(MINEWEB) Opinion: South African mining's new charter - all is not well

Opinion: South African mining's new charter - all is not well
AS South Africa's ruling party embarks on an annual conference much of the focus will be on the mining sector and the debate over not just taxes and royalties, but also the nature of BEE deals
Author: David Hargreaves
Posted: Monday , 20 Sep 2010

LONDON (W.H. IRELAND) -

South Africa. Seconds out. As you read this, the annual conference of the ruling African National Congress (Sept 20-24) will be underway. It will be dominated by mining issues just as RSA is. All is not well. The Government would love to continue encouraging inward investment whilst protecting local interests. In the other corner, the ANC Youth League, the trades unions and the Communist Party are for outright nationalisation. This will be some boxing match. The sparring will be about taxes and royalties, hardly consequential unless they are out of line internationally.

The real fight will be about Black Economic Empowerment, BEE. Introduced to right the perceived wrongs of apartheid, it set minimums for black ownership of most businesses, particularly in mining; 9% moving up to 15% then 26% by 2014. They have not been met. Nor has their partial implementation been a success. The majority have not benefitted, only a forceful few.

The theory of ‘gifting' a large share of a company without compensation would never work in a competitive market place as neither would the concept of loans or a sale of equity to be paid for out of future dividends. None of this has been lost on forthright Mines Minister Susan Shabangu. She was in London last week to soften up the investment fraternity ahead of the Conference and the launch of the new RSA Mining Charter.

The right move, but did it achieve the right result? London matters, as the financial home to most of the RSA involved, major companies, so that was a step in the right direction. Not so cleverly thought through was her previous, recent announcement, that BEE groups would be somehow protected from the economic woes that periodically affect us miners. How this camel gets through the eye of the needle is spelt out in the new Charter. It requires that "some cashflow" should flow through to the BEE shareholders "throughout the term of the investment". What term? What investment?

The good news is that those in charge obviously read The Week in Mining. We have been emphasising for a long time that the present BEE structure is unworkable and that the nanny state which wraps workers in cotton wool has to go. So they are scrapping the hostel system. Whether they have thought through the economics of the revised BEE deal is another matter. Here is how we interpret it:

You, the mining entrepreneur, choose to investigate a project.

The cash clock starts ticking and there are interminable delays on licencing. They are getting longer because the cancer of bureaucracy has taken hold.

* You strike terms with a BEE partner, a condition of the licence.
* Said partner has no money.
* So, what do you do?

Two choices:

Lend it to him Let him have it free, gratis.

The latter is a non-starter because your other 74% shareholders have better places to go; like previously unthinkable West Africa. So this loan, how will he repay it? Why, out of future dividends, of course! But you are an explorer, early developer, as far removed from dividend paying as Lehman Bros is from opening a branch on Mars.

Then, what is the point of our aspiring BEE partner owning shares in a company where he will grow old before he grows rich? The Charter has the answer: Whatever the circumstance, "some cash" must flow to the BEE group.

Now in old fashioned parlance, they call this a preference share. We all know that in times of hardship, even the biggest pass their dividends (don't they, Anglo?) But to default on your preference dividend is tantamount to throwing in the sponge.

So, is the BEE deal a disguised preference share? What fun! The Charter allows for "multiple interpretations" of BEE and will have a ‘scorecard'. This one will run and unless it simplifies and presents as investor friendly, so will the punters run. The ANC will muddle through this time, there is no smell of a coup. But the next election is 2012. By then, there will be many more young voters. They will swing left rather than right. They will have their eye on the rich mining cake and will want what they perceive as their fair slice, with icing, too.

For further information or to be placed on W.H. Hargreaves' Week in Mining distribution list, please contact David.Hargreaves *** WH-Ireland.Co.Uk