Is the African mining and natural resources sector becoming uninvestable?

Warren Beech , Global Head, Mining Subsector, Hogan Lovells, Johannesburg & Jessica Black Livingston, Deputy, Mining Subsector, Hogan Lovells, Denver.

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At the recent Africa Forum hosted by Hogan Lovells, in London, a number of common, positive themes came through: Africa is a continent of endless possibilities and opportunities; Africa has significant natural and human resources which can be unlocked for the benefit of all Africans; and the investability of many African countries has improved, for various reasons, including mature banking, finance and legal institutions, investment-friendly policies and regulatory frameworks, and national development plans which demonstrate governmental support for sustainable infrastructure and development.

Why then, within the context of a mostly positive view of investment in Africa, is the question posed whether the African Mining and Natural Resources Sector, is becoming uninvestable? 

Firstly, positive views of investment in Africa don’t always extend to the Mining and Naturals Resources Sector. While it is often acknowledged by stakeholders that the mining and natural resources of a country can contribute meaningfully to growth, development and transformation, there is a growing questioning of the impact of mining on aspects such as the environment, host communities, social structures, tourism, and industries such as agriculture, versus the benefits that often flow from mining and beneficiation operations. As the voices of concern increase and develop, the benefits that flow from mining and beneficiation operations are likely to be questioned, even further. 

Secondly, the recent mining policy and regulatory changes in Tanzania and South Africa have brought into sharp focus the fragility of investment decisions relating to so-called "frontier markets", such as Tanzania, and emerging markets, such as South Africa.

With a decrease in the number of investable frontier markets (equity and bond markets which are typically smaller than emerging markets and where there is less liquidity) and investment instability in emerging markets, such as South Africa, the recent events in these two countries are more concerning.

Tanzanian President John Magufuli signed into law the Natural Wealth and Resources Bill 2017, and the Natural Wealth and Resources Contracts Bill, 2017, on 3 July 2017. These laws, which were fast-tracked though the Tanzanian Parliament, in a matter of weeks, have far-reaching consequences for foreign companies with investments in Tanzania. Tanzania is one of Africa's largest gold producers (depending on the figures used, Tanzania is either the third or fourth largest gold producer in Africa). 

There has been extensive investment in Tanzania's gold mining industry, with a large percentage of the investment, focused on prospecting operations, which are of course critical in the creation of a pipeline that can be converted into mines, in the future. Many of these investors are listed in Australia, and the Australian Stock Exchange took the drastic step of suspending trading of various junior mining companies, following the announcement of the enactment of the laws, by President Magufuli. The uncertainties flowing from the new laws are likely to impact on these junior mining companies, who are focused on exploration, quite dramatically and it will make capital raising exercises, extremely difficult, if not impossible – where ownership of mining assets in a company are put at risk, this is likely to scare off would-be investors, and make existing investors exercise extreme caution. 

Key changes brought about by the new legislation in Tanzania include the following:

  • The Tanzanian government is given the right to re-negotiate or dissolve current mining contracts with multi-national companies; 
  • The State will be required to own at least 16 percent of mining projects;
  • Export royalties have been increased;
  • The Tanzanian government can reject a mining company's valuation where the government believes that the transfer price is too low, and the Tanzanian government is entitled to purchase the consignment of the minerals, at the price declared by the mining company;
  • The right to international arbitration is removed.
  • The Tanzanian government is also pushing for compulsory listing of mining companies on the Dar es Salaam Stock Exchange, with the complexities that this will bring, particularly because of the potentially small pool of investors who can take up the public offerings. 

While multi-national mining companies with investments in Tanzania continue to engage with the Tanzanian government, some of the multi-national companies have declared disputes with the Tanzanian government and are referring these disputes to arbitration. None of this is good for the Tanzanian mining sector. 

On 15 June 2017 the South African Minister of Minerals, Mosebenzi Zwane published the "Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016", ("Mining Charter 3").

The response was immediate, dramatic, and far reaching. It is estimated that mining stocks lost approximately R50 billion in value, following the announcement, with the rand losing ground, and the Chamber of Mines, the body that represents the majority of the mining companies, launching legal proceedings against Minister Zwane. The grounds of challenge go to the heart of the Minister's powers and functions under the mining legislation and the Constitutionality of Mining Charter 3.

While Minister Zwane has labelled the legal challenge as being anti-transformation, the Chamber of Mines and other bodies representing mining interests have consistently expressed the position that the industry is committed to transformation, that the industry has demonstrated its commitment, through the implementation of appropriate programmes of transformation including in respect of the host communities through the social and labour plans which are a requirement under the Mining Laws, but that the targets in the Mining Charter must be achievable, sustainable, and the timeframe should take into account the reality that the mining industry finds itself in, with the spector of significant, further job losses in the near future (while figures vary, the suggestion is that in excess of 80 000 direct jobs have been lost, in the industry, over the last three to five years. Various South African mining companies have recently announced proposals for further job losses, which may exceed 20 000 direct jobs).

Mining Charter 3 made significant amendments to the transformation requirements under the previous versions of the Mining Charter. Key changes include the following:

  • Holders of new prospecting rights must have a minimum of 50 percent plus 1 Black person shareholding;
  • A holder of a new mining right must have a minimum of 30 percent Black person shareholding (up from the previous 26 percent);
  • The 30% Black person shareholding in new mining rights must be distributed amongst three beneficiaries, namely a minimum of 8% for employee share ownership plans, a minimum of 8% for mine communities to be held in a community trust, and a minimum of 14% to Black Economic Empowerment Entrepreneurs;
  • For employee share ownership plans, a minimum of 8% for mine communities to be held in a community trust, and a minimum of 14% to Black Economic Empowerment Entrepreneurs; 
  • A holder of a new mining right must pay a minimum of 1% of its annual turnover in any given financial year to the Black Person shareholders prior  to, and over and above, any distributions to the shareholders of the holder;
  • While there is limited recognition of the "once empowered, always empowered" principle, unless the Historical Black Economic Empowerment Transaction achieved 26% Black shareholding or more, the historical transaction is not recognised; 
  • Where a Historical Black Economic Empowerment Transaction is recognised, the holder is required to top up the Black person shareholding from the existing level to a minimum of 30% Black person shareholding within twelve months;
  • Even where a holder of a mining right maintained a minimum of 26 percent Black person shareholding as at 15 June 2017, the holder is required to top up its Black person shareholding to a minimum of 30 percent within twelve months from the date of publication of Mining Charter 3;
  • Minimum requirements are specified in relation to procurement, supplier and enterprise development. A holder is required to spend a minimum of 70 percent of total mining goods procurement spend on South African Manufactured Goods, with the 70 percent, being broken down into specified requirements. A minimum of 80 percent of total spend on services must be sources from South African based companies, with the 80 percent, being broken down, into specified requirements;
  • A Foreign Supplier (a foreign controlled and registered company, supplying the South African mining and minerals industry with mining goods and services, which does not have at least a Level 4 DTI Code BEE Status, and 25 percent plus 1 vote Black ownership) must contribute a minimum of 1 percent of its annual turnover generated from local mining companies towards the Mining Transformation and Development Agency;
  • Employment equity targets are increased, and there are specified requirements from Board level, to core and critical skills. 

There were glimmers of hope when, following negotiations between the Chamber of Mines and Minister Zwane, Minister Zwane agreed to suspend Mining Charter 3 pending the outcome of the legal challenge initiated by the Chamber of Mines. However, the following week, Minister Zwane published his intention to issue a notice placing a moratorium on all applications for new prospecting and mining rights, renewals of prospecting and mining rights, and Ministerial Consents in terms of Section 11 of the Mineral and Petroleum Resources Development Act, No. 28 of 2002 ("MPRDA") (in summary where a right or an interest in a right is to be transferred or there is a change of control, Ministerial Consent is required). The Minister indicated his intention to issue the moratorium notice under Section 49 of the MPRDA which vests the Minister with the authority to issue a notice prohibiting prospecting or mining in respect of certain geographical areas or certain minerals for a particular period, having regard to the national interest, the strategic nature of the mineral in question and the need to promote the sustainable development of the nation's mineral resources.

The widely expressed view was that the Minister had exceeded his powers under Section 49 of the MPRDA by intending to issue a blanket notice. Litigation was again initiated, and as at the date that this newsletter is being sent out, there is uncertainty regarding the status of the moratorium notice.

On a positive note, stakeholders across the spectrum, including the largest, recognised trade unions in the mining industry, have spoken out against the actions of Minister Zwane, and there have been widespread calls for his resignation or sacking.

But this of course does not remedy the turmoil which the South African Mining sector finds itself in, and large scale job losses loom.

While the South African and Tanzanian mining sectors are in turmoil, this does not mean that Africa is uninvestable.

Africa has a significant and, often, thriving mining and minerals industry, providing millions of jobs and opportunities. It is also a source of significant foreign direct investment, and the Mining sector remains a substantial contributor to the GDP of many African countries with the benefits that this brings to the growth of those economies. 

It is likely that demand for certain precious metals will continue to grow, and that the demand for the so-called "battery metals" will grow exponentially. All of this creates opportunities for investors, provided that the investors have a proper understanding of the various risks that are faced in these investment opportunities.

The investability of Africa is likely to depend, significantly, on balancing the growing need for mineral resources while at the same time, addressing concerns that multi-national companies extract value without returning benefits for the host countries, and ensuring that the vast socio-economic benefits that can flow from mining operations, materialise.

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