OPINION: Mining Charter III: certainty, but at a cost
POLITICS WEB / 12 MARCH 2019 - 13.56 / PETER LEON
Peter Leon sets out the provisions of the charter that are still cause for concern
The Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018 (Mining Charter III or the Charter) came into force on Friday, 1 March 2019 - almost three years after the publication of the first draft. This brought to a close more than nearly three years of uncertainty and speculation regarding the nature and content of the final version of South Africa’s third official Mining Charter.
However, in spite of the extensive public participation and negotiation process which preceded the publication of the Charter (on 27 September 2018), it still contains a number of provisions that are a cause for concern. These include:
- onerous re-empowerment obligations for the renewal and transfer of existing mining rights;
- the BEE Shareholding top-up requirements for pending applications;
- the absence of provisions for the amendment of existing mining rights; and
- the Minister's seemingly unlimited ability to review and revise the obligations imposed under the Charter from time to time.
To understand the extent of the black economic empowerment (BEE) obligations for South Africa's mining industry, regard must also be had to the Implementation Guidelines for the Broad Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018 (Guidelines), which the Minister of Mineral Resources (Minister) published on 19 December 2018.
The Guidelines outline processes, procedures, forms and templates to facilitate reporting and compliance with the requirements of the Charter. To do so they further explain what the different empowerment elements comprise, expound on the factors which the Department of Mineral Resources (DMR) and the Minister will consider when establishing whether or not a mining right holder complies with the requirements of the Charter and provide useful examples illustrating how the various thresholds will be calculated.
On 19 December 2018, the Minister also published an Amendment to the Mining Charter, 2018 (Amendment). Among other things, it provides that existing mining right holders and existing licence and permit holders must implement the Charter from 1 March 2019 (as indicated above). It also stipulates that the first annual reporting on the Charter must be submitted on or before 31 March 2020.
Mining Charter III has been a significant source of uncertainty and cause of controversy over the last three years. Since a first draft was published for public comment in April 2016, it has led to various High Court applications, occasioned calls for a change in political leadership at the DMR, unsettled investors and prompted adverse pronouncements by sovereign credit ratings agencies.
Regrettably, it appears that the additional obligations imposed under the Amendment and Guidelines have seemingly added to the uncertainty. In fact, some of the concerns with the Charter have been exacerbated by the Guidelines which in certain cases go beyond those envisaged under the Charter (e.g. the obligations in relation to pending applications). With the exception of procedures relating to the beneficiation equity equivalent, the Guidelines likewise do not address any of the ambiguities created by the Charter (and considered in this Brief). The publication of the Guidelines and Amendment appears another missed opportunity for the Minister to have addressed the remaining uncertainties around the Charter.
The significant effect which the earlier drafts and published version of Mining Charter III had on South Africa's mining sector becomes even more pronounced if regard is had to the country's rankings on the Fraser Institute's Annual Survey of Mining Companies' (Survey) "Policy Perception Index". Prior to the publication of the first draft of Mining Charter III, South Africa scored 51.91 and ranked 78th out of the 109 jurisdictions surveyed. After the ruinous June 2017 version of the Charter was published, the country's score decreased to 42.66 and it ranked 81st out of the 91 jurisdictions surveyed. In the most recent Survey, published on 1 March 2019 (i.e. after the publication of the Charter and the Guidelines), South Africa's score increased to 64.57 and the country now ranks 56th out of the 83 mining jurisdictions surveyed.
While South Africa's performance in the Survey is still below average, its score is significantly better than the previous three years which serves to confirm the importance of regulatory certainty. Likewise, if the country wishes to further improve its rankings, the Government should address the provisions of the Charter which are still a cause for concern. These (as well as the obligations imposed under the Charter) are discussed in greater detail below.
If the mining sector is to truly become the "sunrise industry" that the Government wishes it to be, it will have to become more proficient in how it regulates the industry.
Existing rights: existing mining right holders that achieved a minimum of 26 per cent BEE shareholding will be recognised as compliant for the duration of the mining right. This is so irrespective of their current BEE shareholding. To remain compliant the Guidelines provide that such holders must submit annual reports on their current BEE shareholding, meaningful economic participation and their shareholders' rights.
Renewals and transfers of existing rights: existing mining right holders' historical BEE transactions will not be recognised for the purposes of the renewal and transfer of existing mining rights and the applicant for renewal or the transferee, as the case may be, will likely be required to comply with the BEE ownership requirements applicable to new mining rights.
New rights: applicants for new mining rights must have a minimum of 30 per cent BEE shareholding comprising: a minimum of 5 per cent non-transferable carried interest to each of Qualifying Employees and Host Communities, and a 20 per cent effective ownership to BEE entrepreneurs (5 per cent of which must preferably be owned by women). The "carried interest" is essentially a free carried interest but arguably permits notional vendor financing without any form of security.
Pending applications: will be processed under the 2010 Charter. Applicants must accordingly have a minimum of 26 per cent BEE shareholding. However, after the mining right is granted, the holder of that right must increase its BEE shareholding to 30 per cent within five years and possibly also meet the BEE shareholding requirements applicable to new mining rights.
Procurement of goods: a minimum of 70 per cent (by value) of mining goods must be manufactured or assembled in South Africa. Of the indicated percentage of goods 21 per cent must be sourced from companies owned and controlled by Historically Disadvantaged Persons, five per cent from women and youth controlled companies, and 44 per cent from BEE compliant companies. Mining right holders could, however, off set 30 per cent of the procurement budget against supplier and enterprise development (subject to meeting the additional requirements imposed under the Charter).
In terms of the transitional provisions mining right holders are afforded five years to become compliant, with the threshold incrementally increasing from 10 per cent in the first year to 70 per cent in the final year.
Procurement of services: a minimum of 80 per cent (by value) of procured services, whether professional or technical, must be provided by local service providers. Of this, 50 per cent of the procurement spend must be sourced from companies owned and controlled by Historically Disadvantaged Persons, 15 per cent from companies owned and controlled by women, five per cent from youth owned companies, and ten per cent from BEE compliant companies. During the first year, 70 per cent of the procurement spend must be allocated to local service providers and the 80 per cent threshold requirement will apply from the second year onwards.
Employment Equity: the targets have remained largely the same as those imposed under the 2017 version. The exception to this concerns white female representation, which now seemingly must also be considered (as was the position under the 2010 Charter). In addition to meeting these thresholds, mining right holders are obliged to prepare and submit an approved five year employment equity plan as well as a career progression plan (which should include individual development plans for employees).
Exploration and Junior Miners: junior miners with an annual turnover of less than ZAR10 million will be exempt from complying with the employment equity requirements when there are fewer than ten employees, and are exempt from complying with the “inclusive procurement, enterprise and supplier development” requirements. Junior miners with an annual turnover of between ZAR10 million and ZAR150 million must comply with the employment equity requirements at group level and the inclusive procurement requirements. Junior miners with an annual turnover of less than ZAR150 million, are required to have 30 per cent BEE shareholding, but are not obliged to meet the percentages prescribed under the Charter. The holders of prospecting rights will not be subject to the provisions of the Charter.
Annual reports: clause 6.1 of the Mining Charter III and the Guidelines provide that mining right holders are obliged to submit annual reports indicating the extent of their compliance with the obligations imposed under the Charter. To assist them in preparing these reports, the Guidelines provide tables for each specific element of the Charter. These tables stipulate the information that must be provided as well as the format which the report should take. All mining right holders are expected to submit their first annual reports on or before 31 March 2020.
Non-compliance: a mining right holder who fails to comply with the ownership and mine community development requirements and falls within levels 6 and 8 of the Scorecard is in breach of the terms of Mining Charter III and the obligations imposed under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA). Moreover, a licence or permit holder which has not complied with the requirements of Mining Charter III shall be in breach of the Diamonds Act, 1986 and the Precious Metals Act, 2005 and subject to the relevant provisions of the these Acts.
Policy vs Regulation: in April 2017 the Gauteng Division of the High Court ruled that compliance with the requirements imposed under the 2010 Charter is voluntary and not enforceable and declined to hand down an order declaring that that Charter was validly promulgated in terms of the provisions of section 100(2) of the MPRDA or that it is "the Charter contemplated in section 100" (as referred to in section 23(1)(h) of the MPRDA).The Court's decision may hold significant consequences for Mining Charter III. First, it may be possible to argue that owing to the reasoning applied by the High Court, Mining Charter III (like its predecessor) does not create legally binding and enforceable obligations on mining right holders. Second, it could also be questioned whether the Minister is lawfully empowered to review and revise the terms of the Charter (which clause 10 of the Charter empowers him to do) when the empowering provision under the MPRDA does not permit this.
Peter Leon is Partner and Co-Chair at Herbert Smith Freehills.
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER