The publication of the Draft Broad-based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018 (Draft Mining Charter 2018) on Friday, 15 June 2018 came in the wake of the widely-criticised Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry on 15 June 2017 (Mining Charter 2017) and the commitment by both President Ramaphosa and the newly-appointed Minister of Mineral Resources, Mr Gwede Mantashe, to seek solutions to the impasse brought about by Mining Charter 2017, between a broad range of stakeholders in the industry led by the Minerals Council of South Africa (then the Chamber of Mines), and the erstwhile Minister, Mr Zwane.
Despite what appears to have been a broad-based consultation process on Draft Mining Charter 2018, interested and affected parties have been invited to submit written representations on Draft Mining Charter 2018 by 27 July 2018, whereafter the intention is to consolidate the commentary received and to refer Draft Mining Charter 2018 to Cabinet for approval. The Ministry has also indicated that a Socio-Economic Impact Assessment will be done before Draft Mining Charter 2018 is presented to Cabinet. It is anticipated that a mining summit will be held in early July, well within the commentary period. The mining summit will provide another platform for interested and affected parties to consider, and debate, the contents of Draft Mining Charter 2018.
In this Alert, we address some aspects of Draft Mining Charter 2018 that have been the subject of controversy in relation to Mining Charter 2017, or which may be of particular interest to our readers. We have not addressed every element of Draft Mining Charter 2018, and we have not done a comparison between Mining Charter 2017 and Draft Mining Charter 2018, at this stage. For our readers who would like a summary of Mining Charter 2017, and in particular, the elements of Mining Charter 2017, which were regarded as controversial, or received criticism, we published Mining Alert 2 of 2017 where we summarised the key provisions of Mining Charter 2017. As with most situations where a compromise has to be reached, there will be stakeholders who are happy and stakeholders who are unhappy. Public comments so far suggest that, despite the broad-based consultative process that preceded the publication of Draft Mining Charter 2018, there were still some surprises in the version published on 15 June 2018, and that the procurement provisions, which are largely unchanged, remain cause for concern. There are, understandably, some drafting and alignment aspects that will need to be ironed out before Draft Mining Charter 2018 is put before Cabinet.
In this section of the Alert we address the content of Draft Mining Charter 2018 broadly. We will, because of the significance of the ownership provisions, also address the ownership provisions in more detail, in a separate section below.
The preamble to Draft Mining Charter 2018 states: "In reviewing the Mining Charter, it is recognised that competitiveness, growth and transformation are mutually re-enforcing. To this end, the Reviewed Mining Charter introduces new definitions, terms and targets to harmonise with the BBBEE Act and the DTI Codes. The alignment of these policies is intended to ensure meaningful participation of Black Persons in accordance with the objects of the MPRDA and to provide for policy and regulatory certainty thereby facilitating transformation and growth of the mining industry."
Existing mining rights
Element 2.1.1 only applies to "existing mining rights". The definition of "existing right holder" is "a holder of a mining right granted prior to the coming into operation of the Mining Charter, 2018". The key aspects in relation to existing mining rights are as follows:
- Where an existing right holder has achieved and maintained a minimum of 26% BEE shareholding as at the date of publication of Draft Mining Charter 2018, the existing right holder will be recognised as compliant (with Draft Mining Charter 2018) but must, within five years from the date of coming into effect of Draft Mining Charter 2018, supplement its BEE shareholding to a minimum of 30%. The existing right holder in these circumstances must therefore top up from its 26% BEE shareholding to 30% BEE shareholding. The term "BEE shareholding" is defined to mean "host community, qualifying employees and BEE entrepreneurs' shareholding". A "host community" is defined to mean "a community/ies in the local, district, metropolitan municipality or traditional authority within which the mining area as defined in the MPRDA is located". The term "qualifying employees" is defined to mean "for the purposes of the ownership element employees of a mining company excluding employees who already hold shares in the same company as a condition of their employment agreement except where such condition is a Mining Charter requirement". The term "BEE entrepreneur" is defined to mean "Black enterprises that are at least 51% owned by Black persons in which Black persons hold at least 51% of exercisable voting rights and 51% of economic interest or an organ of State excluding mandated investments".
- Where an existing right holder at any stage during the existence of the mining right achieved a minimum of 26% BEE shareholding and the BEE partners have exited the BEE transaction, the existing right holder will be recognised as compliant (with Draft Mining Charter 2018) but must, within a period of five years from the date of coming into operation of Draft Mining Charter 2018, supplement its BEE shareholding from 26% to a minimum of 30%. Element 126.96.36.199 seems to suggest that, as long as an existing right holder achieved its 26% BEE shareholding at a point in time, it would be regarded as compliant even though its BEE partners have exited and that the "top up" is only 4% i.e. to 30%, and not from where the right holder may currently find itself as a result of the exit of the BEE partner. The same consideration referred to above in relation to what constitutes "BEE shareholding" applies equally here.
- The recognition of the continuing consequences of historical transactions include historical transactions that were concluded on units of production, share assets including all historical BEE transactions which form the basis upon which new order mining rights were granted. The recognition of continuing consequences apply at company or mining right level.
- The recognition of continuing consequences are not transferrable and lapse on transfer of the relevant mining right or part thereof.
- The recognition of continuing consequences do not apply to an application for a new mining right and renewal of a mining right in respect of which there had been recognition of continuing consequences.
- Where an existing right holder did not, during the currency of the mining right, achieve a minimum of 26% BEE shareholding (as broadly interpreted in Element 188.8.131.52), as at the date of commencement of Draft Mining Charter 2018, there is no recognition of any historical transactions and that mining right holder is required, within a period of five years of the date of coming into operation of Draft Mining Charter 2018, to supplement its BEE shareholding to a minimum of 30% BEE shareholding, i.e. from the level that it finds itself in, to 30% (as compared to an existing mining right holder which had achieved 26% but not maintained the 26% BEE shareholding as at the date that Draft Mining Charter 2018 comes into force and effect, which only needs to "top up" 4%, to 30%).
Where an application for a mining right has been lodged and accepted prior to the coming into effect of Draft Mining Charter 2018, the application will be processed and granted under the provisions of the current mining charter of 2010, with a minimum requirement of 26% Black Person shareholding. However, the holder of a mining right which has been granted under these circumstances must within a period of five years from the effective date of the mining right supplement its BEE shareholding to a minimum of 30%.
New mining rights
A new mining right, i.e. one which is applied for and granted/issued after the coming into effect of Draft Mining Charter 2018, must have a minimum 30% BEE shareholding "which shall include economic interest plus corresponding percentage of voting rights, per mining right or in the mining company which holds a mining right".
Draft Mining Charter 2018 prescribes how the BEE shareholding must be distributed amongst (a) qualifying employees, (b) host communities, and (c) BEE entrepreneurs.
In the case of qualifying employees, a minimum of 8% of which 5% is non-transferrable free carried interest, must be distributed within a period of five years from the effective date of the mining right.
In the case of host communities, a minimum of 8% of which 5% is non-transferrable free carried interest, must be distributed within five years from the effective date of the mining right.
A minimum of 14% shares must be distributed to a BEE entrepreneur (no five-year period is prescribed in the case of a BEE entrepreneur).
Element 184.108.40.206 therefore prescribes that 10% of the 30% BEE shareholding is on a free carried interest basis i.e. in respect of the 5%, respectively, qualifying employees and host communities will not need to contribute, in any manner, but will participate in the benefits. In addition, a right holder is required to pay a "trickle dividend" equal to a minimum of 1% of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) from the sixth year of a mining right, to qualifying employees and host communities until dividends are declared. If, after the six-year period, dividends are not declared in any particular year, the annual 1% of EBITDA will be payable to qualifying employees and host communities in that year.
Host communities and qualifying employees must also have representation on the board or advisory committee of the right holder.
These provisions seem to suggest that, until year six, if no dividends are paid, then 1% of EBITDA will be payable as a trickle dividend. (Element 2.1.3 does not address the situation where the actual dividends paid are less than the trickle dividend of 1% of EBITDA).
Where a BEE entrepreneur exits, the right holder's empowerment credentials are recognised for the duration of the mining right provided that (a) the right holder is compliant with the requirements of the ownership element as at the time of disposal, i.e. 30% of the shareholding, (b) the BEE entrepreneur has held the empowerment shares for a minimum period equivalent to a third of the duration of the mining right and unencumbered net value must have been realised, and (c) the recognition only applies to measure effective ownership which has vested in a BEE entrepreneur.
The BEE entrepreneur is required to re-invest a minimum of 40% of the proceeds from the disposal in the "mining industry".
The prescribed board/executive/top management targets under the employment equity element must include Black shareholders in line with the objective for active participation in the management and control of the mining industry.
Element 220.127.116.11 sets out prescribed vesting of the BEE entrepreneurship shareholding, namely (a) 15% in the first quarter of the duration of the mining right, (b) 50% in the second quarter of the duration of a mining right, (c) 70% in the third quarter of the duration of a mining right, and (d) 100% by the end of the last quarter of the duration of the mining right.
The prescribed minimum 30% applies for the duration of the mining right.
Equity equivalence against the ownership target
Element 2.1.4 allows for "set off", i.e. equity equivalent mechanism in lieu of BEE entrepreneurship shareholding.
A right holder may claim the equity equivalent mechanism against a maximum of eleven percentage points of BEE shareholding, which may only be claimed against the portion of BEE entrepreneur shareholding (and not community or qualifying employee shareholding).
Procurement supplier and enterprise development
As with Mining Charter 2017, a distinction is made between mining goods and mining services.
With regard to mining goods, a minimum of 70% of total mining goods procurement spend must be on South African manufactured goods. South African manufactured goods are defined to refer to "… goods with a minimum 60% of the value added during the assembly or manufacturing of the product… in the Republic". The calculation of value add excludes profit mark up, intangible value such as brand value and overheads.
Element 2.2.1 requires the 70% in relation to mining goods to be apportioned in a prescribed manner, namely (a) 21% on South African manufactured goods by Black entrepreneurs, (b) 5% on South African manufactured goods by BEE women entrepreneurs or 50% youth owned and controlled enterprises, and (c) 44% on South African manufactured goods by a BEE compliant company (a company with a minimum B-BBEE Level 4 status in terms of the BBBEE Codes of Good Practice and minimum 26% Black ownership).
While it is not clear from Element 2.2.1 (it is clear in Element 2.2.2 relating to services), it appears that the specifications must be achieved within a period of five years from the date that Draft Mining Charter 2018 comes into effect.
With regard to services, Element 2.2.2 prescribes that a minimum of 80% of the total spend on services must be sourced from South African companies. The term "South African Companies" is not defined.
The 80% spend on services must be apportioned as follows, (a) 60% on BEE entrepreneurs, (b) 10% on BEE women entrepreneurs with or 50% youth owned and controlled enterprises, and (c) 10% on BEE compliant companies.
Element 2.2.2 specifies that the procurement targets must be complied with within a period of five years as outlined in the transitional arrangements.
A "set off" provision is contained in Element 2.2 in terms of which a right holder may invest in enterprise and supply development which it may offset against the procurement element obligations. In the case of mining goods, up to 5% of the total procurement budget on mining goods may be offset using supplier development. In the case of services, up to 10% of the total procurement budget on services (excluding non-discretionary expenditure) may be offset using supplier and enterprise development. There are a number of restrictions against the set off including that supplier and enterprise development may only be invested on BEE entrepreneurs with a turnover of less than ZAR50 million per annum and the amounts may not be claimed as expenditure.
In relation to research and development, a right holder must spend a minimum of 70% of its total research and development budget on South African based research and development entities. A minimum of 50% of the 70% must be spent at South African Public Academic Institutions or Science Councils.
In relation to processing of samples, a right holder must utilise South African based companies for the analysis of 100% of all mineral samples, except in cases where samples are analysed for calibration of local laboratories.
Element 2.2.7 makes provision for contribution by foreign suppliers. A foreign supplier is defined to mean "… a foreign controlled or registered company, supplying the South African mining industry with mining goods or services which does not have at least Level 4 status in terms of the BBBEE Codes of Good Practice and 26% Black ownership". A foreign supplier must contribute a minimum of 0.5% of its annual turnover generated from local mining companies towards development of suppliers to be directed to the Mandela Mining Precinct for research purposes.
Human resource development
A right holder is required to invest 5% of the leviable amount (excluding the Mandatory Statutory Skills Levy) on essential skills development, in the manner prescribed in Element 2.3.
Element 2.4 requires the following:
- At board level – a minimum of 50% Black Persons with exercisable voting rights proportionally represented, 20% of which must be Black women.
- Executive/top management – a minimum of 50% Black Persons at the executive directors’ level as a percentage of all executive directors proportionately represented, 15% of which must be Black women.
- Senior management – a minimum of 50% Black Persons in senior management proportionally represented, 15% of which must be Black women.
- Middle management – a minimum of 60% of Black persons in middle management proportionally represented, 20% of which must be Black women.
- Junior management – a minimum of 70% Black Persons in junior management proportionally represented, 25% of which must be Black woman.
- Employees with disabilities – a minimum of 1.5% employees with disabilities as a percentage of all employees, reflective of national or provincial demographics.
In relation to core and critical skills, a right holder is required to ensure that a minimum of 60% Black Persons are represented in the right holder's core and critical skills by diversifying its existing pools. The core and critical skills include science, technology, engineering and mathematical skills.
Mine community development
Element 2.5 requires a right holder to meaningfully contribute towards mining community development with a bias towards mine communities in terms of impact, in keeping with the principles of the social licence to operate.
A right holder is required, in consultation with the relevant municipalities, mine communities, traditional authorities and affected stakeholders, to identify development priorities of mine communities. These developmental priorities must be contained in the prescribed and approved Social and Labour Plan.
Mining right holders operating in the same area may collaborate.
For the purposes of Element 2.5, a "mine community" refers to communities where mining takes place, major labour sending areas, adjacent communities within a local municipality, metropolitan municipality and/or district municipality.
Housing and living conditions
Element 2.6 sets out principles applicable to housing conditions and working conditions which includes proper health care services, affordable, equitable and sustainable health systems and balanced nutrition.
Applicability of the Mining Charter
The ownership element is ring-fenced and requires 100% compliance at all times.
The transitional arrangements include the following:
- Five years for the inclusive procurement element. However, a right holder must, within six months from the date of publication of Draft Mining Charter 2018, submit a five-year plan indicating progressive implementation of procurement targets;
- Within the five-year transitional period, compliance with procurement targets will be as prescribed. For mining goods, the first-year target is set at 10%, 20% in the second year, 35% in the third year, 50% in the fourth year, and 70% in the fifth year. In relation to services the first-year target is set at 70%, and 80% in the second year;
- For employment equity, a five-year period is specified but a right holder must within a period of six months from the date of publication of Draft Mining Charter 2018, submit a five-year plan indicating progressive implementation of the provisions of the employment equity element targets;
Some detailed thoughts on the ownership element
To what extent does Draft Mining Charter 2018 address the concerns previously raised by the industry, particularly in terms of ownership?
Firstly, in terms of existing mining rights, Draft Mining Charter 2018 acknowledges the "once empowered, always empowered" principle in terms of which mining companies are able to claim recognition for previous BEE transactions. Draft Mining Charter 2018 recognises that an existing mining right holder/company who achieved and maintained a minimum of 26% BEE shareholding at the date of publication of the Mining Charter, or who at any stage achieved a 26% BEE shareholding shall be recognised as compliant, notwithstanding the fact that that BEE shareholders involved have since sold their interests or shares. Historical transactions concluded on units of production and share assets are also recognised for this purpose. This right is not transferable. This is a significant concession – but one that is not surprising in the context of the previous court actions by the Minerals Council of South Africa (previously the Chamber of Mines).
Similar to Mining Charter 2017, Draft Mining Charter 2018 requires mining companies to "top up" (the current or previous) BEE shareholding to 30%. However, this can be achieved within five years rather than within the 12-month period required by Mining Charter 2017. Even pending mining right applications will be processed on the basis of a proposed 26% shareholding, so long as these are topped up to 30% within five years.
Mining Charter 2017 had introduced onerous provisions where a holder of a new prospecting right would be required to have a minimum of 50% plus one Black person shareholding, which shareholding would include voting rights in respect of every prospecting right or in the company which held prospecting rights. This provision was not favourably received and as such has not been retained in Draft Mining Charter 2018 (the provisions of Draft Mining Charter 2018 also apply to prospecting rights).
In contrast to the "concessions" to industry set out above, the Draft Mining Charter 2018 has introduced an important new requirement for the granting of new mining rights, being the right of "free carry" for a percentage of shares held by communities and employees. The Mining Charter 2017 required that applicants for new mining rights had BEE ownership consisting of a specified percentage of employees, communities and "BEE Entrepreneurs" (being companies which are 51% Black owned).
As expected, Draft Mining Charter 2018 retains the requirement for this BEE shareholding composition as follows:
- A minimum of 8% of which 5% is non-transferable free carried interest to qualifying employees within a period of five years from the effective date of a mining right;
- A minimum of 8% of which 5% is non-transferable free carried interest to host communities (in the form of a community trust as prescribed) within five years from the effective date of a mining right; and
- A minimum of 14% shares to BEE entrepreneurs.
The minimum "10% free carry" is bound to be of concern to investors, given that these shareholders will not be required to fund their equity. However, the "free carry" concept would have been introduced to ensure that employees and communities are able to extract value from their shares without the burden of long term debt – which was traditionally serviced by dividends from the mining companies, meaning that these holdings were often "under water" and offered no economic benefit for holders. A number of mining companies recognised this already and have been issuing "free" equity to employees (in terms of ESOPs) as well as communities.
The exact ambit of the aforementioned provisions requires further examination. In contrast to Mining Charter 2017, it seems that the above shareholding can be earned on an incremental basis over five years, which appears to suggest that a new mining right can be issued on the basis of an initial 14% BEE entrepreneur interest only.
In addition, it must be considered what is meant by "non-transferable" given that one of the fundamental concepts of share ownership is the ability to realise the growth in capital value – does this mean that the employees and communities cannot transfer their free carry at all? Does it mean it can only be transferred to other employees and communities? Or does it mean that the employees and communities can sell their free carry equity and realise their investment, but the mining right holder will then need to issue new free carry to employees and communities in the same proportions (given that the Charter implies that the "once empowered always empowered principle" seems to apply only to the BEE entrepreneur's portion of the BEE equity).
It is also worth mentioning that Draft Mining Charter 2018's requirement for community trusts is in sharp contrast to the current regulatory environment enforced by the DTI through its BEE Commission. Recent experience with the BEE Commission has shown it is becoming increasingly difficult to recognise community trusts as legitimate BEE ownership vehicles. In its efforts to prevent fronting, the BEE Commission is particularly concerned with schemes that place restrictions on how beneficiaries should use the money they receive – which is a feature of many community trusts that are drafted for specific purposes, such as community upliftment and education. This seemingly contradictory approach of the DTI and the DMR in respect to such trusts in the mining sector is a matter which requires urgent resolution.
Draft Mining Charter 2018 further requires the holder of a mining right to pay a trickle dividend equal to a minimum of 1% of EBITDA from the 6th year of a mining right to qualifying employees and host communities (only) until dividends are declared. This is a "watered down" version of the mandatory payment to pay 1% of turnover to all Black shareholders in any year contemplated in Mining Charter 2017, but could still be problematic, and would need to be subject to the solvency and liquidity requirements of the Companies Act 71 of 2008. Furthermore, it is unclear what is meant by "until dividends are declared"- if a company declares a dividend one year, but not the next, is the obligation to pay the 1% payment triggered again? This provision requires further clarification.
Draft Mining Charter 2018 further makes it mandatory that employees and communities are represented on the board. This makes sense, given that these groups are important stakeholders and will be significant shareholders, but history has shown that this requirement may become fraught with political issues. It is furthermore not clear at what stage this requirement will kick in – at the commencement of the mining right or after the full 8% respective shareholding has vested in the aforementioned groups after five years?
Draft Mining Charter 2018 also contains detailed provisions relating to the BEE entrepreneur ownership, taking its cue from the analogous provisions in the BEE Codes of Good Practice. The provisions include requirements that the "once empowered always empowered" principle will only apply to the BEE entrepreneur's shareholding if it has held its equity for a third of the period of the mining right and that the unencumbered net value has been realised. There are also detailed provisions which require the BEE entrepreneur's shareholding to vest over the term of the mining right as follows:
- 15% in the first quarter of the duration of a mining right;
- 50% in the second quarter of the duration of a mining right;
- 70% in the third quarter of the duration of a mining right; and
- 100% by the end of the last quarter of the duration of a mining right.
It is not clear if by "vesting", it is required that the net value requirement be met and the vested portion owned by the BEE Entrepreneur must be free of debt? This must be examined and interrogated in further detail.
Draft Mining Charter 2018 also recognises the possibility of equity equivalents encouraging beneficiation projects in place of BEE entrepreneur ownership, up to a maximum of 11 percentage points. This development is to be lauded, although the DMR will need to ensure that such project proposals can be processed expeditiously, as the equity equivalent programme under the DTI BEE Codes has proved to be expensive and time-consuming.
The period up until 27 July 2018 will be a critical period for all stakeholders to consider the content of Draft Mining Charter 2018 and every opportunity should be taken to discuss and debate the content, and where possible, to make submissions.