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Mining Charter 3.2:

policy certainty likely to boost investment

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Christiaan Bothma

Member of SPW Investment Team

South Africa’s controversial mining charter is being given top priority by new Mineral Resources Minister Gwede Mantashe, who has promised to finalise the reviewed charter in the next few months. We believe that while more stringent transformation requirements are likely, the negative impact could be outweighed by greater policy certainty, which may well incentivise fresh investment in the beleaguered mining sector.

The much-maligned third version of the mining charter (Mining Charter 3) was published in June last year. It was universally condemned by the industry, its critics arguing that in its current form, it would discourage any new mining investment in South Africa and pose a serious threat to the sustainability of existing investments (see our previous article on the subject here). The Chamber of Mines responded by taking the Department of Mineral Resources (DMR) to court in order to challenge the charter’s implementation.

RECENT DEVELOPMENTS

The election of Cyril Ramaphosa as South Africa’s new president, and the subsequent replacement of Mineral Resources Minister Mosebenzi Zwane by Gwede Mantashe, resulted in greater optimism across the industry. The chamber postponed the court hearing – scheduled for 18 February – in favour of negotiating with government.

The chamber also welcomed the appointment of the new minister, stating that Mantashe is ‘a man of integrity and dignity, who brings with him a sound and fundamental knowledge of the industry he will lead and enable’.

The organisation did, however, recognise that Mantashe is a tough negotiator who won’t be easily manipulated – an assessment certainly vindicated after the first meeting between the various stakeholders last month. In the face of strong opposition, the minister announced that the controversial third charter would not be scrapped – in fact, it would form the basis of negotiations for a new charter.

On a positive note, he did, however, emphasise that as a key component of the economy, the mining industry needs to contribute to economic growth – which is unlikely in the absence of greater policy certainty. At the same time, the minister stressed that the industry must meet its commitment to social and labour reforms. Both the chamber and the DMR described the meetings as robust and open, which is certainly an improvement on the experience under the previous regime.

The meeting concluded with the establishment of two task teams, one to focus on transformation and the mining charter, and the other on growth and competitiveness issues. It’s encouraging to note that the chamber has been invited to participate in both task teams.

In addition, the Mining Industry Growth Development and Employment Task Team (MIGDETT), set up in 2008 to help the industry counteract the effects of the financial crisis, is to be revived. The purpose of the MIGDETT is to encourage regular engagement between the various stakeholders within the sector, instead of waiting for a crisis to bring the industry together.

INVESTMENT IMPLICATIONS

As we noted in our previous article, should Mining Charter 3 be implemented in its current format, it will undoubtedly have negative consequences for the industry. Most notably, the ‘once empowered, always empowered’ principle won’t hold – companies will be required to initiate and finance new black ownership deals on a repeated basis in order to remain B-BBEE compliant. This dilutes value for equity shareholders, and therefore the value of our investments.

However, it does appear that Mantashe is committed to creating policy certainty in order to incentivise new investment in the industry. The creation of an environment in which investors know the transformation requirements and are given more certainty that these won’t change in the foreseeable future, will provide a massive boost for the sector. This will probably hold true even if transformation requirements are increased.

The companies in our portfolio most affected by the outcome of this process are Anglo American (through its holdings in Kumba Iron Ore and Anglo Platinum), Impala Platinum, and Sasol. BHP Billiton isn’t impacted as it has no operations in South Africa subsequent to the South32 divestment.

We believe there’s a strong chance of more stringent transformation requirements for companies in the mining sector, which will come at a cost to equity shareholders. If the trade-off for this is greater policy certainty, however, we’re of the view that the net effect will probably be more positive for the industry in the long term.

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