AN INDUSTRY IN FLUX – WILL UNCERTAINTY BRING A CERTAIN END? February 2018

By GIADA MASINA AND NEO TSHIKALANGE, Published in Mining Feature

The exceptional challenges faced by the South African mining industry during 2017 had a major impact on mining-related transactions. It was a year of extreme political turbulence, economic instability and ongoing regulatory and legislative uncertainty. While the well-known complexities became almost contemporary custom for deal makers within the industry, investor sentiment was at an all-time low and many wondered whether the sector, which plays such a pivotal role in the economy, would be able to recover.

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One of the main contributing factors to the regulatory uncertainty was undoubtedly the publishing of the controversial Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry by the Minister of Mineral Resources on 15 June 2017 (Mining Charter III).

Since its release, Mining Charter III has been subject to an array of criticisms, particularly relating to the lack of meaningful consultation by the Department of Mineral Resources with stakeholders regarding its content. Its provisions have been labelled arbitrary and prescriptive, economically impractical and onerous, a hindrance to global trade and investment and mis-aligned with various legislative and policy frameworks applicable to the mining industry. At best, its provisions are unclear and ambiguous and would leave mining companies with little guidance as to how to apply them.

However, the key question is whether or not Mining Charter III is legally valid and enforceable, and that remains to be seen.

The Minister of Mineral Resources insists that Mining Charter III in its current form is a key instrument for radical change required in order to meet the socio-economic needs of the people of South Africa and that the targets it sets are realistic. However, Mining Charter III has also been caught up in allegations of intervention aimed at advancing individual and political agendas, which raises questions regarding the authenticity and viability of the document. Mining Charter III contains a number of controversial provisions. The requirement that mining companies contribute 1% of their turnover to the Mining Transformation and Development Agency to be formed is a clear example of regulatory overreach, and, in the case of foreign companies generating turnover locally, purports to exercise territorial jurisdiction which will likely conflict with many of South Africa's existing international bilateral trade agreements.

This regulatory overreach is also evident in the retrospective application of Mining Charter III to existing mining right holders, particularly if one considers the increase of the black economic (BEE) ownership threshold from 26% to 30% for existing rights holders. These provisions raise legal concerns as they violate the presumption against retrospective application of the law and will be challenged as unconstitutional.

The debate on the "once empowered, always empowered" principle, which contemplates that a mining company can continue to be recognised as compliant with BEE ownership requirements after the exit of an empowerment shareholder also rages on. Mining Charter III was published at a time when the industry was awaiting a declaratory order by the high court to provide guidance on the manner in which compliance with the ownership element should be assessed, and it clearly provides that past empowerment deals will not be recognised.

Mining Charter III sparked urgent legal challenges by the Chamber of Mines regarding the constitutionality and legality of the document. Implementation of its provisions has been suspended pending the outcome of the review application initially due to be heard by the high court in mid-December 2017 but postponed to February 2018.

Then there is also the Mineral and Petroleum Resources Development Amendment Bill [B 15D – 2013] (Bill) which has been subject to legislative processes in South Africa since 2013. The revised version of the Bill, which was passed by the National Assembly in early November 2016 and was referred to the National Council of Provinces for consideration, still contains numerous controversial proposals that may not pass constitutional muster. The application of parliamentary rules regarding the number of changes that were made to the Bill could also raise procedural issues. It is difficult to imagine the Mineral and Petroleum Resources Development Act being amended without an agreed new Mining Charter in place and it seems likely that the Bill, once finalised and enacted, will also become the subject of a lengthy legal battle regarding its validity and enforceability.

Notwithstanding the suspension of the operation of Mining Charter III, the impact of the regulatory uncertainty coupled with the other economic and political complexities associated with mining in South Africa have been blatantly evident. Ratings agencies have been vocal about their downgrades in South Africa's credit status; a number of mining companies have announced plans to implement closure of various mining operations; and job losses are at an unprecedented high. All this has negatively affected merger and acquisition deal flow and value in South Africa. Local and international investors are reluctant to make the large capital commitments required to embark on new development projects and most activity has centred on distressed transactions, with many companies undergoing restructurings.

In order for South Africa to regain its position as a leading mining investment destination on the continent, and for the industry to achieve real sustainable and inclusive transformation, it is imperative that a legislative framework and policies which are clear and consistent with the rule of law be adopted. The ANC National Conference taking place in December 2017 and the Mining Charter III review application due to be heard in February 2018 will certainly prove crucial to the fate of transactions in 2018, and the state of the mining industry as a whole.

Masina is a Director and Tshikalange an Associate, Corporate and Commercial practice, Cliffe Dekker Hofmeyr.

This article was written prior to the Mining Charter III review.

Cliffe Dekker Hofmeyr