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OPINION: Stricter transformation requirements a fair price to pay for mining policy certainty

BUSINESS LIVE / 10 MAY 2018 - 06:07 / CHRISTIAAN BOTHMA

If investors know the requirements and have more certainty they will not change in the foreseeable future, it will be a massive boost for the sector

SA’s controversial mining charter is being given top priority by new Mineral Resources Minister Gwede Mantashe, who has promised to finalise the reviewed charter by the end of May. We believe that while more stringent transformation requirements are likely, the negative effect could be outweighed by greater policy certainty, which may well incentivise fresh investment in the beleaguered mining sector.

Picture: ISTOCK

The much-maligned third version of the mining charter (Mining Charter 3) was published in June 2017. It was universally condemned by the industry, its critics arguing that in its current form, it would discourage any new mining investment in SA and pose a serious threat to the sustainability of existing investments. The Chamber of Mines responded by taking the Department of Mineral Resources to court in order to challenge the charter’s implementation.

Recent developments

Cyril Ramaphosa taking over as President, and the subsequent replacement of mineral resources minister Mosebenzi Zwane with Gwede Mantashe, resulted in greater optimism across the industry. The chamber postponed the court hearing — scheduled for February 18 — in favour of negotiating with the government.

The chamber also welcomed the appointment of the new minister, stating that Mantashe was "a man of integrity and dignity, who brings with him a sound and fundamental knowledge of the industry he will lead and enable".

The organisation did, however, recognise that Mantashe was a tough negotiator who would not be easily manipulated — an assessment certainly vindicated after the first meeting between the various stakeholders in February. In the face of strong opposition, the minister announced that the controversial third charter would not be scrapped— in fact, it would form the basis of negotiations for a new charter.

On a positive note, he did, however, emphasise that as a key component of the economy, the mining industry needed to contribute to economic growth, which is unlikely in the absence of greater policy certainty. At the same time, the minister stressed that the industry must meet its commitment to social and labour reforms.

Both the chamber and the department described the meetings as robust and open, which is certainly an improvement on the experience under the previous regime.

The meeting concluded with the establishment of two task teams: one to focus on transformation and the mining charter, and the other on growth and competitiveness issues. It’s encouraging to note that the chamber has been invited to participate in both task teams.

In addition, the Mining Industry Growth Development and Employment Task Team (Migdett), set up in 2008 to help the industry counteract the effects of the financial crisis, is to be revived. The purpose of Migdett is to encourage regular engagement between the various stakeholders within the sector, instead of waiting for a crisis to bring the industry together.

On April 4, the high court ruled in favour of the once-empowered, always empowered principle, finding that previous black economic empowerment (BEE) transactions would remain valid, even if the partner exited the transaction. We certainly agree with this ruling.

However, on April 24, the department notified the chamber that it would challenge the court finding. At the time of writing, the specific grounds of appeal were still unclear, but they appeared to be related to the legal enforceability of the first two charters. If the department is successful in this challenge, it would imply that the once-empowered, always empowered principle could still be enforced in subsequent charters.

Investment implications

Should Mining Charter III be implemented in its current format, it will undoubtedly have negative consequences for the industry. Most notably, the fact that the once empowered, always empowered principle won’t apply, is problematic: companies will be required to initiate and finance new black ownership deals on a repeated basis in order to remain BEE compliant. This dilutes value for equity shareholders, and therefore the value of investments.

However, it does appear that Mantashe is committed to creating policy certainty in order to incentivise new investment in the industry. The creation of an environment in which investors know the transformation requirements and are given more certainty that these won’t change in the foreseeable future, will provide a massive boost for the sector. This will probably hold true even if transformation requirements are increased.

Moreover, the fact that the minister is open to talk to the industry and take the opinion of different stakeholders into account, creates a much healthier environment compared to that under his predecessor, Mosebenzi Zwane. The opportunity for regular talks is likely to boost business confidence within the sector on aggregate.

We believe there is a likelihood of more stringent transformation requirements for companies in the mining sector, which will come at a cost to equity shareholders. If the trade-off for this is greater policy certainty, however, we’re of the view that the net effect will probably be more positive for the industry in the long term.

• Bothma is part of the Sanlam Private Wealth Investment Team.

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LINK : https://www.businesslive.co.za/bd/opinion/2018-05-10-stricter-transformation-requirements-a-fair-price-to-pay-for-mining-policy-certainty/

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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