Investment in the Mining and Natural Resources Sector in South Africa has been plagued by, among others, regulatory and policy uncertainty. Previous attempts to implement the third version of the Mining Charter contributed to this policy uncertainty, with regulatory uncertainty being underpinned by various failed attempts to amend the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA).
The publication of Mining Charter 2018 on 27 September 2018 and the announcement of the withdrawal of the MPRDA Amendment Bill, has gone some way in providing certainty and stability.
The Minister of Mineral Resources, Mr Gwede Mantashe, was at pains to point out that Mining Charter 2018 is a "consensus" document, and while there have been significant improvements from the position in previous versions of the Mining Charter, the voices of dissent have already started, from communities that are dissatisfied, through to other stakeholders that have expressed concerns regarding the achievability of some of the provisions of Mining Charter 2018.
This is of course to be expected. It would simply not have been possible to create a document that was 100% acceptable to the myriad of stakeholders in the mining and natural resources sector. In addition, it is clear that there are a number of aspects that will require extensive debate regarding the interpretation and application of some of the provisions of Mining Charter 2018, such as the "carried interest" provisions. Perhaps the Implementation Guidelines, which are to be published within two months from 27 September 2018, will provide the clarity needed. If, after this, some stakeholders are still dissatisfied, there are various mechanisms available including access to the South African courts. South Africa is widely praised for its progressive judicial system and, hopefully, if there are any remaining concerns and if these concerns cannot be addressed through dialogue, these concerns can be addressed within the judicial structures.
For now, the focus is on analysing Mining Charter 2018 with a view to implementation and compliance.
The South African mining and natural resources sector has been widely recognised as a significant contributor and potential further contributor to growth and transformation in South Africa for the benefit of all South Africans. Commentators also seemed to suggest that the sector was the reason why South Africa was not regarded as being in a recession, in the second quarter of 2018. The mining and natural resources sector can continue to play this critical role, if certainty and stability can be achieved.
It is not our intention to address each and every aspect of Mining Charter 2018 – we will do so in subsequent articles – but rather to address some of those aspects that resulted in robust debate prior to the publication of Mining Charter 2018, namely the ownership and procurement elements.
The ownership element
"Once empowered always empowered"
The "once empowered always empowered" principle has been the subject of extensive debate, with holders of mining rights that entered into empowerment transactions, historically, contending that these transactions should be recognised indefinitely, even where the empowerment partner has exited. The ownership element of Mining Charter 2018 provides for the recognition of historical transactions. An existing mining right holder, i.e. a holder of the mining right granted prior to 27 September 2018, that achieved a minimum of 26% Black Economic Empowerment (BEE) shareholding, is recognised as compliant for the duration of the mining right. If a minimum of 26% BEE shareholding was achieved and the BEE shareholders/partners exited prior to 27 September 2018, the historical transaction is also recognised, and the holder of the mining right is regarded as compliant for the duration of the mining right.
There are likely to be two concerns for existing mining right holders. Firstly, recognition of historical transactions does not apply when the relevant mining right is renewed. This will be of particular concern to holders of mining rights, that are expiring soon. While section 24(5) of the MPRDA provides that a mining right in respect of which an application for renewal has been lodged will, despite its expiry date, remain in force until such time as the renewal application has been granted or refused (which may extent the period of the recognition of the historical transactions), on renewal, the historical transactions no longer enjoy recognition. In addition, there are likely to be concerns on how the provisions of section 25(1) of the MPRDA are going to be interpreted. This provides that the holder of a mining right has the exclusive right to apply for and be granted a renewal of the mining right. While it does not state that the mining right must be renewed on exactly the same terms and conditions, this has certainly become an expectation, which may no longer apply.
The second concern is that the recognition of continuing consequences in respect of an existing mining right, is not transferrable, and the historical recognition lapses upon transfer of the mining right or part thereof, which seems to suggest that even if a part of a mining right is transferred, then the historical recognition in respect of the entire right, may lapse.
On a positive note, the recognition of continuing consequences includes historical transactions concluded at holding company level, mining right level, on units of production, shares or assets including all historical BEE transactions which form the basis upon which the new order mining rights were granted.
Where an application was lodged and accepted prior to 27 September 2018, the application will be processed in terms of Mining Charter 2010, with a requirement of a minimum of 26% BEE shareholding. The holder of the mining right must, however, within a period of five years from the effective date of the mining right increase the BEE shareholding to a minimum of 30%.
New mining rights
A new mining right must have a minimum of 30% BEE shareholding that must include economic interest plus corresponding percentage of voting right per mining right or in the mining company which holds a mining right. The 30% BEE shareholding must be distributed as prescribed, i.e. (a) a minimum of 5% non-transferable carried interest to qualifying employees from the effective date of the mining right, (b) a minimum of 5% non-transferrable carried interest or a minimum of 5% equity equivalent benefit to host communities from the effective date of a mining right, and (c) a minimum of 20% effective ownership in the form of shares to a BEE entrepreneur, 5% of which must preferably be for women.
The carried interest has been retained in relation to communities and employees but there has been a change in wording from "free carried interest" to a "carried interest". This is one of the key aspects that will require careful consideration and interpretation. Importantly, in the case of communities, the shareholding can be held by a trust or similar vehicle.
The shareholding to be held by BEE entrepreneurs may not be diluted below 51% ownership and control by BEE entrepreneurs.
BEE shareholding may be concluded at holding company level, mining right level, on units of production, shares or assets. Where the BEE shareholding is concluded at any level other than mining right level, the flow-through principle will apply.
Vesting of BEE shareholding for new rights
A minimum of 50% BEE shareholding shall vest within two thirds of the duration of the relevant mining right, and the prescribed minimum 30% target applies for the duration of the mining right.
Disposal of BEE shareholding in respect of existing and new mining rights
A mining right holder's empowerment credentials are recognised for the duration of the mining right, where a BEE shareholding or part thereof is disposed of below the prescribed minimum shareholding (30%) provided that (a) the mining right holder is compliant with the requirements of the Mining Charter 2018 at the time of disposal, (b) the BEE shareholder has held the shares for a minimum period equivalent to a third of the duration of the mining right, and an unincumbered net value must have been realised, (c) the recognition of empowerment credentials only applies to the measured effective ownership which has vested to BEE shareholding, and (d) an agreement detailing exit mechanisms and the BEE shareholders' remaining financial obligations constituting a contract between the mining right holder and the BEE shareholders has been submitted to the Department of Mineral Resources. The recognition of consequences of previous deals cannot be claimed against future mining rights or mining right renewal applications, in these circumstances.
Beneficiation equity equivalence against the ownership target
A mining right holder may claim the equity equivalent up to a maximum of five percentage points of BEE entrepreneur shareholding, i.e. where a mining right holder is carrying out beneficiation as contemplated in the parameters of Mining Charter 2018, a mining right holder may claim a 5% equity equivalent in relation to the BEE entrepreneur shareholding, for beneficiation.
Where, before 27 September 2018, a mining right holder claimed the beneficiation offset (up to eleven percentage points), the historical mining right holder, retains the offset for the duration of that mining right.
Procurement and supplier development
Mining Charter 2018 retains the distinction between mining goods and mining services.
In the case of mining goods, a minimum of 70% of total mining goods procurement spend (including non-discretionary expenditure) must be on South African manufactured goods. "South African manufactured goods" is defined to mean goods with a minimum of 60% local content during the assembly or manufacturing of the product in South Africa. The calculation of local content excludes profit mark-up, intangible value such as brand value and overheads.
The 70% of total mining goods procurement spend must be allocated as follows: (a) 21% to be spent on South A
frican manufactured goods produced by a historical disadvantaged persons owned and controlled company, (b) 5% to be spent on South Africa manufactured goods produced by a woman or youth owned and controlled company, and (c) 44% to be spent on South African manufactured goods produced by a BEE compliant company (which is defined to mean a company with a minimum B-BBEE Level 4 status in terms of the Department of Trade and Industries Broad-Based Black Economic Empowerment Codes of Good Practice, and minimum 25% plus one vote ownership by historically disadvantaged persons).
In relation to services, a minimum of 80% of the total spend on services (including non-discretionary expenditure) must be sourced from South African based companies. "South African companies" are defined to mean companies incorporated and registered in terms of the Companies Act 71 of 2008, with operations in South Africa and subject to South African Laws.
The 80% total spend on services must be allocated as follows: (a) 50% must be spent on services supplied by historically disadvantaged persons owned and controlled companies, (b) 15% must be spent on services supplied by women owned and controlled companies, (c) 5% must be spent on services supplied by youth, and (d) 10% must be spent on services supplied by BEE compliant companies.
The procurement targets must be complied with progressively within a period of five years as outlined in the transitional arrangements. Within six months from 27 September 2018, a mining right holder must submit a five-year plan indicating progressive implementation of inclusive procurement targets.
Compliance with procurement targets within the transitional period must be as follows: (a) Mining goods – the first-year target is set at 10%, second year at 20%, third year at 35%, fourth year at 50%, and fifth year at 70%, (b) Services – first-year target is set at 70% and second year at 80%.
Setoff provisions are, however, included for enterprise and supplier development. In the case of mining goods, up to 30% of the total procurement budget on mining goods (excluding non-discretionary expenditure) may be offset against supplier development. A mining right holder may develop suppliers through original equipment manufacturers as prescribed in the Implementation Guidelines. In the case of services, up to 10% of the total procurement budget on services (including nondiscretionary expenditure) may be offset against supplier and enterprise development. Various criteria must be met for the offset to be claimed within the parameters of Mining Charter 2018.
A mining right holder is required to spend a minimum of 70% of its total research and development budget on South African based research and development entities, which can be either public or private.
The mining right holder must use South African based facilities or companies for the analysis of 100% of all mineral samples across the mining value chain.
A mining right holder may not conduct sample analysis using foreign based facilities or companies without the written consent of the Minister.
Some additional observations – Other elements of Mining Charter 2018
Element 2.5 recognises mine community development and that mine communities form an integral part of mining development, which requires a balance between mining and mine communities' socio-economic development needs. A mining right holder is required to meaningfully contribute towards mine community development with a bias towards mining communities and in keeping with the principles of the social licence to operate.
While several communities championed for consent to be required from the community, before mining commences, Mining Charter 2018 has retained the obligation to consult, and recognises that mining right holders in the same area may collaborate on identified projects to maximise the socio-economic developmental impact.
Element 3 sets out a regime for junior miners and applies to mining rights granted after 27 September 2018.
An additional aspect that was hotly debated, was the "trickle dividend", that holders of mining rights were meant to pay. This aspect has been completely removed from Mining Charter 2018.
The previous version of the Charter contained various "lock in" provisions for BEE partners. Under Mining Charter 2018, BEE partners are permitted to sell their shares and are not required to re-invest a portion of the proceeds in mining, as required in the previous version.
The change to "carried interest" will require careful consideration. Previous versions of the Charter referred specifically to "free carried interest" and the change to "carried interest" is unclear. Mining Charter 2018 provides that the cost of the "carried interest" can be recovered from development of the asset, but at the same time, specifies that the "carried interest" has to be free of any encumbrance, i.e. they may not be debt funded.
Stakeholders in the mining and natural resources sector will no doubt, over the next few weeks, be debating the interpretation and application of Mining Charter 2018, but it is hoped that the publication of Mining Charter 2018 will bring about much needed certainty and investor stability.