too to decide that its shareholders’ interests were best served by a sizeable offshore investment.
The decline of South African mining is due to a number of factors but as the Fraser Institute’s rating show, a good deal of the decline is due to very poor legislation and policy-making.
Mining is governed by the Minerals and Petroleum Resources Development Act (MRPDA) and the Mining Charter. Both of these are due to be amended with legislation and regulation that make the position worse. Amendments to current MRPDA were first introduced in 2013 but it is still caught up in the works – previous versions were unconstitutional. A new proposed Mining Charter is also due to be published and is contested, but it seeks to regulate the operations of mining right holders. Both make a bad existing situation even worse.
For the mining sector, perhaps the worst aspect of the existing legislation and regulations is not in the wording but in the way in which legislation and regulations are implemented. This much is clear from a highly unusual challenge brought by mining lawyer, Hulme Scholes, not on behalf of his clients but in his own name, in the North Gauteng High Court (case number 50464/15). His application seeks to interdict the publication of a new Mining Charter and to set aside the existing one. Mr Scholes’ affidavit, made under oath, is alarming. At one point, Mr Scholes, who is an experienced and well regarded mining lawyer, states the following:
“… it is important to me to be able to determine, with certainty, what the law is which governs the legality of the operations of a mining company. If I am not able to do that with any certainty it makes it impossible for me to advise the clients…. with any confidence on what they should do as an application for a MPRDA right to qualify for that right and, once they are a holder of that right, how they should operate their business to ensure that they continue to comply with the provisions of the MPRDA so as to secure their tenure of that right.”
Elsewhere, Mr Scholes gives ample evidence of how officials in regional offices of the Department of Mineral Resources, with wide discretion, simply decide for themselves how to apply the law and regulations. What we have then is a lawyer approaching a court directly in his own because he does not know how to provide professional advice to his clients.
The wide discretion is an invitation for corruption. When mining concerns are brave enough to take this conduct on in court, the courts have expressed their extreme disquiet at the conduct of Department of Mineral resources (DMR) officials and have done so on several occasions.
The new Mining Charter, being piloted through by the recently appointed and Gupta-associate Mining Minister, Mosebenzi Zwane, is to be published within the next few months. A final version of the amended MRPDA is also to be presented to Parliament. One can be certain that both of these will be challenged in court on various grounds but particularly on the basis that they breach the Constitution.
The complete lack of seriousness of getting mining regulation right becomes abundantly clear on the reading of the new Mining Charter. A few points stick out. The first one is the perpetual 26% black ownership requirement. According to research done by Merrill Lynch in 2015, 63% of the local resource sector is foreign owned. Across the sector, that would leave 10% to non-black local investors. For historical reasons, black shareholders often lack their own capital and so it must be provided by someone else. For investors with capital, eyeing a certain risk-adjusted return, the 26% rule on a perpetual basis reduces potential return, which means the returns on investment must be significantly higher than they otherwise would have been. The result is that the investment does not proceed or is limited to small projects where the resource can be easily extracted at low cost and with minimal capital investment.
Moreover, since the 26% shareholding must be financed and kept in black hands, black shareholders become the perpetual wards of the mining company concerned. Financing costs (that benefit banks) are often higher than the returns on the shares held (dividends are the last rung of the ladder to be paid). Another consequence is that the perpetual 26% requirement forces lock-in provisions preventing the free trade in these shares. This is no way to build a sustainable capitalist class in control of where its capital is invested. Specific equity set-asides also beg the question of exactly who gets to participate in the opportunity. As we have seen, political influence carries the day and what we get instead are rentiers and other undesirables.
Another feature of the new Mining Charter is the establishment of something called the Mining Transformation and Development Agency – to be funded by a new tax on foreign-owned suppliers to the mining industry.This is almost certainly unconstitutional. Collection of taxes is, constitutionally, a Treasury function and legislation that raises taxes must be done in terms of section 77 of the Constitution (money Bills). The Mining Charter, which is obligatory for mining rights holders, has an enormous impact yet is largely drafted within the DMR without any parliamentary oversight. One cannot have the executive taking it upon itself to pass legislation in this way.
In the current political environment, it is hard to imagine pushing for something better and which will work. Yet, one can be sure that Minister Zwane can’t remain in his post for much longer. Besides questions of basic competence, he is too compromised. Perhaps now is a good time to think about where South African mining should be a generation from now.
The one good part of the current MRPDA, the introductory section, sets this out nicely:
to develop the sector while protecting the environment; promote economic and social development; promote local and rural development and the social upliftment of communities affected by mining; bring about equitable access to South Africa’s mineral resources and eradicate all forms of discriminatory practices, and redress the results of past racial discrimination.
How then does one transform the ownership patterns of the mining sector while expanding it at the same time? The answer lies in a focus on just one thing – reduce uncertainty and therefore risk wherever possible. Mining is subject to huge swings in commodity prices and faces numerous operational risks already. Reducing regulatory risk also reduces the cost of capital that we need to grow the sector.
This is not the same as throwing the doors open to capital on their terms. Rules that increase costs such as labour rights, the interests of local communities, environmental protections reduce risks as these make the whole sector more sustainable, politically, economically and environmentally. Norway, for example, with its expansive regulatory regime, attracts far more investment in its main extractive industry, oil and gas, than most other oil and gas jurisdictions, particularly those in Africa, but is certain and everyone can determine what the rules of the game are. Uncertain and changing regulation increase the risk premium and correspondingly reduce investment.
Reducing the cost of capital benefits everyone but, relatively, it also improves the position of new entrants such as aspirant black industrialists. Large incumbent multinational mining companies with diversified global portfolios have their own balance sheets and in a riskier regulatory environment, their principal advantage over new entrants is their lower cost of capital. Like any other industry, new entrants often bring along with them a fresh energy and ideas, but they can best compete when the costs of their financing narrows to that faced by the incumbents. Regulatory certainty allows that to happen.
Best practice in reducing regulatory uncertainty exists. Chile, for example, now a member of the OECD (a club of developed countries), shows what can be done. Mining rights there are not subject to the vagaries of state officials but are subject to a judicial-based system which builds certainty over time. We should do that too.
Despite the poor performance of South African mining and its reduced importance in the world, it still contributes 8.6% to GDP, employs over 500,000 people directly and supports an additional 500,000 indirect jobs. It also accounts for half of all foreign exchange and 13.2% of corporate taxes. Current politics prevent us doing what needs to be done but until we change course, South Africa will continue to under-perform its potential, and minerals that could develop the economy will, instead, remain in the ground. DM
Photo: Workers underground at Lonmin Rowland Shaft setting up for drilling and later drilling. By GREG MARINOVICH.
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