The implications of the new look South African Mining Charter
Off the back of the recent Johannesburg Mining Indaba, speakers still despair at the state of the South African mining industry. Once the leading economic sector in South Africa, mining revenues have tumbled in recent years as global commodity prices have suffered with the downturn in Chinese demand, coupled with labour problems and the wider macro-economic problems in South Africa. All this has led analysts to predict that up to 50,000 jobs will be lost in the South African mining industry in this year alone.
Against this backdrop, the Minister of Mineral Resources is pushing to finalise revisions to the country's Mining Charter; focussing on restructuring Broad Based Black Economic Empowerment ("BBBEE") transactions in the South African mining industry.
The original Broad Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry (the "Mining Charter"), published in August 2004, sought to address the issue of the participation of historically disadvantaged South Africans in the mining sector. But it is not as clear in its requirements as the subsequent BBBEE legislation and codes which were introduced in 2007 and which set out the various targets that have to be met by businesses operating in South Africa.
So-called "Trumping Provisions" have more recently been enacted that stipulate that in the event of any conflict between BBBEE legislation and any legislation already enacted, the BBBEE legislation should prevail. However, the mining and minerals industry was given an exemption from the Trumping Provisions to allow the sector more time align with the provisions of the BBBEE legislation. This exemption runs out towards the end of October 2016. Hence the need for action.
Revisions to the Mining Charter were published for public comment in April 2016 and commentators have focussed on the new requirement, which applies retrospectively, for each mining operation to have at least 26% ownership by an empowerment partner in perpetuity. This would mean that where a black empowerment shareholder sells its shares, the company must replace that shareholder with other black empowerment shareholders within three years, to ensure the ratio of 26% is maintained. This contrasts with the principle of "once empowered always empowered" – a principle followed in the industry which is currently being considered by the High Court in South Africa.
The draft Mining Charter also looks to formalise the structure of black participants via a single special purpose vehicle, develops requirements in respect of housing and living conditions for mine employees and increases "local content" requirements in the procurement of capital and consumable goods.
No-one questions the importance of advancing black participation in the South African mining industry and the value of harmonising legislation on this topic, but there is concern that the draft Mining Charter may have other implications for the mining sector at a time when it is already struggling. Key amongst these are the following:
- the proposed changes have created further uncertainty and unpredictability around the ongoing debate on BBBEE in the mining sector;
- there are potential costs arising from the proposed restructuring of black empowerment shareholders via a SPV structure;
- there are complex tax implications associated with the BBBEE which will need to be considered carefully;
- existing empowerment transactions are likely to need to be refinanced to comply with the structural requirements and there may be difficulties in obtaining this funding in the future;
- companies could be forced to tighten the lock-in provisions for BBBEE participants and generally the transfer of shares is likely to become more illiquid;
- clearly there will be costs of complying with the much needed improvement in housing and living conditions which fall on the mining companies again with complex tax implications; and
- failure to meet the required targets could results in automatic non-compliance with the draft Mining Charter and the risk of suspension or cancellation of rights or even criminal prosecution,
All of this is likely to further challenge investor confidence in an already depressed sector. The much needed positive signals for the mining industry in South Africa still seem to be missing at this point.
The mining sector in other African countries is facing similar constraints caused by the downward trend in commodity prices – how have their governments reacted to the challenges? It is fair to say that the reaction is mixed – which is to be expected from a continent comprising 54 different countries. Botswana continues to be a highly attractive location for international investment in the mining industry – with a stable, well understood and defined licensing system. Namibia also has an attractive story to tell to international investors with a positive approach to the regulation of the mining industry – although recent BBBEE legislation will mean that ownership structures may need to be adjusted going forward.
In contrast, mining in countries such as Zambia has struggled with a government flip-flopping around increasing royalty rates. This echoes the trend in other African jurisdictions where populist governments need to demonstrate to their electorate that citizens are benefitting appropriately from the mining sector. This trend has seen a variety of jurisdictions attempt to bolster their revenues from the mining sector in the face of falling commodity prices by looking to increase royalty rates (for example in Zambia and Tanzania) or demand an increase in ownership in mining companies (for example, this has been on the agenda in Guinea, Mali and Zimbabwe) – all of which again has the inevitable negative impact on investor confidence – although the governments of Zambia and DRC, for example, recognising the pressure the industry is under have adopted a more realistic approach to regulatory changes. The trend in resource nationalisation is not unique to the African continent and has also been seen in places such as Australia.
The depressed nature of the South African mining sector looks set to continue with the proposed Mining Charter likely to add to costs and uncertainty in the short term compounded by the macro-economic factors affecting South Africa. Whilst many jurisdictions are facing similar challenges due to the fall in commodity prices – it seems clear that countries in Africa can encourage investment in mining through the policies of their governments. Integrated government policies linking resource development to infrastructure and power availability can have a significant impact on the sector and governments looking to encourage investors will aim for a transparent, clear and stable regulatory framework and efficient bureaucracy, free of inconsistencies and ambiguity.
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Vale invests $150mn to extend life of Manitoba operations
Vale has announced a $150mn CAD investment to extend current mining activities in Thompson, Manitoba by 10 years while aggressive exploration drilling of known orebodies holds the promise of mining well past 2040.
Global energy transition is boosting the market for nickel
The Thompson Mine Expansion is a two-phase project. The announcement represents Phase 1 and includes critical infrastructure such as new ventilation raises and fans, increased backfill capacity and additional power distribution. The changes are forecast to improve current production by 30%.
“This is the largest single investment we have made in our Thompson operations in the past two decades,” said Mark Travers, Executive Vice-President for Base Metals with Vale. “It is significant news for our employees, for the Thompson community and for the Province of Manitoba.
“The global movement to electric vehicles, renewable energies and carbon reduction has shone a welcome spotlight on nickel – positioning the metal we mine as a key contributor to a greener future and boosting world demand. We are proud that Thompson can be part of that future and part of the low carbon solution.”
Vale continues drilling program at Manitoba
Coupled with today’s announcement, Vale is continuing an extensive drilling program to further define known orebodies and search for new mineralization.
“This $150mn investment is just one part of our ambitious Thompson turnaround story. It is an indicator of our confidence in a long future for the Thompson operations,” added Dino Otranto, Chief Operating Officer for Vale’s North Atlantic Base Metals operations.
“Active collaboration between our design team, technical services, USW Local 6166, and our entire Thompson workforce has delivered a safe, efficient and fit-for-purpose plan that will enable us to extract the Thompson nickel resources for many years to come.”
The Thompson orebody was first discovered in 1956 by Vale (then known as Inco) following the adoption of new exploration technology and the largest exploration program to-date in the company’s history. Mining of the Thompson orebody began in 1961.
“We see the lighting of a path forward to a sustainable and prosperous future for Vale Base Metals in Manitoba,” said Gary Annett, General Manager of Vale’s Manitoba Operations.