For over a century, up until the fall of apartheid, the entirety of South Africa’s mining sector was controlled by a small selection of diversified conglomerates, each governed by a group financing model. New, foreign or specialised participation in the sector was a rarity, as the incumbent mining finance houses held titles and rights over unexploited assets.
When a freely elected African National Congress government took over in 1994, industry restructuring and unbundling became a top priority, and the introduction of a “use it or lose it” principle mandated that dormant assets became the property of the state to license out to new participants. In just 20 years the structure of the industry has transformed dramatically as a result, and in 2014 there are over 40 mining companies listed on the Johannesburg Stock Exchange (JSE), compared with just six two decades earlier.
While mineral ownership has today undoubtedly spread out into more hands, as exemplified by JSE-listed Exxaro and African Rainbow Minerals, which both have majority black ownership and management, a further objective that the government has been looking to address is diversifying ownership representation to better reflect the country’s demographic composition. The Mining Charter, enacted in 2004, prescribes that by 2014 the sector should have achieved 26% black ownership – an industry-sponsored component of the government’s empowerment initiative, known as Broad-Based Black Economic Empowerment (BBBEE, see Economy chapter).
“When making investments anywhere in the world there are always conditions in place that investors need to adapt to. In South Africa there is a particular history that we are looking to redress, and miners need to and should understand this,” Mosa Mabuza, the deputy director-general for Mineral Policy and Promotion at the Department of Mineral Resources, told OBG.
Over the past decade a number of mining companies have sold off the required equity stakes, in some cases at a discount to ensure accessibility, in order to meet government-backed charter deadlines for black ownership. But as there is no mechanism to lock in these deals, if and when an empowerment partner opts to sell off their stake a company may suddenly find itself failing to meet the requisite ownership scorecard. Thus, in order to again fulfil the charter stipulations, it would need to sell off a fresh stake, with the cumulative result being ownership dilution in excess of the originally called for 26%.
As prohibiting black equity owners from relinquishing their stakes goes against the very principles of empowerment, the Chamber of Mines has lobbied for the introduction of a “Once-Empowered, AlwaysEmpowered” evaluation, whereby past deals made will be recognised towards black empowerment credentials.
Another unintended by-product of the Mining Charter was the phenomenon of “fronting”, a term that refers to a situation where a firm might technically comply with the ownership requirements, but the black equity partners are afforded little to no influence or genuine participation in decision making.
Fronting has been a challenge in a number of sectors throughout the economy and recent reforms have sought to reduce the scope for abuse. “Unfortunately, ownership has received the most attention when it comes to transformation, yet it is the least relevant when it comes to impactful transformation, and creates other complications,” Kieran Daly, the head of mining research at Macquarie Group, told OBG. “The only parties to have consistently benefitted have been investment bankers and deal-structurers.”
Who’s Keeping Score
With the charter set to expire in 2014, uncertainty reigns as to whether the legislation will continue, or be enveloped into the Department of Trade and Industry’s BBBEE generic industry codes. The charter focuses on a broad range of transformation metrics beyond ownership, but it is the ownership targets and the evaluation of them that draws the most scrutiny and tends to dominate debate over whether or not true sector transformation is being achieved.
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