ON TARGET - JSE MAGAZINE

ON TARGET

The mining industry seems to be meeting most of the government’s empowerment requirements

ON TARGET

A decade after the first Mining Charter was introduced, which called for 26% black ownership of mines by 2014, a massive audit is under way to determine whether SA miners have met the target.

The audit, by Moloto Solutions on behalf of the Department of Mineral Resources, was due to be completed by the end of 2014, and the results announced in March 2015. Mining companies were required to comply by 1 May 2014.

The charter’s aim is to ensure that historically disadvantaged persons benefit from the exploitation of the country’s mineral resources in a more meaningful way.

This could be achieved through ownership as well as other opportunities such procuring more services from black-owned companies, employment equity and improved labour conditions.

Mining houses were required to meet the charter’s target as a condition to get mining rights under the Mineral and Petroleum Resources Development Act.

Although some government ministers are not happy with the level of ownership transfer to the previously disadvantaged, on the face of it, the targets appear to have largely been met.

In a speech that Mineral Resources Minister Ngoako Ramatlhodi made at the 2014 annual Mining Lekgotla in Midrand in August, he said transformation had ‘delivered varied results’.

‘Whilst the review process on the implementation of the Mining Charter is still under way, initial results suggest that whatever compliance we may have achieved, much more work still needs to be done. If anything, the restive mood among our key stakeholders, such as workers, communities and the population at large, must give us reason to double the effort with regard to transformation,’ he said.

In a Business Day interview in June 2014, the minister said he would like to see a higher level of black equity ownership in mining companies. ‘I think it should be increased,’ he was quoted as saying, although he did not say by how much or when.

Nevertheless, the industry seems to be on track to meet most of the charter’s requirements.

Consultancy PwC’s report on trends in the mining industry, released in mid-November 2014, finds that most mining companies report ‘good progress towards achieving targets’. Its findings are based on the financial results of 37 mining companies with a market capitalisation of more than R200 million, which have a primary listing on the JSE or a secondary listing on the bourse, with their main operations in Africa.

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‘Otherwise black shareholders will be forced to be locked into deals and restricted when selling their shares’

HULME SCHOLES, PARTNER, MALAN SCHOLES ATTORNEYS

PwC’s analysis found that the ‘meaningful economic participation’ of previously disadvantaged people in the SA mining industry ranges from 26% to 56%. Miners have also met the minimum target of 26% full shareholder rights for ownership of mines by previously disadvantaged South Africans by 2014.

‘Companies have disclosed that this target has been reached and, in most cases, exceeded,’ says PwC. However, some mining companies are still struggling to meet some of the charter’s other requirements, such as providing housing and improved living conditions. It’s also finding difficulty in achieving employment equity among senior and middle management.

PwC’s research is backed by similar findings from the Chamber of Mines.

‘An overview of the sample of some of the members of the Chamber of Mines shows that these companies have worked hard at achieving the target of 26% equity by the HDSAs [historically disadvantaged South Africans] this year. Last year the average of these companies was 21.6% ownership by HDSAs,’ said the chamber’s president Mike Teke in an article titled ‘Transforming mine sector is reason to celebrate’ in Business Day in February 2014.

However, Hulme Scholes, a partner at the law firm Malan Scholes, which specialises in the mining sector, is concerned about whether the department will apply the Codes of Good Practice for the mining industry when evaluating whether these targets have been met.

‘In terms of the codes, if BEE shares are encumbered, they don’t count. In my view, having sat through one of these audits, the message I got was they are going to apply the codes,’ he says.

In 2009, the former Department of Minerals and Energy conducted an audit on mining ownership gauging progress in the first five years of the Mining Charter. It found that the industry had at best reached 9% ownership by black people – far from the midway target of 15%. This figure was disputed by the industry, which led to talks between it, labour and the government. A more detailed charter was produced in 2010, officially known as the Broad-Based Socio-Economic Empowerment Charter. It still set the ownership target at 26%, but refined some of the transformation goals.

Diversified resources companies Exxaro, Royal Bafokeng Platinum and Impala Platinum (through its equity stake in Royal Bafokeng Holdings) have achieved the best black economic empowerment in SA, says Webber Wentzel mining analyst Peter Leon.

Anglo American unbundled Kumba Resources into Kumba Iron Ore and Exxaro, a 55% black-held mining company, in an empowerment transaction in 2006. Exxaro is now the second-largest coal producer in SA. Kumba Iron Ore is another success story, with the community owning a 3% stake in its subsidiary, Sishen Iron Ore Company. This share is worth some R4 billion and is unencumbered. More than 6 200 employees were each paid out about R576 000 in 2011. They are in line to receive another substantial payout when the employee share ownership plan matures again in 2016.

Royal Bafokeng Holdings (RBH) is Implats’ anchor empowerment partner and its single-largest shareholder. RBH was set up as a community-based investment company 20 years ago to look after the wealth of the Royal Bafokeng Nation, a Setswana-speaking community of about 100 000 who live in Rustenburg Valley, a rich source of platinum group metals and other minerals.

RBH has a majority stake and control of Royal Bafokeng Platinum, a black-owned and controlled platinum group metals producer listed on the JSE.

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These long-standing black empowered miners provide examples of BEE success stories.

The most recent mining empowerment deal highlights another issue that the mining industry is grappling with as government fails to provide certainty. This is the principle of ‘once empowered, always empowered’. One example is Northam Platinum, which recently concluded a R6.6 billion empowerment deal, taking its BEE shares to just more than 35%. This occurred after the Department of Mineral Resources ‘directed’ it to get new empowerment partners after Afripalm and Mvelaphanda Resources sold their shares to repay interest on loans they had taken out to buy the stake in the first place, according to a Business Day report.

Leon says that two key issues on the charter need clarification. ‘One is how ownership is measured as the Mining Charter is quite vague. A much more tricky issue is the principle of “once empowered, always empowered”,’ he says

PwC says: ‘The mining sector argues it has put empowerment transactions in place to meet the requirements of the charter and that these historical transactions should count towards their empowerment credits, even if those partners no longer hold their shares.’

The Department of Mineral Resources, however, ‘seems to imply that mining companies should repeatedly enter into new BEE transactions every time an existing BEE partner exits’, says PwC.

Scholes says that the department has never formally put forward its position on this. ‘In my view, it’s absurd to interpret this restrictively. According to a recent Supreme Court of Appeal judgement, if you interpret legislation in a way that gives absurd or unbusiness-like results, it has to be reinterpreted in a way that doesn’t.

‘This means that a “once empowered, always empowered” principle should be read into the Mining Charter. Otherwise black shareholders will be forced to be locked into deals and restricted when selling their shares,’ he says.

‘It is startling that one of the single biggest issues with BEE ownership transactions is still the sustainability of funding mechanisms used,’ says Stephan van der Walt, head of corporate finance at Bravura Capital.

‘We have found that unsustainable BEE funding models are unfortunately still the order of the day. This is an issue which is considered by the DTI Codes, and correctly so, but not the Mining Charter.

‘Companies and their advisors need to apply common, sound and basic funding principles when structuring BEE ownership transactions whilst also ensuring that the correct stakeholders close to the business are benefiting, not just in a sustainable manner, but also in a way which makes business sense and results in real empowerment, for the benefit of the company, the stakeholders and ultimately the country.

‘Applying these principles correctly addresses both the “encumbered” and “once empowered always empowered” issues highlighted,’ he says.

By Gene Michelson
Image: 
Andreas Eiselen/HSMimages