WILL THE NEW BROOM SWEEP CLEAN? February 2018

By RITA SPALDING AND JONATHAN VEERAN, Published in Mining Feature

When Roman historian Suetonius described Emperor Nero as "fiddling while Rome burns" he could well have been referring to the Zuma regime, whose political legerdemain over the last decade has resulted in the erosion of trust among government, business and labour.

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During 2017, a few high-profile moves succeeded in widen- ing the trust deficit in the mining sector, with the Department of Mineral Resources (DMR) and Zuma protégé, Mosabenzi Zwane, in one corner, and industry and stakeholders in the other. First, the tragic saga of the Mineral and Petroleum Resources Development Amendment Act, 2013, (the Amendment Act) which has been held up in parliamentary processes for more than four years and, more recently, the publication of the controversial Mining Charter 3, in June 2017.

Viewed cumulatively, the publication of the Amendment Act and the imposition of the Mining Charter 3 have and will continue to result in international and domestic investors looking elsewhere for regulatory certainty and better returns on investment owing to a lower cost of compliance. These instruments increase the ownership targets for historically dis- advantaged individuals to 30%; create more onerous ownership requirements for suppliers to the industry; result in a compulsory local beneficiation and also demand that research and development be focused locally, ideally at previ ously disadvantaged universities.

The goals behind these moves are, make no mistake, laudable. But imposing regulation for such issues and expecting homogenous growth is both impractical and unrealistic. This is likely to discourage investment in the Mining Sector at a time when market conditions, restructuring exercises and commercial sense has resulted in a number of well-priced assets coming into focus. An example of this is Sibanye Stillwater's acquisition of Lonmin plc which would potentially grant the fledgling platinum producer its very own smelting capacity.

While the Mining Charter and the MPRDA are the core document for transformation in the industry, their respective goals cannot be achieved without the full buy-in of industry. The mining sector's major gripe is lack of trust between government and business. If there is a lacklustre consultation process with key stakeholders, it be-comes impossible to implement changes in a commercially viable fashion. Little thought has been given to how the policy can be practically implemented or the pressure it might bring to bear on a sector which has seen mass retrenchments and has yet to recover from the recent global commodity downturn.

The best solution to overcome this impasse would be to sit down, formally agree on the vision and then approach the practicalities of how this can be achieved. We've just seen an ANC Elective Conference. Post the conference, the newly installed ANC President, Cyril Ramaphosa, expressed opposition to the implementation of the Charter. If this statement is genuine, and not mere politicking, then there is cause for hope.

Ramaphosa's sentiments, coupled with a commitment to a more efficient and less corrupt administration, will result in great interest and more investment in a country which is often said to be blessed with the greatest endowment of natural resources in the world.

The reality is that if the grant of new licences is delayed, if miners can't get consent to do transactions – be it a transfer of a share or a right – that is hugely problematic. Financiers certainly aren't going to wait forever for the DMR to give clarity, and if you can't get new rights you can't explore, can't mine and can't create jobs. Unfortunately, it will be the poorest of the poor who suffer the most.

South Africa is not the only country in the world with minerals and many investors are already opting to rather invest in other countries in Africa, like Botswana, Mozambique, Namibia, Zambia and, more recently, Zimbabwe. While historically we have been welcoming, compliance is become increasingly onerous, expensive and tangled.

Certainly the mining industry is heavily associated with the errors of the past and continues to be penalised far more aggressively than other sectors, without recognising the value it brings to the economy. That said, it is imperative to appreciate how the legacy of apartheid continues to impact the mining sector today. It is perhaps the industry's biggest stumbling block. But, as re- cent fiascos have shown, addressing the imbalances of the past cannot be achieved without getting over historical divisions.

Much of this failure to communicate hinges on a fundamental lack of understanding of how the industry works. Take, for example, the Charter's introduction of a problematic 1% of annual turnover payment to BEE shareholders in the Mining Charter. This payout is based on turnover, not profits, may not be used to settle debt and would have to be paid before dividends. Thus, a mining company could find itself in a position where it is obliged, under the Mining Charter, to pay out large sums of cash regardless of whether or not such a payment is commercially viable. Again the objective behind this move is admirable and is designed to get money flowing into the hands of BEE shareholders now, not tomorrow or in a decade's time. This is indeed in the spirit of transformation but basing it on turnover is yet another example of a failure to understand the financial inner workings of mining companies.

Similarly, the proposal that a Mine Development and Transformation Agency, run under the auspices of government but funded by the industry as part of a new levy, creates more questions than answers. With respect, this is a patriarchal and patronising move, which assumes that communities cannot manage their own affairs. Furthermore, it would give a single agency a say on every single mining company, which opens up competition law issues, confidentiality issues, and concerns around how the agency would be staffed.

If you want to increase black ownership in the mining industry then lock- ing black shareholders into these trusts is not the way to go. This prevents the flow of assets and forces black shareholders to sell to a closed pool. If the point of transformation is to put money into the hands of black citizens, then this approach offers no flexibility.

Again, this highlights the tensions between realities on the ground and policy. In developing policy in South Africa we often forgo proper economic analysis. We don't assess what markets can withstand and what investors are looking for. We devise policy in a vacuum, divorced from the work being carried out in other government departments and in ignorance of the real- world pressures on the economy and business.

Right now the industry is poised on a knife's edge. So much depends on what government and the newly installed ANC management team do in the weeks and months ahead. Right now is the time for level heads, not posturing. It is vital that all stakeholders appreciate that the country faces a far more daunting future without a healthy mining industry. Labour has to appreciate the impact of very real cost constraints. Mining companies must accept that there is a historical cost of doing business in South Africa; yes, it is expensive and BEE compliance is essential. Government too needs to play ball, not politics.

Spalding and Veeran are Partners with Webber Wentzel.

Webber Wentzel