With some changes and clarifications the Mining Charter is aces

The development of the new mining charter, its third iteration after the 2004 and 2010 versions, has been a very long-running saga.

The 2010 charter targets took us only until 2014, so it was something that began to occupy the mind of then mineral resources minister Susan Shabangu during her last months in office that year.

It was something that was worked on by Minister Ngoako Ramatlhodi during his 15-month term.

His successor, Mosebenzi Zwane, of course did his best to take an axe to the industry through the charter and various other methods but, fortunately, failed.

That episode aside, for all the architects of the first two charters, and for current Minister Gwede Mantashe and his stakeholders, the Minerals Council included, a charter is and has been a complicated instrument to devise.

Our industry’s transformation imperative is immense, coloured by its long history and its profound impact on South Africa’s socioeconomic history and the legacies that remain with us today.

The challenge of producing a product with which all stakeholders will be satisfied, and which also balances the imperatives of transformation on the one hand, and growth and development on the other, is a near impossible task.

In assessing these balances, it is a mistake to assume that transformation is a zero-sum game, where what is good for transformation is bad for industry growth and development. There are many areas in which these imperatives are mutually reinforcing.

However, it is also the case that overly intensive requirements and targets can have the unintended consequence of damaging both development and transformation.

We look here at some examples of both types of approaches.

First, had the industry failed after 1994 to invest heavily in skills training, and continued using the skills of only 10% of the population (as was the case until the 1980s) this would – aside from the injustice of it – have seriously stunted industry growth and returns to shareholders.

Today, well over half of these positions are filled by black men and women.

There is still some way to go before the country’s demographics are represented in the industry at all levels, but progress is significant.

Second, alienated mining communities do not make for efficient mining operations.

As it is, the industry spends an estimated R2 billion a year on local economic development in these communities and in labour-sending areas.

But it is clear that we still have work to do to improve relationships with communities.

And one of the great improvements the new charter will bring is its recognition for regulatory purposes of collaborative developmental efforts by companies with adjacent operations in particular mining towns.

This should make possible the initiation of meaningful projects using economies of scale and broader consultation processes.

(Over and above this, the industry paid around R7 billion in royalties in 2017. Although these rents flow into the fiscus and arguably into communities, it has been a long-standing desire of the industry that these should flow directly into mining communities – but that’s a separate discussion.)

In those days, the industry comprised six major mining groups, with very differently structured shareholder bases compared with today and, needless to say, no black-owned companies.

Today, taking account of all past transactions, the ownership empowerment level is about 36%.

Possibly more important, there is a host of significant black-owned mining companies, among them African Rainbow Minerals, Royal Bafokeng Platinum, Seriti, Kalagadi Minerals and Exxaro, and many smaller ones.

Today the Minerals Council has no fewer than 80 members, a potent sign of transformation and, as a consequence, the deconcentration of the industry.

The development of black businesses supplying goods and services to the industry is another charter pillar that tells a similar story.

The transformation imperative is deep and just.

The methods and systems described so far demonstrate how it can and does enhance growth and development too.

However, there have been ideas floated that, if pursued, might have had the opposite effect – creating serious obstacles to growth.

In these cases, trade-offs would have arisen, where transformation and growth would not be mutually reinforcing.

Both goals would ultimately have suffered as a consequence of a declining industry. I would like to focus here on some of them. Not surprisingly, many of these are in the BEE ownership sphere.

An earlier proposal requiring that prospecting operations be 51% BEE owned was one that concerned the industry. The fact is that an exploration project is no guarantee of a lucrative future. In fact, the majority of these projects end with no feasible discoveries. The miners who go out to do this kind of work know that it is a high-risk endeavour.

If they were going to have to share the occasional rewards with BEE partners for whom the transaction meant zero downside risk (as is the case with most such transactions nowadays) South Africa’s share of global greenfields exploration spend would fall below the already mediocre 1% level.

The free carried interest idea was another potential killer of new investment in mining. It may not be generally known in the public domain how mining companies assess the feasibility of new mining projects. Using the best available geological, financial, operations and other information, they model the hypothetical profit margin of the project over its full life. They then assess that outcome against the long-term return on investment level set by the board for any project, say 10%.

The original June 2018 draft of the charter envisaged 5% free carried interest for each of employees and communities. One can see the attraction of such an idea; many mining companies see value in employee share ownership and all recognise the need to fund local economic development in mining communities.

However, this idea would have required any new project to allow for an extra 10 percentage points on return on investment. Very few new mining projects would promise an additional 10% “cushion” in the return on investment modelling. This would mean that most new projects would simply not happen.

Hence, while we still await detail in the guidelines that are to be developed over the next two months, it is a relief that there is now a provision that the cost of the carried interest be recovered through the development of the asset.

The Minerals Council is not fully happy with the new charter. Some concerns apply to issues which we accept because we recognise the concerns of other stakeholders. There are a couple of issues on which further discussion with government is needed, related to the recognition of continuing consequences of previous BEE transaction as regards renewal and transfer of rights, and extremely high requirements for local procurement.

As a whole, though, this charter is something that we believe, with some possible amendments and clarification by way of the impending implementation guidelines, all parties should be able to live with, as it facilitates both transformation and growth.

Baxter is CEO of the Minerals Council of SA