Crucial decision needed on empowerment levels

ALLAN REID Aligning the Mining Charter with the Department of Trade and Industry codes will be challenging, regardless of the Department of Mineral Resources' 12-month extension

29th January 2016

By: Nadine James

Features Deputy Editor


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An urgent court judgment needs to be made to determine the empowerment levels in South Africa’s mining industry, as this will, most likely, impact on the future alignment between the Department of Trade and Industry (DTI) codes and the Mining Charter, stresses Cliffe Dekker Hofmeyr director of corporate and commercial law Allan Reid.

The Department of Mineral Resources’ (DMR’s) ten-year review of Mining Charter compliance from 2004 to 2014 caused heated debate among industry stakeholders, specifically regarding the assessment of black ownership in mining companies. The results released on March 31, 2015, reported an average of 20% black ownership, which fell short of the charter’s stipulation of 26% by 2014 and contradicted the Chamber of Mines’ (CoM’s) finding of 38%.

Reid thinks the actual industry empowerment levels are somewhere between these two figures and says the huge discrepancy is either because of the application, or the lack thereof, of the ‘once empowered always empowered’ principle.

The principle refers to the notion that a company, having entered into a black economic- empowerment (BEE) partnership, can still claim empowerment status, even if the black shareholders have since sold their shares.

The CoM approached the High Court in June 2015 for a declaratory order to provide guidance on the principles applicable to the assessment of the ownership element in the Mining Charter.

Initially, the DMR and CoM were to jointly approach the court. “However . . . the DMR has filed its answering affidavits to the chamber’s application and the chamber has exercised its right of reply. Little is being said by either of the parties with regard to progressing the application, but we understand that the matter will be heard in March,” elaborates Reid.

He believes that the DMR’s assessment is flawed, explaining that many mining companies concluded BEE deals years ago, often at considerable cost to companies and shareholders.

“In terms of these transactions, shares were allotted to BEE entities, subject to various periods of lock-in, during which the shares could not be sold. “Since these periods have expired, those BEE entities have divested themselves of the shares and have benefited from the proceeds of the divestment, leaving the mining company without a current BEE partner.”

Further, Reid notes that if such a company were now required to regain a 26% BEE ownership level, it would be compelled to do another BEE transaction at, or below, market value, further diluting company and shareholder value.

“So, every seven or ten years, depending on the lock-in period, shareholders and investors would have to fund a new BEE transaction . . . for the company to maintain its mining rights.”

However, Reid does stress that the ‘once empowered, always empowered’ principle is not in line with the new DTI codes and, even if the CoM is successful in its court application, aligning the Mining Charter and the DTI codes “is going to be challenging”.

Small Reprieve Trade and Industry Minister Dr Rob Davies announced the DMR’s 12-month exemption on October 30, 2015, to enable stakeholders to align the Mining Charter with the DTI codes.

Section 3(2) of the Broad-Based Black Economic Empowerment (BBBEE) Act came into effect on October 24, 2015, and “this so-called ‘trumping provision’ provides for the supremacy of this Act over all other legislation in the event of any conflict with regard to BEE”, explains Reid.

Further, Section 10 of the Act requires all governmental bodies to apply the DTI codes or other recognised BEE codes when procuring goods or services or issuing licences or other authorisations under any other laws.

“The provisions of sections 3(2) and 10(1)(a) indicate that the DMR may have been obliged, were it not for the moratorium, to apply the provisions of the BBBEE Act and the DTI codes when issuing rights, permissions or permits in terms of the Mineral and Petroleum Resources Development Act. This may have placed the mining industry at a disadvantage and would have created huge uncertainty.

“It is important to note that there are alternative and compelling interpretations that suggest that, even in the absence of Minister Davies’ exemption, mining companies would not be subject to evaluation, based on the Codes of Good Practice, when applying for mining and prospecting rights,” Reid adds.

He says, while the target for black ownership under the DTI codes is the same as that of the Mining Charter (26%), the remaining elements of the DTI codes, in terms of how BEE compliance is measured, are substantially different from those set out in the Mining Charter.

The charter contains a unique potential offset against the ownership target for the value of a mining company’s beneficiation to a maximum of 11%. In addition, under the DTI codes, the extent of BEE compliance is determined with reference to an entity’s overall score and corresponding BEE compliance level. The charter’s scorecard does not contain the same method.

“Certain elements are not applicable to the general DTI codes, specifically those of beneficiation, mine community development and housing, and living conditions,” Reid says.

He believes that the moratorium will allow for the negotiation of meaningful changes to the Mining Charter and that the changes should be in line with industry practice and industry-specific challenges, and take the current parlous state of mining in South Africa into account.

Edited by Tracy Hancock
Creamer Media Contributing Editor



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