On 15 June 2017, the Minister of Mineral Resources published the reviewed Mining Charter. In theory, the Charter seeks to address the issue of black economic empowerment within the mining sector. In practice, though, the Charter has already induced panic in the financial markets and is likely to discourage investment, complicate shareholding matters and reduce employment within the mining sector.
This version of the Charter (which explicitly replaces the 2004 and 2010 versions) has been criticised for failing to take into account the concerns of the Chamber of Mines and mining companies.
The Charter reads like a wish-list and is filled with populist, impractical, statements. There is need, particularly in the mining sector, to correct historical injustices, create employment, develop skills, opportunities and wealth for historically disadvantaged South Africans. But is a populist wish-list the way to achieve this or will it discourage these goals? This article draws to your attention key issues on the Charter.
To find out how we can help you navigate your way through the MPRDA and the Charter, please contact Charles Ancer on (011) 328 9373 or
ancer@fluxmans.com.
FIRST THE GOOD NEWS:
The Charter does not have the force of law. The Mineral and Petroleum Resources Development Act, No 28 of 2002 (“
MPRDA”), does not include the term ‘charter’ in its definition of “this Act”. However, the Department of Mineral Resources (“
DMR”) realised this omission and the Charter is specifically included in the updated definition of “this Act” in the Mineral and Petroleum Resources Development Amendment Bill, 15A of 2013. However, the DMR, in practice, treats the Charter as if it has the force of law.
The Charter is unlikely to be implemented in its current form for quite a while. The Chamber of Mines and a number of mining companies have indicated that they intend approaching the courts for relief to prevent the new Charter being implemented in its current form.
The Charter harmonises its definitions with the Broad-based Black Economic Empowerment Act, No 53 of 2003, and now uses the term “Black Person” as a generic term, referring to Africans, Coloureds and Indians.
THEN THE BAD NEWS:
The Charter will, ironically, have the opposite effect of what the Minister purportedly aims for, that is the facilitation of sustainable transformation, growth and development of the mining sector. The Charter places onerous burdens on companies that hold prospecting or mining rights (“
Holders”) and will discourage investment (whether continued or new) and encourage divestment. Unless amended, the Charter is likely to result in a rapid, widespread decline in investment and employment in mining, which is so sorely needed in South Africa.
NOW THE UGLY DETAILS:
These are the details you need to know about the Charter:
- There is an increase in required BEE shareholding to 30% for mining rights and 50%+1 for prospecting rights.
- There is significant interference in the way companies conduct their shareholding affairs, there are pre-emptory requirements for the arrangement and composition of BEE shareholders.
- BEE shareholders are entitled to a minimum 1% of the Holder’s annual turnover, before any profits are contemplated or dividends declared.
- BEE shareholders cannot be diluted below the 30% stake.
- The acquisition debt for a BEE Shareholder’s equity must be paid from dividends within ten years (i.e. 3% a year if the shareholding is 30%) and if there are insufficient dividends to pay the debt, the Holder (or the seller of the shares) must write off the debt.
- Existing structures must now be ‘topped up’.
- The Holder must ensure that BEE shareholders actively control their share of equity interest in the Holder, “including the transportation, as well as trading and marketing of, the proportionate share of the production”.
- A Holder must invest an equivalent of 5% of its total payroll for essential skills development - including a 2% levy to the new Mining Transformation and Development Agency - and a 1% levy to South African Historically Black Academic Institutions.
- A Holder, who intends selling its mining asset, must give Black-Owned Companies a preferential option to purchase.
- The Holder’s board of directors must have a minimum of 50% Black Persons with exercisable rights, 25% of whom must be female.
Holders of prospecting rights must now have a minimum of 50%+1 BEE shareholding and Holders of mining rights a minimum of 30% BEE shareholding. The Charter, quite peculiarly, goes into intricate detail on how the 30% BEE shareholding must be distributed. The BEE shareholding distribution must be held in the following manner:
- a minimum of 8% of the shares must be held by an employee scheme;
- a further 8% must be held by the mine community in the form of a community trust (managed by a new entity called the Mining Transformation and Development Agency); and
- a minimum of 14% of the shares must be issued to “BEE Entrepreneurs”.
Shares held by any Black Person in any of these categories must be transferred to another Black Person in the same category, such that the Black Person shareholding distribution must always be maintained by the Holder.
The Holder must ensure that any dilution by issue of new shares does not reduce the Black Person shareholding distribution.
The portion of the 30% BEE equity shareholding which is not yet vested, must vest in no more than ten years and by no less than 3% annually in proportion to the respective non-vested shareholding of the employees, mine communities and BEE entrepreneurs. Such vesting must be paid for from the proceeds of dividends, provided that if the dividends are insufficient to repay the debt, the balance owing must be written off either by the Holder or the seller of the shares to the Black Person, as the case may be.
Subject only to the solvency and liquidity requirements in the Companies Act the Holder of a mining right must pay a minimum 1% of its annual turnover in any financial year to its BEE shareholders, prior to and over and above any distributions to the shareholders of the Holder.
BEE Entrepreneurs will be allowed to dilute a maximum of 49% of their shareholding in the Holder, provided that the proceeds of such dilution are used by the BEE entrepreneur to “develop another asset”.
Offsetting of ownership against beneficiation, which has been required by certain foreign companies who have been unable or unwilling to dilute their shareholding and which has previously been permissible in certain circumstances, is now limited to 11% of the ownership target if approved by the DMR.
Existing structures are now called Historical BEE Transactions. A Holder is required to top-up its BEE shareholding from its existing level to a minimum 30% within 12 months i.e. by June 2018. Such top-up does not need to be in the BEE shareholding distribution proportion regarding the BEE Entrepreneur/employee schemes/community trusts.
The Charter requires that the top-up must be affected by reducing the remaining shareholders who are not BEE, in proportion to their respective shareholding in the Holder.
The top-up must be given proportionally to the Holder’s existing BEE shareholders, or if such BEE shareholder had exited the BEE Historical Transaction, then the top-up must be given to a BEE Entrepreneur.
The recognition of Historical BEE Transactions does not apply to transactions which did not achieve a minimum of 26% empowerment by 15 June 2017, nor to applications submitted to the DMR as at 15 June 2017 i.e. such applications will most likely have to be amended to take the Charter into account.
The Holder must spend a minimum of 70% of goods procurement on South African Manufactured Goods of which:
- a minimum of 21% must be sourced from Black-Owned Companies;
- a minimum of 5% must be sourced from Black-Owned Companies with a minimum of 50%+1 female Black Person Owned and Controlled and/or 50%+1 Black Youth-Owned and Controlled; and
- a minimum of 44% of mining goods procured must be set aside for sourcing South African Manufactured Goods from BEE Compliant Manufacturing Companies.
The Holder must spend a minimum of 80% of the total spend on services from South African Based Companies of which:
- a minimum of 65% must be sourced from Black-Owned Companies;
- a minimum of 10% must be sourced from Black-Owned Companies with a minimum of 50%+1 Female Black Person-Owned and Controlled Companies;
- a minimum of five must be sourced from Black-Owned Companies with a minimum of 50%+1 Black Youth-Owned and Controlled Companies.
All mineral samples must now be analysed for verification in local laboratories. A Holder may not conduct sample analysis using foreign based facilities or companies without the prior consent of the Minister. Holders must, when submitting annual Charter compliance reports, provide proof of local content for goods and services in the form of certification from the South African Bureau of Standards.
A Foreign Supplier must contribute a minimum of 1% of its annual turnover generated from local mining companies towards the Mining Transformation and Development Agency.
There is a requirement that the board of directors must be a minimum of 50% Black Persons with exercisable rights, 25% of whom must be female.
There are employment equity levels which state that at the executive top management level, 50% of executive directors must be black, 25% of whom must be female Black Persons. In senior management there must be a minimum of 60% Black Persons, of whom 30% must be female Black Persons. In middle management, there must be a minimum of 75% Black Persons of whom 38% must be female Black Persons.
A Holder must invest 5% of its total payroll for essential skills development in the following manner: 2% on artisanal training etc. which must be representative of national and/or provincial demographics and biased towards low level employees; 1% towards South African Historically Black Academic Institutions for research and development and 2% towards the Mining Transformation and Development Agency.
Holders must contribute “meaningfully” towards mine community development in terms of their approved social labour plans.
Where Holders intend to undertake research and development, at least 70% of such research and development must be spent in South Africa and 50% of the 70% must be spent on South African Historically Black Academic Institutions. Holders must report on their level of compliance annually. The ownership, mine community development and human resources development elements are ring-fenced and are required to have 100% compliance at all times. All targets stipulated in the Charter are applicable throughout the duration of the right, unless a specific element specifies otherwise.
The transitional arrangements in the Charter allow for 12 months for ownership to be aligned. The transitional arrangements for procurement element targets is three years and the Holder must, by June 2020, submit a three-year plan indicating progressive implementation of the Charter in respect of procurement. This transitional period can be extended for a further two years, to allow the Holder sufficient time to “develop the 50%+1 vote Black-Owned Company Suppliers”. Within this transitional period, the compliance target for procurement in the first year is set at 15% of the 70%, in the second year 45% of the 70% and in the third year, the target is 70%.
A Holder who has not complied with the ownership, mine community development and human resource development area and falls between level 5 and 8 on the scorecard will be regarded as non-compliant with the Charter and in breach of the MPRDA.
To find out how to navigate your way through the MPRDA and the Charter, please contact Charles Ancer on (011) 328 9373 or ancer@fluxmans.com