The world’s largest platinum producer, Anglo Platinum, in September last year unveiled three black-empowerment deals to put R35-billion of its assets under the control of black South Africans.
This follows after the mining company faced criticism from government to move faster bringing black players on board, in order to receive its mineral rights conversions.
New legislation introduced in 2004 requires all South African mining companies to convert mining rights held under the previous ‘old order’ laws to ‘new order’ rights. One of the conditions for this conversion is compliance with the Mining Charter, which states that mining companies should have 15% black ownership by 2009, and 26% by 2014.
International auditing, tax and advisory firm KPMG’s director of corporate tax and head of mining tax Andries Myburgh says it is always a challenge when one structures these deals. “The mining companies have to comply with legislation in order to continue operation, but it must also make commercial sense.” He adds that tax can be one of the big costs when it comes to these transactions.
He adds that the parties to these types of transactions should, therefore, give careful consideration to the tax implications attendant on these transactions in order to avoid unnecessary and unintended tax liabilities arising, which would add to the costs of the transaction.
KPMG provides Anglo Plati- num with extensive tax advice and assistance on its transactions. “As a mining client, Anglo Platinum has some mining-tax-specific issues that need careful consideration and attention.” KPMG’s mining tax practice has extensive knowledge and experience not only on the mining tax issues but also on legal and other challenges facing the mining industry.
One of these challenges that mining companies face owing to the mining legislation is that every mining company has to convert its ‘old order’ rights into ‘new order’ rights. In order to comply with the legislation, mining companies have to put ownership structures in place – only then will the Department of Minerals and Energy process the conversion from the ‘old order” rights to the ‘new order’ rights.
One of the debates in the mining industry is whether, from a legal perspective, the holder of old-order mining rights can sell or transfer such rights before conversion thereof into new- order rights. Therefore, where a mining company negotiates a transaction, whether in the form of a black economic-empowerment (BEE) transaction or with a total independent party, entailing the sale of mining operations which include old-order rights, careful consideration should be given in structuring such transactions to ensure that the regulatory and commercial objects of such transactions are achieved.
“Where a sale transaction involves old-order rights, careful consideration should be given to the tax implications, in addition to the regulatory and other commercial issues, to ensure that neither the seller nor the pur- chaser incurs unnecessary and unintended tax consequences. “The transaction should be structured to ensure that the purchaser will be able to carry on mining operations and derives mining income to ensure that it qualifies for the mining capital allowances provided for in the Income Tax Act,” says Myburgh.
KPMG is currently involved in three significant transactions being implemented by Anglo Platinum, including Anglo Platinum selling 50% of the Booysendal project and the 22,4% it owns in Northam Platinum to Mvelaphanda Resources for R4-billion. Mvela Resources, which already owns 50% of Booysendal, will sell Booysendal to Northam in exchange for further shares. This transaction, with its existing 22% holding in Northam shares, will give Mvela Resources a 63% shareholding in Northam after the conclusion of the transaction.
The deal will result in Mvela Resources controlling the fifth-largest platinum-group metals (PGMs) resource base in SA.
The second transaction will see Anglo Platinum sell 51% of the Lebowa Platinum mine, on the north-east of the Bushveld Complex, as well as 1% of the adjacent Ga-Phasha project to TSX- and JSE-listed Anooraq Resources for R3,6-billion. This will make Anooraq a 51% shareholder in both ventures. Anooraq is 65% owned by a BEE group, Pelawan Investments.
The deal will result in Anooraq controlling South Africa’s third-largest PGM resource base.
After selling control of about 214-million ounces of PGM reserves and resources, Anglo Platinum will control about 700- million ounces, maintaining its position as the largest holder of PGM resources in the country.
The third transaction is the employee share ownership plan (Esop) for more than 43 000 Anglo Platinum employees, who will hold 1% of the issued shares. At the current prices, the value of the Esop is about R3,3-billion. The Esop is already in place.
Myburgh says that KPMG, in addition to the mergers and acquisitions and mining-tax-specific knowledge, has a strong knowledge base on issues regard- ing Esops and the tax implications arising from the transactions.
Myburgh adds that KPMG has been involved in several of Anglo Platinum’s joint ventures in the past. “These ventures mainly consisted of unincorporated joint ventures with other BEE parties,” he says.
He explains that these unincor- porated ventures come in various forms, the most common being that companies are just “pooling their assets together”. The main tax issues surrounding unincorporated ventures are capital gains tax issues, the transfer of the mineral rights and income tax issues rising from the mining equipment and assets, and how one uses them together.
Myburgh says that on all the transactions, KPMG works in close partnership with the Anglo Platinum group tax, corporate finance and legal teams as well as the Anglo American teams and Anglo’s external advisers and lawyers.
He concludes that being a consulting practice and having advised on various BEE transactions, merger and acquisition transactions and private equity transactions to companies in various industries, but in particular the mining industry, KPMG has an extensive knowledge base on the typical tax issues arising from these transactions. The KPMG mining tax practice focuses on mergers and acquisitions and BEE transactions, and adds significant value to mining companies in this regard owing to its tax-specific, in particular, mining tax, knowledge.