Does the South African Mining Industry have a Future?
Speech to the British Chamber of Business in South Africa by Peter Leon, Partner and Africa Co-Chair, Herbert Smith Freehills LLP
South Africa has had an extraordinary week. An hour before midnight last night, Jacob Zuma resigned as President of the Republic a year before the scheduled end of his term. His party, the ruling African National Congress (“ANC”), had resolved on Tuesday to recall him from office and decided yesterday to remove him by a vote of no confidence if he failed to resign. Thus ended Zuma's Presidential tenure in which South Africa’s economy fell to its slowest growth rate, highest unemployment levels and worst sovereign credit ratings since it emerged from apartheid isolation. It all rather reminds one of the famous line in T S Eliot's The Hollow Men: 'This is the way the world ends, not with a bang, but a whimper'.
Tomorrow, South Africa’s fifth President since the end of apartheid, Cyril Ramaphosa, will deliver a State of the Nation Address that will hopefully set South Africa once more on a sustainable trajectory of economic growth, in which the mining sector – one the country’s oldest and largest industries – is destined to play a significant part.
Before reflecting on the future of South Africa’s mining industry, let us look at its origins. In an acclaimed biography of the late Nelson Mandela, whose birth hundred years ago we celebrate this year, Martin Meredith painted a striking picture of the place to which Mandela had fled as a youngster seeking riches and relief from the rigours of tribal life in Qunu (in what is now the Eastern Cape):
Johannesburg was known in the vernacular as Egoli – the city of gold. It stood in the centre of the richest goldfield ever discovered, a reef stretching for some forty miles along the line of a rocky ridge named by Afrikaner farmers as the Witwatersrand, the Ridge of White Waters, after the glistening streams that flowed through it. The gold rush there, starting in 1886, had brought hordes of white foreigners to Paul Kruger’s ramshackle Transvaal republic and transformed a barren stretch of highveld, 6 000 feet above sea level, into a landscape of mining headgear, battery stamps and ore dumps. From the original tented diggers’ camp there had grown a frontier town of corrugated-iron buildings and boarding houses, renowned for drunkenness, debauchery and gambling.
By 1896, after only a decade’s existence, Johannesburg’s population had reached 100 000. Railways had arrived from the Cape, from Durban and from Delagoa Bay (Maputo). More substantial buildings had appeared: a stock exchange, banks and mining houses. At the newly built Rand Club, the white elite – bankers, financiers, lawyers, engineers and businessmen – gathered to grumble and plot against Kruger’s republic, for gold had made the Transvaal the richest state in Southern Africa. By 1899 more than a quarter of the world’s output of gold came from the Witwatersrand.
For the next hundred years, mining would be the backbone of South Africa’s economy, consistently the largest contributor to the country’s export earnings and gross domestic product, peaking in 1980 at 21 per cent of GDP. It was also a major contributor to employment, peaking in 1987 at just over 760 000 jobs, although the quality of those jobs (especially in respect of living conditions as much as health and safety) was often deplorable, particularly for black migrant mine workers drawn from across the whole of Southern Africa. As early as 1913, the journalist Sol Plaatje, one of the founders of the ANC, wrote of –
… two hundred thousand subterranean heroes who, by day and by night, for a mere pittance lay down their lives to the familiar ‘fall of rock’ and who, at deep levels, ranging from 1,000 to 3,000 feet in the bowels of the earth, sacrifice their lungs to the rock dust.
It was thus to be expected that when the ANC came to power after the country’s first democratic elections in 1994, that the mining industry would be a major focus of attention. In 1998, the ANC developed green and white papers for mineral law reform: under the common law and the De Klerk-era Minerals Act, 1991, ownership of minerals vested in the owner of the mineral rights, who had the right to exploit them (subject to state authorisation, which had to be granted if the relevant statutory requirements were met), as well as to assign or transfer that right freely for value.
This was fundamentally changed on 1 May 2004, when the Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”) came into effect. The MPRDA introduced a fundamentally different system of mineral resource ownership and regulation from that which had previously existed, while making provision for the conditional conversion of certain “old order” rights into prospecting and mining rights under the MPRDA. With the state as “custodian” of all minerals “for the benefit of all”, mineral resource owners were deprived of their basic right of control, which they previously enjoyed. The MPRDA essentially replaced the principles of private law, based on rights of ownership, with principles of administrative law based on conditional state licences. That, in essence, is the nub of the problem which the industry has faced since 2004.
Most regrettably, the MPRDA failed to prescribe objective (as opposed to discretionary) guidelines as well as proper timelines for the exercise of licensing powers by either the Minister of Mineral Resources (“Minister”) or the Department of Mineral Resources (“DMR”), leaving much to their interpretation and discretion. This in turn has led to a climate of inconsistency as much as regulatory uncertainty. As a result, investor confidence waned, as demonstrated by South Africa’s ever declining Policy Perception Index in the Fraser Institute’s Annual Survey of Mining Companies:
- South Africa scored 51 per cent in 2001, immediately before the MPRDA was enacted (ranking 20th out of 53 jurisdictions globally);
- South Africa scored 43 per cent in 2004, when the MPRDA came into force (ranking 34th out of 53), but an abject 32 per cent the following year (ranking 53rd out of 64).
The SIMS report
This policy uncertainty reached new lows under the leadership of Jacob Zuma, who was elected as ANC President in 2007 with the express purpose of reversing Thabo Mbeki’s policies of the social market, and with the key support of three groups each calling for the nationalisation of mines (the ANC Youth League, the South African Communist Party and the Congress of South African Trade Unions).
On the Fraser Institute’s Annual Survey, after a modest recovery between 2005 and 2009, South Africa’s Policy Perception Index fell dramatically again in 2010, to an all-time low of 23 per cent (ranking 67th out of 79 jurisdictions, only one per cent and four places higher than Zimbabwe). This came after the Zuma Administration replaced the original Mining Charter (a negotiated tripartite pact among government, labour and business, aimed at socio-economic transformation in the mining industry), with a new Mining Charter in September 2010, which was more prescriptive as well as onerous than the original. Worse, it only imposed obligations on the industry and none at all on labour or government.
The nationalisation question was then assigned to an ANC research team, which produced a report in early 2012 on “State Intervention in the Mining Sector” (“SIMS”). The SIMS report advised against wholesale nationalisation, as it would be “unaffordable” if accompanied by market-value compensation, and “unconstitutional” if not. As an alternative, the SIMS report recommended a host of fiscal and other measures that would effectively deprive mining companies of effective control of their investments. Nevertheless, at its policy conference in Mangaung (Bloemfontein) in July 2012, the ANC effectively endorsed much of the SIMS report, resolving that South Africa’s wealth of minerals (especially platinum, iron ore and coal) should “urgently” be targeted for “State intervention with a focus on beneficiation for industrialisation”.
The SIMS report, however, could not have been further detached from the industry’s prevailing economic reality. Facing a perfect storm of falling prices and rising costs, the country’s platinum industry (in particular) was in crisis, setting off a wave of wildcat strikes that culminated in the appalling police massacre of 34 mine workers at Lonmin’s Marikana mine in August 2012; a terrible blot on South Africa’s embryonic democracy.
The National Development Plan
By 2012, South Africa was in need of a clear, realistic and predictable path towards a world-class mineral regulatory regime, capable of delivering decent jobs and livelihoods in an equitable and sustainable manner. Instead of endorsing the SIMS report, it would have made more sense for the ANC to have followed the prescripts of the National Development Plan (“NDP”), prepared over three years by a diverse group of policymakers and industry specialists, chaired by the former Finance Minister Trevor Manuel, in which current ANC President Cyril Ramaphosa, played a key role.
The NDP offered a sober assessment of the shortcomings of the South African mining industry:
The South African mining industry has performed poorly over the past decade. During the commodity boom from 2001 to 2008, the mining industry shrank by 1 per cent per year, as compared to an average growth of 5 percent per annum in the top 20 mining exporting countries. The mining industry is smaller now than it was in 1994. This is an opportunity lost, as estimates show the mining sector could expand by 3 percent to 4 percent a year to 2020, creating a further 100 000 jobs… The central constraints are uncertainty in the regulatory framework and property rights; electricity shortages and prices; infrastructure weaknesses, especially in heavy haul rail services; ports and water; and skills gaps.
To reverse this trend, the NDP made the following recommendations (among others):
Address the major constraints impeding accelerated growth and development of the mining sector in South Africa. The main interventions include: ensuring certainty in respect of property rights; passing amendments to the [MPRDA] to ensure a predictable, competitive and stable mining regulatory framework; secure reliable electricity supply and/or enable firms to supply their own plant with an estimated potential of 2 500MW by 2015; and secure, reliable rail services, potentially enabling private participation.
Drawing from the SIMS report rather than the NDP, a poorly considered and drafted Bill to amend the MPRDA (“the Bill”) was introduced to Parliament in early 2013. The Bill would significantly widen the powers of the Minister, including by giving him unfettered power to legislate through the Mining Charter, which was originally envisaged as a non-binding once-off policy document. The Bill would also empower the Minister to “designate” any minerals to be offered at discounted prices to local beneficiators, failing which they could not be exported without his prior consent. Not only would this almost certainly violate South Africa’s international obligations as a member of the World Trade Organisation, the granting of such wide (legislative) powers to the Executive would likely violate the constitutional doctrine of the separation of powers.
Despite being warned of this, the ANC rushed to pass the Bill before the 2014 general election, allowing only three weeks of public consultation in Parliament’s second chamber, the National Council of Provinces. Soon after the election, however, the new Minister, Ngoako Ramathlodi, requested President Zuma not to assent to it. Thus, in early 2015, the President exercised his constitutional prerogative to refer the Bill back to Parliament for reconsideration.
It languished there untouched for another year, before a new public consultation process was undertaken, which only concluded late last year. Unfortunately this process has simply generated a new range of procedural missteps, and has failed to address any of the substantive problems with the Bill. Consequently, in my view, the only constitutionally acceptable solution, now, is for the government to withdraw the Bill entirely.
The resultant policy uncertainty was exacerbated by the opacity and apparent mobility of the black economic empowerment goalposts set by the (revised) Mining Charter in 2010. The Chamber of Mines (“Chamber”) and the DMR disagreed strongly as to how to calculate compliance with the requirement that 26 per cent Black ownership requirements of the Mining Charter which had to be met by December 2014. The DMR’s 2014/2015 Mining Charter Audit, released in March 2015, found that 79 per cent of mining companies had not met this target. The Chamber disputed this, and in May 2015 accepted an invitation by Ramatlhodi to join the DMR in seeking a declaratory order from the Pretoria High Court. As Ramatlhodi remarked at the time, “sensitive issues” required “legal remedies” rather than the imposition of regulations.
Ramatlhodi’s tenure as Minister was sadly short lived. In September 2015 he was unexpectedly replaced after eighteen months in office by one Mosebenzi Zwane, formerly a provincial minister for agriculture in the Free State, where he was alleged to have contrived a dairy farm development seeing R220m of government funds siphoned into the Dubai bank accounts of three wealthy businessmen from India – the Gupta brothers – who had established a vast and diversified business empire in South Africa with their main empowerment partner, Duduzane Zuma, the President’s son. R30m of this is alleged to have paid for a Gupta family wedding in Sun City.
Minister Zwane proved to be much less accommodating than his predecessor in interpreting the Mining Charter, so the Chamber proceeded with its court case, challenging the DMR’s rejection of the ‘once empowered, always empowered’ principle, which would effectively require mining companies to substitute any departing black shareholders in perpetuity. It also challenged the retrospective application of the Mining Charter to transactions concluded before its introduction in September 2010, as well as the refusal to give mining companies credit for the ‘continuing consequences’ of black empowerment transactions concluded after the promulgation of the MPRDA in May 2004.
2016 brought no greater certainty. In March 2016, the Chamber’s court challenge was postponed, and shortly afterwards Minister Zwane, without warning or consultation with the industry - or any other stakeholders - published a draft “reviewed” Mining Charter even more onerous and opaque than its 2010 predecessor. In June 2017, after a year of private negotiations and repeated postponements the Minister gazetted the third Mining Charter in “final form”, which took almost no account of the input by the industry, labour and community organisations. The Chamber was forced to seek an urgent interdict preventing the Minister from implementing the Charter, to which he ultimately agreed, pending a full judicial review of the third Mining Charter this month (which is now also challenged by several community organisations).
Thus, since the Bill was introduced in 2013, the legal status of the Mining Charter (and any successor to it) remains unresolved, as does the meaning of its main objectives, in particular black ownership. It is no surprise, then, that South Africa’s Policy Perception Index in the Fraser Institute’s Annual Survey of Mining Companies has slipped every year since 2013, leaving the country languishing in 84th place out of 104 mining jurisdictions in 2016 (the latest year for which results are available; the results for 2017 are expected to be released at the end of this month). While South Africa’s Index declined from 57 per cent in 2013 to 47 per cent in 2016, Botswana’s Index improved from 89 percent to 92 per cent, the twelfth highest globally. Over the same period, the mining sector’s contribution to GDP decreased from 9 per cent  to 6.8 per cent  and it shed an estimated 70,000 jobs, revealing that policy uncertainty has a real-world impact beyond a mining company's fortunes.
The Charter and the Bill - as much as the constitutional wrangles surrounding them - have thus exacerbated regulatory uncertainty, which is anathema to investment in the industry. If the country’s mining sector is to have a future, this is the first issue that needs to be addressed. To give just one example of this, the Chamber’s own research indicates that net investment in the South African mining industry has declined by 57 per cent since 2008.
Since his election as the President of the ANC at the party’s elective conference in December 2017, Cyril Ramaphosa has made a concerted effort to lure foreign investors back to South Africa. Under his leadership, in contrast to its statist vision in 2012, the ANC stated as follows in its 106th Anniversary statement last month:
Our vision is an economy that encourages and welcomes investment, offers policy certainty and addresses barriers that inhibit growth and social inclusion. Our commitment is to build strong partnerships in which efficient and accountable government agencies, responsible citizens and businesses, effective trade unions and civil society work together for the common good.
The election of Ramaphosa may signal a recommitment by the ANC to the NDP, which Ramaphosa had a large part in drafting, as Deputy Chair of the National Planning Commission. Indeed, in contrast to its 2012 predecessor, the ANC’s official policy on the mining sector is now:
The ANC should prioritise the implementation of the NDP’s key proposals for minerals and metals including:
- ensuring that minerals legislation provides a predictable, stable, competitive and certain regulatory environment for increased mining activity and investment
- deepen linkages between mining and other sectors of the economy including linkages with upstream suppliers of mining services and with downstream producers, including the development of new uses for platinum by developing fuel cell technologies;
- and undertake research and development to find methods to lengthen mine life and use energy and water resources more efficiently.
It is noteworthy that this statement eschews any mention of the embattled Bill or Charter, which the ANC had previously insisted should be “expedited”, in almost every policy statement it made on mining between 2013 and 2016. From a policy perspective, this should clear the way for both the Bill and the third Mining Charter to be withdrawn, and for the path of regulatory certainty to be laid.
Even before his election, Ramaphosa remarked that South Africa must urgently break the ongoing deadlock on the regulation and transformation of the mining sector to ensure the proper use of this country’s world-class mineral resources:
The Mining Charter is now going to be thoroughly discussed with key role players so that we find a solution to unlock our mining industry for SA to benefit from the boom: if the Mining Charter is holding us back then we should deal with it.
Additionally, Ramaphosa regards as urgent the restoration of good governance at all state departments and state-owned companies, whose networks and services he sees as crucial investment enablers. The recent removal of Eskom’s board is an encouraging sign of this. His reported refusal to offer Jacob Zuma any amnesty from prosecution (which would be unconstitutional), in order to persuade Zuma to hand him the keys to the Union Buildings, signals an important commitment to constitutionalism and the rule of law.
Another sign of the winds of change was yesterday’s series of arrests and raids on suspects implicated in the Free State dairy farm development for which Minister Zwane had been responsible. It thus appears increasingly likely that Cyril Ramaphosa’s Cabinet, to be appointed in the coming days, will include a new Minister of Mineral Resources. The positive and decisive steps taken in the two months since Ramaphosa was elected ANC President, when contrasted with the regulatory entropy of the Zuma Administration, inspire some optimism that South Africa’s mining industry does indeed have a future.
What South Africa needs now is a demonstrable recommitment to the essential prerequisites for economic growth. In a sense, there could be no better way to honour the memory of Nelson Mandela, who expressed the following in his first address to the Chamber of Mines in 1994:
The mining industry, by virtue of the place it occupies in our economy, is in a position to make a special contribution to the transformation of our society, which should have as its central objective, improving the quality of life of all its citizens.
I wish to assure you that the government will play its part. The government, and particularly the ministry, will work to ensure the creation of an environment for growth and sustainable development of the industry…
More broadly, the government has made clear its commitment to fiscal discipline and to creating an environment in which business can thrive…
We hope that the mining industry would also send a powerful message to everyone in our society that the resources of our nation, under whatever form of ownership, will be stewarded with a regard for the urgent need to uplift particularly the most disadvantaged of our society. This would be no empty gesture but an action which would have important and beneficial consequences for the nation.
 Martin Meredith Mandela: A Biography, 1997.
 Statistics South Africa South African Statistics 2015, paras 15.1 and 6.1.
 See Institute for Race Relations South Africa Survey 2017 at 102.
 See Chamber of Mines Mine SA 2017 at p 8.
 President Nelson Mandela Address at 104th Annual General Meeting of Chamber of Mines of South Africa, 8 November 1994.