The full impact of South Africa’s “Covid-19 induced hibernation” will only fully emerge in the months and years to come, law firm Hogan Lovells Asia-Africa practice group head Wessel Badenhorst says.

Considering that, by the same token, businesses and employees alike are metaphorically fighting for economic survival, Badenhorst notes that the economy and businesses in the country will have to restructure in the months to come as they absorb the blow from the pandemic, with the negative impact being that, in some cases, it may be too much to absorb.

Taking this into account, with predictions that many businesses will be liquidated, Badenhorst says “this is not a viable option” for mines, as mining rights revert to the State upon the final liquidation of the company holding the right, thereby removing the right to access and exploit the minerals.

Not only that, the South African mining industry is a significant contributor to the country’s gross domestic product (GDP) and is a substantial employer. As a net exporter of minerals, the mining industry is also a source of foreign currency, putting healthy pressure on the exchange rate.

However, Badenhorst laments that the lockdown “has hit the industry hard”, considering that most mines had to stop production or greatly scale down operations. 

In addition, although the rand is at a record low to the world currencies, mines cannot capitalise on higher rand profits as commodity prices have sunk to new depths, he notes.

Instead of liquidation, Badenhorst suggests business rescue as an option, considering that business rescue has, as its fundamental aim, the preservation of the business in a revised form.

“It creates a moratorium on creditors claiming payment and puts the restructuring in the hands of an expert. But it takes time and great expense to restructure a mine, during which all statutory and regulatory compliance must be maintained,” he explains, noting that even a small mining operation put out of production during its business rescue may spend several million rand a month on care and maintenance.

As such, he advises that when restructuring businesses, “it is best to do it as early as possible when more options are still available”. 

He implores boards of directors to not delay in looking at their financial positions, as Section 129(1) of the Companies Act requires them to continuously determine whether they can pay their debts in the ensuing six months, failing which, this triggers financial distress and obligations on directors to act. 

“One cannot underestimate the negative impact of Covid-19 on businesses and a failure to continuously assess financial distress could be reckless.”

In elaborating on why mines may want to restructure, Badenhorst explains that “mines are capital-hungry businesses with massive overheads”. 

Restructuring, he adds, may be required because of an inability to access capital, leading to solvency issues, or because there is a lack of liquidity. Restructuring may take many forms, and at one level, it may require the renegotiation of funding covenants.

However, at a more operational level, it may mean the rightsizing of overheads, a reduction in employment or the mothballing of unprofitable operations. At a strategic level, mines may want to merge in order to capitalise on economies of scale, centralise services, pool mineral resources or access beneficiation plants.

“It is at this level where the Department of Mineral Resources and Energy (DMRE) and other governmental agencies may come in to assist by throwing a regulatory lifeline to ailing mines.”

Some of Badenhorst’s suggestions in this respect include that a financier may need to take security over the mining right by way of a mortgage bond. However, he notes that, according to Section 11 of the Mineral and Petroleum Resources Development Act (MPRDA), the Act requires Ministerial consent before passing a mortgage bond over a mining right, except in cases where the financier is a South African bank.

“One solution could be to suspend the requirement for Ministerial consent for the time being to allow for the recapitalisation of mines.”

He further notes that neither mergers and acquisitions, nor a change in the controlling shareholding of the mining company, can happen without Ministerial consent. These Section 11 applications can take anything from 7 to 24 months to approve (some exceptions notwithstanding).

“The DMRE could set up a specialist team to expedite Section 11 consents and their subsequent registration in the Mining Titles Office, where they are precipitated by the post-Covid-19 impact.”

According to Badenhorst, this will ensure that consents can be obtained in a matter of weeks, rather than months.

Additionally, considering that some regulatory compliance that is disproportionately financially onerous during a period of financial distress could also be suspended or deferred.

For example, social and labour plan spend could be deferred, certain health and safety appointments could be allowed to be shared between mines to reduce costs, and ongoing environmental rehabilitation could be deferred.

“There is precedent for this,” Badenhorst says, “we have seen how quickly our government can act in response to the pandemic”.

He adds that other countries have already implemented and proposed similar regulatory holidays to combat the annihilation of their economies.

As such, “it goes without saying” that to achieve a more streamlined restructure of the mining industry, while at the same time aiming to preserve it, requires the urgent creative and collaborative efforts of government, industry and labour.