CERTAINTY WILL HELP MINING SECTOR TO DO THINGS BETTER
The assurance by Mineral Resources Minister Mosebenzi Zwane at the Mining Indaba that regulatory and policy certainty in the mining sector is a top priority for the Department of Mineral Resources has been welcomed by stakeholders.
They are looking forward to the finalisation of all outstanding mining regulatory and policy pieces, including the passing of the revised Mineral and Petroleum Resources Development Amendment Bill; the coming into force of all provisions relating to environmental management; the repeal of obsolete regulations; and the completion of the process of aligning the Mining Charter with the broad-based black economic empowerment (B-BBEE) codes of good practice. Although regulatory uncertainty is not responsible for the state of the industry, certainty will go a long way towards stabilising it.
Despite the challenging times, the environment is acting as a catalyst for merger activity and unbundling. Several companies are selling their noncore operations to new players, which have different operating requirements and are banking on an upturn in commodity prices in the medium term.
The success of these deals will save some jobs. The recent deal activity also presents the industry with an opportunity to reflect on past deals and consider innovative new ways to create even better empowerment structures.
Many BEE transactions undertaken in the first wave of empowerment deals had a 10-year lock-in for black investors, with most of the acquisition loans finally repayable at the end of the decade. The loans were often based on an assumption of share growth and dividend yields, which did not materialise. As a result, some of these deals are now under water.
The claireearlier transactions were also often undertaken on an assumption that come 2014-16 there would no longer be a need for black ownership and the principle of "once empowered, always empowered" would apply.
In his opening speech at the indaba, Zwane intimated that the requirement of mining companies being 26% held by historically disadvantaged South Africans would continue beyond this year. This is consistent with the department’s approach to the "once empowered, always empowered" notion, which has led to aspects of the principle being challenged in court by the Chamber of Mines.
The locking-in of black investors for protracted periods stops them from realising the capital value of their investments and has given rise to a continuous need to undertake new BEE transactions once the lock-in periods have expired.
The lack of sustainability of some of the earlier deals is leading to a new wave of BEE deals and the restructuring of existing shareholding. Future BEE deals in the mining sector will need innovation to ensure sustainability.
This will require new ideas about how the BEE deals are funded to ensure maximum ownership recognition and no perceived dilution of equity from the funding mechanics. The alignment of the BEE codes of good practice and the Mining Charter should be finalised as soon as possible so that there is clarity on how this ownership element will be measured in future.
This is especially the case if the approach to calculating "net asset value" in the BEE codes is incorporated into the revised Mining Charter. The "net asset value" calculation measures the extent to which acquisition loans have been paid down, as well as the value of the holding compared with the acquisition loans.
This approach has the potential to cause problems for black ownership holdings in the mining sector, especially those that have seen a sharp decline in the share price since acquisition; hence the need to find new ways to keep these deals sustainable.
The mining sector is also seeing the entry of private equity type structures in the black shareholding space. The BEE codes take a fairly generous approach to black private equity when it comes to measuring black ownership. This approach is not formally recognised in the mining context, but with private equity players becoming more interested in the sector, clarity on the manner in which such structures are measured is long overdue.
The possibility of increasing the 26% BEE ownership threshold in the revised Mining Charter cannot be ruled out. There have been political indications that this increase has been contemplated. However, there is likely to be wide consultation on such a proposal.
There have been policy pronouncements by parastatals that in effect require a greater percentage of black ownership.
The coal sector has been particularly affected by this. As a result, there has been a lot of restructuring in this sector recently.
Eskom has communicated that its strategic coal suppliers should be 51% owned by black people. This is not a Mining Charter requirement, but Eskom is emphasising this requirement when contracting with strategic suppliers.
For some time now, there has been talk of the state playing an increasing role in the mining sector in future. More recently, this talk manifested in the publication of the draft bill seeking to establish the African Exploration Mining and Finance Corporation as a stand-alone state-owned company.
This company will own the state’s interests in exploration and mining operations.
The bill focuses on institutional arrangements, and the details regarding the focus areas and day-to-day operations of the company will be set out in the regulations to be published later.
This article first appeared in Business Day on 17 February 2016.