Johannesburg - The new Mining Charter, released this week, has almost no chance of surviving a court challenge and will probably be suspended within a week, say mining lawyers.
One veteran black mining executive told City Press that the department of mineral resources may have wilfully plunged itself into months, or possibly years, of lawfare “because by doing so, they think they will be seen to be doing radical economic transformation”.
“Who will invest under these conditions? No one.”
Even the ANC said it was seeking an urgent meeting with Mineral Resources Minister Mosebenzi Zwane after he revealed, at very short notice, the new charter on Thursday – overshadowing his colleague, Finance Minister Malusi Gigaba, who spoke at about the same time on how to restore economic confidence.
The governing party’s economic transformation committee raised concerns about the new 30% ownership target and the potential effect on jobs, ANC spokesperson Zizi Kodwa told business news site Fin24.
This echoes the public dressing-down Zwane received when he announced a “Cabinet decision” last year to investigate banks that closed the Gupta family’s bank accounts. The announcement proved to be a lie.
The new charter contains many brand-new rules that would significantly subordinate existing white and foreign shareholders in South African mines – very likely forcing them to dilute their ownership.
If the charter survives legal challenges, it would be a radical departure from the first two charters – released in 2004 and 2010 – with many targets still unclear.
One immediate consequence would be to force mines to sell or transfer several billion rands in assets to black companies in record time to “top up” to the new 30% ownership target.
This would have to be done within 12 months, making it unlikely that these transactions would be financed by banks or even by the traditional means of black economic empowerment (BEE) deal finance, comprising vendor loans from the mining companies themselves.
The Chamber of Mines announced that it was going to court to interdict the charter less than an hour after it appeared in the Government Gazette on Thursday.
Amid widespread uncertainty about what the charter’s many new provisions collectively do, mining company shares on the JSE plummeted, with more than R30bn in market value disappearing on Thursday afternoon.
The Anglo American group was particularly hard hit, with its two major subsidiaries in South Africa, Kumba Iron Ore and Anglo Platinum, losing 7% of their value.
UNLIKELY TO SURVIVE
Mining lawyers told City Press that the new charter was an easy legal target. Jacinta Rocha, a mining law analyst, said it was irrational and unconstitutional, adding that it offended “basic principles of South African law”.
“The minister has two advisers. If I were him, I would fire them both.”
“There are far too many constitutional concerns. A constitutional challenge will be successful,” said Warren Beech, head of mining at law firm Hogan Lovells.
Allan Reid, mining head at Cliffe Dekker Hofmeyr, agreed. “I do not think it would stand up in court – on several grounds.”
The top-up itself was probably open to legal challenge because it retrospectively imposed new conditions on rights the state had already granted, said Reid.
The charter needed to be reasonable in the legal sense, he added, saying the chamber’s claims of near-zero consultation and the radical changes the charter contained made it vulnerable on those scores as well.
“The composite whole of the contents renders it unreasonable,” said Reid.
The charter could be interdicted within a week as the court application was probably mostly drafted a long time ago, in anticipation of at least some of the charter’s contents, he added.
Nonetheless, pushing out a document that was guaranteed to be taken to court “might have been politically motivated”, said Beech.
Perhaps Zwane was just caving in to the incessant pressure to come up with something, he added.
WHAT DOES IT DO?
The new charter splits the industry in two, with separate rules on black ownership for new mining rights holders on the one hand – and existing mining rights holders on the other.
One of the most controversial clauses applies only to new mining rights. It says the mines will pay 1% of revenue to black shareholders above and beyond any profits or dividends. According to Rocha, only a money bill can levy a royalty of this nature, adding to the charter’s unconstitutionality. Rocha used to be the deputy director-general of the mineral resources department, in charge of mineral regulation.
New rights will only be issued if 30% black ownership is in place, while the old rights holders get 12 months to top up. It is not clear how much of the industry would be subject to the wide-ranging additional “new holder” rules, given the maturity of the industry.
However, Beech said the “new” regime could rapidly apply to large swathes of the “old” existing industry.
“It should apply to all current prospecting rights that get converted to mining rights,” he told City Press.
“It will create a mixed or hybrid system when existing mines expand or consolidate their old rights with new rights. It will create quite a bit of complexity.”
One of the new conditions is that you can only get a prospecting right with 50% plus one black person shareholding. Reid called this “one of the most unreasonable provisions I have ever seen”.
“Who will invest if they have no control over their investment? We can only assume that Zwane has decided to chase the last investors out of South Africa.”
THE NEW RULES
Other new conditions on “new” mining rights include restrictions that stop the 30% black ownership from ever getting diluted.
. For new mining rights, the target is not only 30%, but 30% with specific shares for employee schemes (8%), community trusts (8%) and black entrepreneurs (14%).
. After that, each category of black shareholder “shall ensure” that shares they sell go to the same category of black shareholder. This seems to mean an employee share trust can only sell to another employee share trust, while a community trust can only sell to another community trust.
“This could create practical difficulties,” said Beech.
“Employee stock ownership plans may not find other such plans with the means to buy their shares.”
. Even more restrictively, if a black entrepreneur were to sell their shares, the charter seems to oblige them to spend the money on mining “assets” only.
. If new shares are issued to raise capital, it cannot dilute the black shareholders – implying they must get free shares if they cannot pay.
By the chamber’s estimation, its members have 38% black “ownership” on aggregate. This, however, includes “once empowered” credit for past deals.
By the estimation of the mineral resources department, current black ownership is what matters.
“Very few companies have 30% purely on equity. Their immediate concern is the top-up,” said Beech.
This could quickly involve an unimaginable amount of forced deal-making.
The local mining industry has assets totalling more than R1.2 trillion, according to Stats SA’s publication, Annual Financial Statistics, based on company surveys.
Every percentage transferred would then be roughly R12 billion. Assuming that the industry is even just four percentage points short of the 30% goal, the charter calls for sales of R48 billion in assets in a single year.
“These transactions take a long time. You cannot do deals in 12 months,” said Beech.
“There is a limited pool of people who could buy these assets, especially black entrepreneurs. So, institutions like the Industrial Development Corporation would have to put in quite a bit.”
The traditional financing mechanism for many BEE deals in mining has been vendor financing, whereby the mine lends the money to the BEE partner and the debt gets paid over time with dividends.
“Few companies can do that right now,” said Beech.
A senior mining executive told City Press that the new charter seemingly learnt nothing from the lack of transformation in the past 10 years of the charter system.
“No one has benefited, except the banks and lawyers who arranged the deals,” he said.
‘WE KNEW NOTHING’
The Chamber of Mines claims the new charter contains virtually no input from it – unlike the first two charters, which were negotiated extensively.
A draft charter in 2015 had included the chamber’s major concern – the end of “once empowered”. Since then, there has apparently been no real engagement.
Before Zwane became mineral resources minister, the chamber had struck a deal with his predecessor, Ngoako Ramatlhodi, to jointly go to court for a declaratory order on the once-empowered issue.
After Zwane’s appointment, President Jacob Zuma asked the chamber to stop that case and negotiate instead, said Roger Baxter, CEO of the chamber. He would not be drawn on what targets the chamber would accept.
“Quid pro quos must be negotiated,” said Baxter.
The last time the chamber met Zwane was in March.
Before that, there had been a meeting in January.
One chamber executive speculated that Zwane was, in January, trying to seal a deal in time for the Mining Indaba.
*This article previously referred to Jacinto Rocha as the former deputy-general of the department of mineral resources. He was in fact the deputy director-general of mineral regulations. We apologise for the error.
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