The publication of the Reviewed Broad-based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016 in the Government Gazette on 15 June 2017 (MC17) had and immediate, dramatic effect on the mining industry and has resulted in extensive dialogue. The publication of MC17 also appears to have had a divisive effect, primarily, between stakeholders in the industry and Minister Zwane.
In this Mining Alert we provide a high-level summary of the provisions of MC17, and we address two key aspects, namely (a) the ownership element, with particular emphasis on holders of existing prospecting and mining rights and (b) the transitional arrangements
We will be sending our further alerts, in the coming days in relation to aspects such as the impact of MC17 on foreign companies and/or foreign companies that supply goods and services to the South African mining industry, the financial impact of compliance with MC17, and the procurement element.
Limited recognition of "once empowered, always empowered"
One of the most controversial and hotly-debated aspects, was whether the "once empowered, always empowered" principle would in some way, be included in the Revised Mining Charter, ie MC17.
MC17 gives limited recognition to Historical Empowerment Transactions, provided that these Historical Empowerment Transactions achieved a minimum of 26% empowerment, ie any Historical Empowerment Transactions that did not achieve a minimum 26% empowerment component are not given any recognition. To identify which Historical Empowerment Transactions qualify for recognition, it is necessary to have regard to the definition of "Historical BEE Transactions" under the definitions in MC17. A Historical BEE Transaction is defined to be a BEE Transaction that was (a) concluded prior to 15 June 2017, and (b) that achieved a minimum 26% Black shareholding or more (we discuss the reference to "shareholding" further below).
The Historical Empowerment Transaction must be a "BEE Transaction". This is defined in MC17 to mean the issue of equity instruments to Black Persons or a group of Black Persons based on the principles of Broad-based Black Economic Empowerment – transactions that did not meet these principles, are not regarded as a "BEE Transaction".
The definition of "Historical BEE Transaction" is, however, only the starting point and must be read with clause 188.8.131.52 of MC17, which provides that the recognition of Historical BEE Transactions shall include the recognition of historical deals concluded on units of production, share asset deals (including deals where the BEE Partner(s) have sold their shareholding) and all Historical BEE Transaction deals that form the basis upon which new order mining rights were granted.
The recognition of Historical BEE Transactions does not appear to be limited to shareholding, with clause 184.108.40.206 specifically providing for recognition of transactions that included units of production and related transactions. It therefore seems that, in determining whether the "26% shareholding" has been achieved or not, under clause 220.127.116.11, historical deals concluded on units of production, share asset deals, etc will be recognised.
The intention to include more than just shareholder transactions is also supported by the provisions of clause 18.104.22.168, which provides that the recognition of Historical BEE Transactions shall not apply to transactions which did not achieve a minimum of 26% empowerment by 15 June 2017.
Clause 22.214.171.124 read with clause 126.96.36.199 suggests that the "cut off", is Historical BEE Transactions that were concluded prior to 15 June 2017.
Clause 2.1.2 makes a distinction between Historical BEE Transactions where the holder has, after 15 June 2017 maintained 26% Black Person shareholding (or empowerment, on the argument presented above), and an existing holder which has acquired and maintained more than 30% Black Person shareholding (or empowerment based on the argument above).
Clause 188.8.131.52 provides that an existing holder that has maintained a minimum of 26% Black Person shareholding will be required to Top Up its Black Person shareholding to a minimum of 30% within twelve months from 15 June 2017, but that he Top Up need not be in proportion to the shareholding distribution contemplated in clause 184.108.40.206 among (a) ESOPs, (b) Mining Communities, and (c) BEE Entrepreneurs – the Top Up must be given proportionately to the holders' existing BEE Partner/s, and if those BEE Partner/s have exited the Historical BEE Transaction, or the contract between the holder and the BEE Partner/s has lapsed, or the BEE Partner/s have transferred the shares to a person other than a Black Person then the Top Up must be to a BEE Entrepreneur. The required Top Up must be achieved by reducing the shareholding of the remaining shareholders who are not Black Persons, in proportion to their respective shareholding in the company.
Where an existing holder has acquired and maintained more than 30% Black Person shareholding, the holder is allowed to maintain its existing BEE structure until such time as the BEE Partner/s exits or on renewal of the relevant right. It seems that, on the exit of the existing BEE Partner/s, or on renewal of the right, then a Top Up must occur as described above.
The concept that empowerment must occur at the level of the right or the company holding the right, has been reconfirmed in MC17.
Clause 220.127.116.11 confirms that Historical BEE Transactions will not be recognised in respect of (a) applications for new prospecting rights or mining rights, or (b) applications for renewal of "such rights" (which suggests that it only applies to renewal of new rights, and not rights that were held prior to 15 June 2017, but that are renewed, after 15 June 2017), or (c) to applications in terms of section 11 of the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA), "affected by such recognition".
The transitional arrangements in clause 2.11 of MC17 apply to "existing holders" only.
Clause 2.11(a) reconfirms that an existing mining right holder has a maximum of twelve months to comply with the revised targets of MC17, calculated from 15 June 2017.
There are two exceptions. The first is that the twelve-month period in relation to the issuing of shares to mine communities and the holding of such shares in a trust created and managed by the Mining Transformation and Development Agency (MTDA) will only commence on a date to be published by the Minister. This is understandable, in view of the fact that the MTDA has not yet been established, and the regulations, giving effect to the establishment and functioning of the MTDA, are yet to be published.
The second exception is in relation to the procurement element, where the transitional period is three years. There is significant uncertainty in the wording of clause 2.11(c), which provides that the holder must within three years from 15 June 2017, submit a three-year plan indicating progressive implementation of the provisions of MC17 insofar as they relate to procurement. It is not clear whether the "three-year plan" must relate to the three-year period calculated from 15 June 2017, or a new three-year period, calculated from 15 June 2020. The provisions of clause 2.11(e) do not assist – this clause provides that compliance with the procurement targets within the "transitional period" shall be as set out in this sub-clause. The "transitional period" appears to refer to the three-year period calculated from 15 June 2017, which would make the "three-year plan" superfluous, unless this also related to the three-year period calculated from 15 June 2017. Clause 2.11(d) provides that the transition period may, on request, be extended by a further two-year period, adding to the uncertainty.
The transitional arrangements must also be read in the context of clause 2.9 (reporting, monitoring and compliance) and clause 2.12 (non-compliance). Clause 2.9 provides that the ownership, mine community development, and human resources development elements are "ring-fenced and require 100% compliance at all times". Clause 2.12 provides that a holder who has not complied with the ownership, mine community development and human resources development elements, and falls between levels 5 and 8 of the scorecard will be regarded as non-compliant with the provisions of the MC17 and in breach of the MPRDA, and will be dealt with in terms of section 93 read in conjunction with sections 47, 98 and 99 of the MPRDA.
Applications for new rights – Ownership
Clause 2.1.1 addresses new prospecting and mining right holders.
Clause 18.104.22.168 provides that a holder of a new prospecting right, ie in relation to a prospecting right that is applied for and is granted after 15 June 2017, the holder must have a minimum of 50% plus one Black Person shareholding – unless this is the case, the prospecting right will not be granted.
Under clause 22.214.171.124 a holder of a new mining right, ie a mining right applied for and granted after 15 June 2017, must have a minimum of 30% Black Person shareholding – without this, the mining right will not be granted.
Under clause 126.96.36.199 the 30% Black Person shareholding (in relation to mining rights) must be distributed as follows (a) a minimum of 8% issued to ESOPs (or any similar employee scheme structure, (b) a minimum of 8% issued to mine communities (in the form of a community trust), and (c) a minimum of 14% issued to BEE Entrepreneurs.
Under clause 188.8.131.52, a Black Person holding shares in any one of the categories above, must ensure, that in the event of transferring the shares, the party to whom the shares are transferred must fall within the same category as the transferring Black Person.
Clause 184.108.40.206, which is particularly poorly drafted, addresses the vesting of shareholding and provides for the full vesting of the shareholding within a ten-year period, and if the full vesting cannot be paid for from the proceeds of dividends received by the Black Person shareholders, the balance owing must be written off by the holder or vendor of the shares.
Clause 220.127.116.11 provides that the holder of a new mining right must pay a minimum of 1% of its annual turnover (not profit) in any given financial year to the Black Person shareholders, prior to and over and above any distributions to the shareholders of the holder.
Clause 18.104.22.168 provides that the BEE Entrepreneurs are allowed to dilute a maximum of 49% shareholding in the holder, provided that 100% of the proceeds from the dilution are used by the BEE Entrepreneurs to develop "another asset".
Clause 22.214.171.124 extends the scope of involvement of the Black Person shareholders to include transportation, trading and marketing of the proportionate share of the production.
Brief summary of MC17
MC17 contains seven elements, namely (a) ownership, (b) procurement, supplier and enterprise development, (c) employment equity, (d) human resources development, (e) mine community development, (f) sustainable development and growth of the mining and minerals industry, and (g) housing and living conditions.
We have addressed key aspects of the ownership element, above. The following aspects are also included under the ownership element:
- Sale of South African mining assets – a holder who sells its mining assets must give Black-owned companies a preferential option to purchase.
- Mineral beneficiation – a holder may offset a maximum of 11% of Black Person ownership by financially investing in and contributing to beneficiation over and above the provisions of section 26 of the MPRDA. Various criteria are set out that must be met by a holder who is claiming the offset, including that the holder must have, since 2004, been investing in beneficiation, and the beneficiation must be ongoing.
Procurement, supplier and enterprise development
- The primary focus under this element is both procurement of South African manufactured goods and sourcing of services from South African based companies.
- A holder (this includes historical holders, subject to the transitional provisions referred to above) is required to identify what goods and services are available within the community where its mining operation takes place and where feasible, must give preference to suppliers within that community. Procurement policies must be reviewed, and amended to adhere to the following criteria:
- In relation 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 goods where at least 60% of the value add during the assembly and/or manufacturing of the product is realised within the borders of South Africa). The 70% spend must be apportioned, namely (a) a minimum of 21% must be sourced from Black-owned companies, (b) a minimum of 5% must be sourced from Black-owned companies with a minimum of 50% plus one vote female Black Person-owned and controlled and/or 50% plus one vote youth-owned and controlled, and (c) a minimum of 44% sourced from BEE-compliant manufacturing companies, ie companies which meet a minimum of level 4 under the DTI Codes, and have 26% Black ownership.
- With regard to services, a minimum of 80% total spend must be sourced from South African-based companies, and the 80% must be apportioned, namely (a) a minimum of 65% must be sourced from Black-owned companies, (b) a minimum of 10% must be sourced from Black-owned companies with a minimum of 50% plus one vote female Black Person-owned and controlled companies, and (c) a minimum of 5% must be sourced from Black-owned companies with a minimum of 50% plus one vote youth-owned and controlled companies.
- With regard to contributions by foreign suppliers, a foreign supplier (a foreign controlled and registered company that does not have at least Level 4 DTI Code BEE status and 25% plus one vote Black ownership) must contribute a minimum of 1% of its annual turnover generated from local mining companies towards the MTDA.
- A holder is required to have a minimum threshold of Black Persons as follows:
- Board – a minimum of 50% Black Persons, 25% of which must be female Black Persons.
- Executive/top management – a minimum of 50% Black Persons at executive director level, 5% of which must be female Black Persons.
- Senior management – a minimum of 60% Black Persons in senior management, 30% of which must be female Black Persons.
- Middle management – a minimum of 75% Black Persons in middle management, 38% of which must be female Black Persons.
- Junior management – a minimum of 88% Black employees in junior management, 44% of which must be female Black Persons.
- Employees with disabilities – a minimum of 3% employees with disabilities as a percentage of all employees.
- Core and critical skills – a minimum of 60% Black Persons represented in the core and critical skills.
- Career progression (aligned with SLP) – development and implementation of a career progression plan.
Human resource development
- A holder must invest 5% of the leviable amount (as per the Skills Development Act) on essential skills development, allocated as set out in clause 2.4(a) to (d) of MC17.
Mine community development
- A holder is required to meaningfully contribute towards the development of the mine community, with a bias towards communities where mining takes place.
Sustainable development and growth of the mining and minerals industry
- Reference is made to the improvement of environmental management, health and safety performance, and research and development spend as per clause 2.6 of MC17.
Housing and living conditions
- Clause 2.7 of MC17 sets out the principles relating to housing and working conditions.