The draft Mining Charter Three, which was unexpectedly published in April without any stakeholder engagement, “is completely unworkable in its current form”, says law firm Herbert Smith Freehills director Patrick Leyden, adding that buy-in from the relevant stakeholders is critical for the successful implementation of the charter’s requirements.

Although the current draft is intended to provide policy and regulatory certainty in South Africa’s mining industry to ensure investment in its development, Leyden averred at a conference in Johannesburg last month that publishing the draft charter without stakeholder input had the opposite effect.

He added that, until all stakeholders were able to reach agreement on the terms of the previous charter’s ownership requirements, it would be unlikely that they would agree to the conditions of a new charter.

The draft charter was opened for a 30-day public comment period after it was published. The Department of Mineral Resources (DMR) told Mining Weekly in June that it was still processing the submissions it received during this period.

“The published version of the charter is a proposal to the public and intended to initiate a process of robust engagement with stakeholders to shape the final charter, which will be gazetted,” it said in an email, but no date was provided as to when this would take place.

Law firm Webber Wentzel corporate practice partner Jonathan Veeran posited during a mining seminar hosted by the firm in Johannesburg last month that the increased compliance targets were “a strategic political move to throw the absolute worst-case scenario at the industry” and that the outcome of negotiations between the DMR and the Chamber of Mines (CoM) would be a beneficial compromise.

While the South African mining industry awaits further developments concerning the draft of Mining Charter Three, the ownership, procurement and employment equity targets for the next iteration of the charter will, without a doubt, be more onerous for mining companies.

OWNERSHIP
Veeran noted that Mining Charter Three’s clarification around the 26% ownership requirement, which had been interpreted by the CoM under the ‘once empowered, always empowered’ principle, was a “move by government to display that it still maintains the policy and regulatory mandate to legislate” the matter.

According to the DMR, a significant number of mining companies did not comply with the ownership requirements of Mining Charter Two, following the compliance deadline of the end of 2014.

In a statement to Mining Weekly, the CoM stated that all its members had met the 26% requirement and had exceeded it in some cases.

The chamber said that, on average, there was a 38% empowerment level for mining companies operating in South Africa.

“Since 2000 and as at 2014, the value of empowerment transactions amounted to R205-billion in 2014 money terms, while the value of meaningful economic value transfer amounted to R159-billion,” it explained.

Under Mining Charter Two, the 26% ownership target was aimed at historically disadvantaged South Africans (HDSAs) and, while the target remains the same, Mining Charter Three has omitted the HDSA definition and replaced it with the term ‘black people’.

Leyden noted that the change in terminology was likely an attempt to align the draft charter to the Department of Trade and Industry’s Broad-Based Black Economic-Empowerment Codes of Good Practice, which refers to black people, not HDSAs.

Meanwhile, Leyden and Veeran pointed out that, under Mining Charter Two, which was gazetted in 2010, the 26% ownership requirement extended only to a mining company, whereas the current draft charter extended the ownership requirement to each mining right held by a mining company.

Leyden explained that this would mean a mining company holding several mining rights would need a 26% black ownership stake for each of the mining tenements for which it had secured licences. “Now, each mining right must be empowered.”

However, Veeran pointed out that, under the ownership compliance requirements of the current draft charter, black economic- empowerment (BEE) transactions would also need to be consolidated. He said this was contradictory, owing to the requirement that each mining right would have to be empowered and could result in a contravention of Section 1C of the Constitution, which states that laws must be clear and unambiguous to enable interested and affected parties to comply.

Leyden pointed out that the draft charter also stipulated that the structure of the 26% black shareholding must comprise black entrepreneurs, employees and mining communities, with each being afforded a stake of at least 5%.

“A black economic shareholding is [now] valid only if it consists of all three of these designations. The unintended consequence of this is that a company wholly owned by black entrepreneurs might not comply if the entrepreneurs do not have a worker and community shareholding,” he added, noting that this matter required further clarification.

The current draft charter states that shareholdings of employees and mining communities should be held in a trust or a special-purpose vehicle.

In its current form, the Mining Charter will also have to be applied retrospectively to all BEE transactions concluded before it is gazetted.

“In effect, the DMR has stipulated in the charter that mining companies would have to unwind all their BEE transactions to comply with the new structural requirements imposed by the draft charter,” explained Veeran.

Leyden stated that mining houses would incur up to 30% of the financing costs if they had to renegotiate BEE transactions, particularly since community and employee trusts did not necessarily have the capital to buy shares directly and would have to apply for loans from banks or mining companies.

In addition, the draft charter contains clauses stating that trade unions and traditional authorities must be directly involved in BEE transactions concerning employees and communities. Veeran noted that there were no specific details of what this requirement entailed.

Although the previous charter required meaningful participation from HDSAs and the current charter meaningful participation from black people, there was a caveat under Mining Charter Two, which stated that market conditions should be assessed when allocating dividends, a requirement removed from the current draft.

Veeran explained that mining houses would, subsequently, have to ensure a trickle dividend was paid to black shareholders irrespective of market conditions and that shareholders could leverage their investment in a mining operation.

PROCUREMENT
Under the previous Mining Charter, a mining company was required to buy 40% of its capital goods from local companies. However, the draft has increased this to 60%, which must be acquired from a BEE-compliant manufacturer.

Further, 30% of the 60% requirement will have to be allocated to local small businesses.

Veeran and Leyden said this target may be too high, as they are doubtful of local businesses’ capacity to manufacture specialised mining equipment.

Further, 70% of consumables and 80% of services will also have to be acquired from BEE-compliant companies to meet the new draft charter’s requirements.

The draft charter also states that mining companies must support small businesses, which Veeran thought would be possible for the consumables and services aspects, “provided there is some sort of [enterprise] development process in place”.

EMPLOYMENT EQUITY
Employment equity requirements in the current draft charter are also more stringent, with executive management or board members having to comprise 50% black people, up from 40% in the 2010 charter.

Requirements for senior, middle and lower management positions have also been increased to 60%, 75% and 88% respectively.

Further, the percentages of black women in these positions have also been increased significantly. Leyden pointed out that these percentages were, in most cases, half of the equity requirements of a particular category.