Speech by the DA Shadow Minister of Mineral Resources, James Lorimer MP, during the budget debate on Mineral Resources, Parliament, July 15 2014

Mining Department must build credibility to attract investment

15 July 2014

Mining has been through a tough time in the past couple of years.

Production is down. There have been bloody and destructive labour disputes. There has been a world economic crisis which has slashed demand for the minerals that are mined in our country. The cost of electricity has soared, as has the cost of labour. Many of our mines have stopped making profits.

The question we need to answer is; how much of this is self- inflicted? How much of this is due to poor legislation and wrong-headed policy that is carried out badly.  And how much is due to the prevailing conditions in the world economy?

Before we look at this it is worth getting some of the basics in place. We do not court international investors because we owe them anything. We need them because it takes money to unlock the wealth that is mining. We will not get the benefits that mining can bring us unless we have money, and we don't have the money in our own country, unless it comes from investors, mostly overseas investors.

So attracting investors is key, unless, the state gets involved in the mining business.

But countless local and international examples show that governments do not mine well. They don't understand capital and efficiencies that private business does. They tend not to be able to mine profitably. When there are no profits there is no reinvestment and workers get a worse deal; 

There's an even bigger problem.  To start and maintain mines the state needs capital. That generally ends up being the people's money, which, because it is being spent on mines, cannot be spent on  housing, hospitals and schools.  

That is why we need investment.

The trick is to make sure we get the maximum investment and take the maximum benefit for the South African people. We need to make our mining regime attractive enough so that investors flock to our industry while taking out the most we can in tax and other benefits and creating the greatest possible number of jobs.  This balance, where we get a win-win arrangement cannot happen if government does not have a credible role as a partner with the industry.

So is our mining jurisdiction credible?

Let's first of all look within the Department. It remains difficult to get a mining licence. Even if all requirements are met. Procedures don't always go as planned.

Let us take one situation which encapsulates much of what this department is doing wrong. 

In 2007 Australian owned Aquila Resources is granted and executes a prospecting licence on land north of Hotazel in the Northern Cape province.  It discovers Manganese and spends about R50 million prospecting over the next four years. 

At the end of 2010 it applies for a mining right, intending to invest about R1.8 billion in a Manganese mine. A month later the DMR informs Aquila that it has granted a prospecting right over the same area to a company called the Pan African Mining Development Company. This is a company that is jointly owned by the South African, Zimbabwean and Zambian governments. The company is housed in the Central Energy Fund where it has one line in the annual reports. That one line shows its lost about R2.7 million in each of the last two years. 

For the next two and a half years Aquila tries to get more information from the DMR on what is going on and how a double prospecting right could have been issued. The DMR gives no concrete information. Aquila is sure of its case and spends another R100 million proving the resource.

Minister Shabangu agrees to decide the issue by January 14th this year. As yet nothing has happened. Aquila has been sold to a Chinese company who's plans are in doubt.

For at least some of this time the Chairman of the Pan African Mineral Development Company is none other that the Director General of the Department. Does the Department not understand the concept of conflict of interest? Does this government really believe it can be player and referee and not lose credibility?

This sends an appalling signal to would be investors. The message is: Come and spend your money in South Africa and through incompetence or crookery, you risk losing it.

Self-evidently - that is no way to run a mining jurisdiction. 

It shreds the credibility of the Department.

Mr Chairman, that lack of credibility is evident elsewhere.When we look at the Department's budget before us, we are struck by two glaring defects.

The first of these relates to the Council for Geoscience, one of the two major entities funded from the Department's budget. In 2010 parliament passed legislation to expand the record keeping duties of the Council, but until today, and in this budget too, those new duties required of the council are not funded by government. 

Not a huge amount of money is missing, apparently about R20 million. This is made worse by the recently passed but unsigned amendments to the MPRDA. That benighted piece of legislation saw fit to scrap the petroleum Agency PASA, one government entity which had performed its task efficiently, and give the duties to, the council for Geoscience, which is already underfunded. 

If this parliament wants to be taken seriously it should ensure that funding is provided for legislative mandates. It's no good simply legislating for a big idea without funding that idea. If, as seems increasingly unlikely, the President signs the bill, the Council for Geoscience will be simply unable to do what it is supposed to do and the chaos in our regulatory regime will get worse. 

The second glaring defect relates to inspection. The performance of South Africa's mining industry in fulfilling its social and developmental obligations is very much a disputed space right now. There's an on-going debate about the extent to which mines are fulfilling their duties as set down in the law and the Mining Charter. Everybody seems to agree that mines are not doing what they should, but there's disputes about which mines are and which are not. So it would be vital for policy formation to know what is actually happening in this regard.

As we questioned the Department on this last week, it became resoundingly obvious that there are simply not enough inspectors in order for government to make any kind of accurate assessment on the extent of compliance. It was let slip that there is only one inspector covering social and labour plans for each region. That is to inspect 1600 mines countrywide. That would work out at close to three mines a week that would need to be inspected by each inspector. Clearly impossible.  Clearly totally unrealistic. The DMR appears to rely largely on compliance reports given by the mines themselves.  If this government doesn't have information on compliance it has little hope of making credible policy.

So there is clearly not enough money for Geoscience and clearly not enough money for inspectors.

Some of us in the committee recommended rejecting this budget on those grounds. 

Now the ANC on the portfolio committee did not want to rock the boat and decided this budget should be passed with some recommendations being made on the future funding of inspectors. 

But then what is this budget process for? If the committee sees a shortcoming, surely it must correct it?  Now, best case scenario, we will see another year of inadequate inspections and an underfunded Council for Geoscience. Is anybody taking parliament seriously? It doesn't sound like the ANC is. If it doesn't, can it expect other people to do so? Credibility, once again, is lacking.

This gets worse. This government is convinced of its own ability to shape the economy as it sees fit. In doing so it makes the mistake of every statist government in history. Each one is blindsided by unintended consequences. Each one ends in failure.

The case of coal proves the point. 

For years, South Africa's coal industry has produced low-cost coal for Eskom by subsidising the lower grades of coal supplied to power stations through money made by exporting higher grades of coal.

But that must all change because of this government's bid to force the creation of BEE moguls. Government will pick these winners and give them helpful contracts, no matter what the cost.

The major supplier of coal to the new Khusile power station is supposed to be the New Largo colliery which is 27% BEE owned, in line with the demands of  the Mining Charter. But in terms of the department of Trade and industry's triple B double E legislation, all coal suppliers have to have 50% BEE ownership. 

Coalfield developers Anglo American won't begin to build the mine before an agreement is signed. Government is refusing to sign an agreement until it gets the BEE ownership that it wants. The result: stalemate. Even if Khusile is built on time. It's major coal supplier will not be ready. This may well have adverse consequences for our electricity supply crisis and for Eskom's disastrous financial position as it will have to continue to spend vast amounts of money producing electricity fuelled by diesel instead of cheaper coal power.

This kind of rule- making has ensured that major investors are not building new mines and Eskom faces what's being called a coal supply cliff from next year.

To deal with the consequences of its failed attempt to bend the industry to its will government has included provisions in the new MPRDA, to force mines to sell some of their production at lower prices locally. That may be a short term gain for Eskom, but in the long run it will simply make the problem worse. Coal mining in South Africa will no longer be so profitable so large mining companies will put their investment money elsewhere. Mozambique is not far and has massive undeveloped coal resources.

There is a naive belief that investors will be forced to come here because we have so much mineral wealth. The truth is different. There are dozens of other mining jurisdictions where it is easier and more profitable to mine.

If this government wants investment in our mining, it has to rid itself of the notion that it can micro-manage the mining sector. The simple truth is, it cannot and any attempt to do so will bring serious consequences in falling tax revenues, lost jobs and a diminished supply of strategic minerals. 

More than anything else, if this government wants to attract the investment our industry needs, it has to restore its own credibility. A good place to start would be in passing a realistic budget. 

Issued by the DA, July 15 2014

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