Shaun Smit, Transcend Capital

The Mining Charter requires that mining companies have 26% ownership by historically disadvantaged South Africans (HDSAs) by the end of 2014. It also requires that a substantial proportion of procurement by mining companies is from black economic-empowerment (BEE) entities – mining suppliers that have more than 26% HDSA ownership. Non-compliance with the Mining Charter places the granting of mining rights at risk, and pressure in this respect is increasingly cascading down to mining suppliers.

Mining suppliers themselves are not measured in terms of the Mining Charter, but rather their transformation is typically measured in terms of the Department of Trade and Industry’s Codes of Good Practice on Broad-based Black Economic Empowerment (BBBEE).  Mining companies most often report under these codes in addition to the Mining Charter.  Further pressure regarding HDSA ownership is building as revisions to the codes become effective in April 2015, where the revised codes include sub-minimum targets that can only be achieved if HDSA ownership is in place. The revised codes also include sub-minimum targets regarding enterprise and supplier development, where the focus is on supporting businesses with majority ownership by HDSAs.  Not achieving any of the sub-minimum targets will make it impossible to achieve a respectable BBBEE status. 

HDSA ownership is clearly business critical across the industry and it is imperative that it is at the top of the agenda for any board.

Elaborating on the Mining Charter’s 26% HDSA ownership requirement for mining companies, the charter refers to ‘effective ownership’ and ‘meaningful economic participation’. The former is defined as ‘meaningful participation of HDSAs in ownership, voting rights, economic interest and management control’.

The latter encompasses, among other things, the following key elements:
• BEE transactions include identifiable beneficiaries that include entrepreneurs, workers and communities;
• The financing of transactions should be structured to enable some cash flow to beneficiaries throughout the term of the investment, barring unfavourable market conditions;
• BEE investors have full shareholder voting rights; and
• Vesting of ownership occurs within agreed timeframes, taking market conditions into account.

In terms of historical BEE transactions in the industry, particularly those of the major mining houses, BEE investment consortiums typically include a combination of strategic investors and broad-based ownership vehicles including employee ownership (Esops) and/or community trusts.

An important Mining Charter provision for mining companies which beneficiate extracted minerals is that the value of beneficiation activities is permitted to be offset against HDSA ownership requirements, up to a maximum of 11%.

Taking all of the above into account, the question that is most likely top of mind is how then to implement HDSA ownership in a way that achieves compliance with relevant BEE legislation, and makes business sense. Misconceptions exist about the options available to businesses, and in many cases there is a history of failed prior partnerships that leave stakeholders apprehensive and pessimistic about finding optimal ownership solutions. The good news is that it is possible to implement a transaction that can achieve the above goals. 

The first critical aspect in implementing a transaction is ‘who?’ – finding the right partner(s). An ideal ownership structure for any company includes an element of strategic and/or operational investors together with broad-based ownership.  Importantly, the flexibility must exist to improve the structure as and when desired. In terms of strategic and operational investors it is important to critically assess possible partners across various competencies to ensure that there is a strategic and cultural fit, so as to improve the likelihood of a long and happy ‘marriage’. In terms of broad-based ownership, Esops have a mixed history of success, but this is primarily due to the way they have been structured and the underlying in-built volatility of potential outcomes. Employee ownership provides an opportunity to forge a closer relationship with employees and strengthen labour relations. The caveat is that management of employee expectations from the outset is vital, with negative implications if this is not done. For mining companies, community trusts often conceptually make a lot of sense; however in practice successful implementation can prove challenging. Another attractive broad-based ownership alternative is for strategic alignment with other players in the value chain – an example being alignment of mining supplier initiatives with those of major customers.

The second critical aspect in implementing a transaction is ‘how?’ - optimal transaction structuring.  There has been significant movement beyond the vanilla transactions of old, and innovative structures are frequently implemented. The importance is to structure your transaction to be robust, flexible and sustainable, while optimising tax and accounting consequences, as well as taking the revised BBBEE codes’ sub-minimum net value targets into account.

Embarking on an HDSA ownership voyage may appear daunting, but with a clear understanding of the available options, finding a value-adding and sustainable solution that achieves meaningful transformation is certainly possible.

Shaun Smit is a director at Transcend Capital, a corporate finance advisory firm specialising in BEE transactions.