In September, the South African government released its amended Broad Based Socio Economic Empowerment Charter for the South African Mining Industry (the “Amended Charter”). This occurred against a cacophony of negative press surrounding the licensing process administered by the Department of Mineral Resources (“DMR”), the ongoing debate surrounding the nationalization of the country’s mines and the country’s falling ranking on Canada’s Fraser Institute Survey of Mining Companies. While the new legislation is aimed at addressing various shortcomings in the implementation of the Mining Charter of 2002 (the “Old Charter”), it fails to provide clarity on certain empowerment targets or rein in the broad discretionary powers given to the DMR. Both of these are long-standing issues of concern for investors in the mining sector.
According to the DMR, the amendments and clarifications contained in the Amended Charter are intended to “streamline and expedite attainment of its objectives” and to introduce “an element of sustainable growth of the mining industry, which seeks to ensure sustainable transformation and growth of the mining industry”.1 The Old Charter aimed to empower and improve the socio-economic welfare of Historically Disadvantaged South Africans (“HDSAs”) but it is widely recognized that its transformation objectives have not been met. For example, while the Old Charter set a target of 15 per cent ownership of mining assets by HDSAs by 2009, a review undertaken by the DMR found that HDSA ownership of mining assets reached just 8.9 per cent by the 2009 deadline.
The Amended Charter retains the Old Charter’s longer term goal of 26 per cent HDSA ownership of mining assets by 2014 which is to be structured in such a way as to enable meaningful economic participation of HDSAs. The Amended Charter introduces an off-set mechanism which allows a mining company to offset up to 11 per cent of its HDSA ownership requirements against the value of the level of beneficiation it achieves. Transactions concluded prior to the promulgation of the Mineral Petroleum Resources Development Act (“MPRDA”) are grandfathered for the purposes of calculation of such offsets.
While the Amended Charter contains some helpful definitions including a definition of “beneficiation” which was absent in the Old Charter, a number of its provisions are ambiguous. For example, the Amended Charter defines “meaningful economic participation” to include the structuring of Black Economic Empowerment (“BEE”) transactions (pursuant to which a portion of the equity of a mining company is transferred to a BEE entity2) such that barring unfavourable market conditions, the mining company is obligated to ensure that some of the cash flow of the company will flow to the BEE entity throughout the term of the investment. To this end, the financing of such BEE transactions must be structured such that a percentage of the cash flow is used to service the funding of the structure while the remaining amount is paid to the BEE beneficiaries. The Amended Charter is silent on the form that the cash flow should take ownership to vest within the timeframes agreed with the BEE entity taking into account market conditions.
The Amended Charter also provides that BEE beneficiaries are entitled to full shareholder rights such as a right to full participation at annual general meetings and voting rights.
The ownership targets, including the requirement for “meaningful economic participation”, are one of the more heavily criticised aspects of the Amended Charter. Some commentators3 have observed that the requirement that some “cashflow” flow through to BEE shareholders throughout the term of the investment may prejudice other shareholders and creditors of a mining company. The economic viability of mining companies may be threatened as the asset base of a mining company seeking to comply with the targets, may be eroded by mandatory dividend payments or similar distributions. Moreover, the financing costs for mining companies may become prohibitive as the payment of distributions to BEE shareholders will have to be factored into such costs from the inception of the venture. It is instructive to note that the Amended Charter fails to provide any guidance on the levels of distribution payments to be made to BEE shareholders or address the legal mechanism through which the preferential payment of such distributions to BEE shareholders is to be made.
The objectives of BEE transactions have been criticized since the inception of the Old Charter and the revisions in the Amended Charter have done little to silence critics. Joel Netshitenzhe, executive director of the Mapungubwe Institute of Strategic Reflection and member of the ANC’s National Executive Committee, has stated that BEE objectives should be one part of the mining strategy. In his view, instead of being an end in itself, ownership should be seen as a means of promoting the government’s strategic imperatives. Jeremy Cronin, deputy general secretary of the South African Communist Party, has also said that BEE has set back the mining sector in South Africa by taking precedence over other key strategic goals.
The Amended Charter sets new procurement targets for mining companies. Mining companies are now required to procure a minimum of 40 per cent of capital goods, 70 per cent of services and 50 per cent of consumer goods from BEE entities by 2014. These targets have been widely decried as unrealistic.
Some additional clarity is provided in respect of targets set for diversity, equitable representation at junior, middle and senior management levels, skills development, measures to improve the standards of housing and living conditions for mine workers, environmental management and health and safety standards.
The Amended Charter also introduces the concept of a “social development fund” into which multinational suppliers of capital goods must contribute a minimum of 0.5 per cent of their annual income generated from local mining companies. The Amended Charter does not address the manner in which the fund is to be administered.
Penalties for non-compliance
Non-compliance with the provisions of the Amended Charter will render a mining company in breach of the MPRDA. Under section 47 of the MPRDA, the Minister of Mineral Resources has the power to suspend or cancel rights, permits or permissions where a holder of such rights, permits or permissions is in breach of the Act. Consequently, a mining company could lose its licence to operate if it fails to meet the targets set in the Amended Charter within the prescribed timeframes.
Perpetuation of broad ministerial discretion
The Minister of the DMR has broad administrative discretion to unilaterally amend the Amended Charter “as and when the need arises” thus contributing to the general regulatory uncertainty which has had a negative impact on investor confidence in the mining sector.
Looking ahead: Forthcoming revisions to the MPRDA
In the wake of the damage done to South Africa’s reputation as a safe mining investment destination by the DMR’s actions, with respect to the double granting of licences in the Kumba Iron Ore/Imperial Crown Trading and Lonmin Plc/HolGoun Group sagas, the South African government has been forthright in admitting that the MPRDA contains a number of ambiguities. In a speech delivered to the Africa Down Under Conference in Perth, Australia on September 1, 2010, the Minister of Natural Resources announced a Joint Stakeholder Task Team to identify the amendments that need to be made to the MPRDA to resolve these ambiguities.
In a media conference held in Pretoria, South Africa on August 17, the Minister noted that the lack of transparency in, and access to, licensing data is causing unnecessary suspicion of the licensing regime. She also cited administrative capacity problems and increasing perceptions of corruption and incompetence as problem areas to be addressed. At the media conference, the Minister announced, inter alia, a six month moratorium on new applications for prospecting mining licenses to allow the DMR to complete an audit of licences granted since the promulgation of the MPRDA and confirmed that from September 1, information on the status of applications for exploration and mining licences will be accessible on the DMR’s website. The Minister also announced a new integrated system of “licence process tracking” which would be ready for public access within six months.
Old wine in new bottles
The Amended Charter and the proposed changes to the administration of the MPRDA represent significant attempts by the South African government to further participation in the mining sector by HDSAs and provide additional clarity to the regulatory regime. While these measures are to be applauded, their impact and ability to effect the required changes in the South African mining regulatory regime remains to be seen. Initial industry reaction to the new measures would suggest that the South African government has introduced more uncertainty to the regulatory regime than intended and further steps will have to be taken to provide the clarity and consistency required to implement these new rules.
About the author
Avril Cole is an associate in the private capital, banking and mining groups of Macleod Dixon LLP’s Toronto office. Macleod Dixon LLP is a global law firm with offices in Canada (Calgary and Toronto) and five emerging markets with natural resource based economies, Venezuela, Brazil, Colombia, the Russian Federation and Kazakhstan. The firm is known for excellence in the natural resources arena, including mining and oil and gas. Macleod Dixon is ranked by Who’s Who Legal as the 2010 Global Mining Firm of the Year.
1 Department of Mineral Resources, Republic of South Africa, “Amendment of The Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry”, September, 2010.
2 The Amended Charter defines a “BEE entity” as an entity of which a minimum of 25% + 1 vote of share capital is directly owned by HDSAs.
3 Veeran, Jonathan (Webber Wentzel), Recent Regulatory Developments in the South African Mining Industry, October 5, 2010