COMPREHENSIVE ANALYSIS OF MINING CHARTER III

1. Introduction

Much controversy has surrounded the Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining Industry (“Mining Charter III”). Since a draft was published for public comment in April last year questions have arisen as to the lack of meaningful consultation by the Department of Mineral Resources (“DMR”) with the organised mining industry and other stakeholders and indications by the DMR that it would significantly increase the Charter’s black economic empowerment (“BEE”) ownership, procurement and employment equity requirements.

After months of speculation regarding the nature and content of Mining Charter III, the DMR finally published it on 15 June 2017 (“the Charter date”), when it also came into effect.^[1]

In contrast to suggestions by the Minister of Mineral Resources (“Minister”) that Mining Charter III is a “win-win” for all,[2] the Chamber of Mines (“Chamber”), within hours of the Charter’s publication observed that:

[it] rejects the unilateral development and imposition of the DMR’s Charter on the industry, and is of the view that the process that was followed by the DMR in developing its version of the Reviewed Mining Charter has been seriously flawed.^[3]

The Chamber indicated that it would approach the High Court for an urgent interdict to suspend its implementation, pending the launch of judicial review proceedings,^[4] and that it intended reviving its previous application for a declaratory order, which had been temporarily suspended pending discussions with the DMR. In this earlier application the Chamber sought a declaratory order from the High Court on the interpretation of various provisions of Mining Charter II, particularly in the context of the continuing consequences of previous BEE transactions and the ‘once empowered, always empowered’ principle.[5]

The ruling African National Congress’s (“ANC”) economic transformation committee has likewise criticised the DMR’s decision to publish Mining Charter III without further engagement with the mining industry, observing that “the mining industry has shed about 60,000 jobs in the last five years” and that this position should not be aggravated further.[6]

In addition to the concerns relating to the process and content of Mining Charter III, its validity and enforceability remains a key concern. The Minister published Mining Charter III under section 100(2)(a)[7]of the Mineral and Petroleum Resources Development Act, 2002 (“MPRDA”) which empowers him to develop a policy, rather than a set of binding rules, and to do so only once, within six months of the MPRDA’s promulgation date (1 May 2004). This, in fact, occurred on 13 August 2004.[8]

It is thus doubtful whether the Minister is empowered to introduce Mining Charter III at all (whether viewed as a new Charter or an amendment of the first Charter), and accordingly debatable whether it is legally binding on the mining industry. The MPRDA Amendment Bill, 2013 aimed to address this by elevating the Charter to the status of legislation while giving the Minister the power to amend it, but this Bill is still before Parliament and unlikely to pass this year.

Deeming this change (among others) “likely unconstitutional”, President Jacob Zuma referred the Bill back to Parliament in January 2015, where the process of correcting this and other identified deficiencies is still underway, two and a half years later. The legal position thus remains, in our view, that the Minister can neither amend the Charter nor make it binding on the industry.

As South Africa continues to slip down the rankings of the Fraser Institute’s Annual Survey of Mining Companies (principally as a result of regulatory uncertainty),[9] it is unfortunate that the DMR has missed the opportunity to enhance regulatory certainty and promote investor confidence. If the Chamber (or other interested and affected parties) proceeds with the threatened litigation, Mining Charter III will likely be the subject of years of protracted litigation.

In the remainder of this note we discuss the new obligations imposed by Mining Charter III under the headings Ownership, Sale of Mining Assets, Procurement, Employment Equity, Establishment of Mining Transformation and Development Agency, and Social Contributions.

2. Material changes

Ownership

New prospecting rights

Applicants for new prospecting rights must have a minimum of 50 per cent plus 1 Black Person shareholding, which shares must have voting rights attached to them. The rationale for this significant increase in ownership by Black Persons is unclear given that prospecting is generally capital intensive with no revenue generated during the prospecting phase. It is therefore difficult for exploration companies to obtain funding for prospecting operations.

New mining rights

– Applicants for new mining rights must have a 30 per cent Black Person shareholding which must be held in a separate entity from the holder of the right and must be made up of a minimum of:

o 8 per cent of issued shares owned by ESOPs;

o 8 per cent of issued shares owned by Mine Communities; and

o 14 per cent of issued shares owned by BEE Entrepreneurs.

– It is not clear who is responsible for the formation of the empowering entity and the costs associated with its formation. In the absence of any prescribed requirements, the responsibility and costs are likely to fall on the mining company. Furthermore, the shareholding of Mine Communities must be held in a trust which must be created and managed by the Mining Transformation and Development Agency (“MTDA”) which is yet to be established by the Minister. It is not clear how applicants for new mining rights will address this requirement prior to the formation of the MTDA.

– Black Person shareholders may only sell their shares to Black Persons who fall in the same category as they do. Whilst the purpose of this clause is clear (i.e. to prevent a dilution of Black Person ownership), it is likely to prejudice communities and ESOPs who are effectively locked in and may struggle to find other communities and ESOPs to purchase their shares. This restriction does not appear to apply to existing rights which suggests that mining companies with existing mining rights will need to continually re-empower if Black Person shareholders dispose of their shares to non-Black Persons.

– The holder of a new mining right is to pay a minimum of 1 per cent of its annual turnover (in any financial year) to the Black Person Shareholders over and above any distributions to shareholders. It is not clear whether this is intended to be a “distribution” under the Companies Act, 2008 or a form of tax or royalty. If it is the former it appears contrary to the provisions of the Companies Act which require the equal treatment of shareholders holding the same class of shares. If the latter, it is clear that the Minister has no fiscal powers under the Constitution (which are reserved to the Minister of Finance in the form of a money bill which only he may introduce to Parliament).[10]

– If vendor loans to Black Person shareholders are not repaid through dividends after ten years, the outstanding balance must be written off by the mining right Holder. This arguably violates the constitutional prohibition on the arbitrary deprivation of property.[11] The Constitutional Court has held (albeit in different context) that, where a law extinguishes a debt, this constitutes a deprivation of property, which will be arbitrary (and thus unconstitutional) if it does not employ a mechanism that is procedurally fair and proportionate to the ends being pursued.[12] In principle, such a mechanism must permit consideration of the reasons for deprivation in the specific circumstances of each case. The blunt and blanket deprivation envisaged in Mining Charter III does not appear to meet these constitutional requirements.

Existing prospecting and mining rights

– Historical BEE Transactions (BEE transactions concluded prior to the Charter date that achieved a minimum 26 per cent Black Person shareholding) are “recognised” for reporting purposes. This includes the recognition of historical transactions concluded on units on production, share asset transactions and all historical transactions on which the original rights were granted.

– An existing Holder[13] which has maintained a minimum 26 per cent Black Person shareholding is required to Top Up its Black Person shareholding to 30 per cent within twelve months (of the Charter date) by increasing pro rata the shareholding of its existing Black Person shareholders.[14] This could be extremely costly to mining companies and their shareholders.

– A Holder is not required to restructure its Black Person shareholding (in terms of the new mining right requirements) for the purposes of a Top Up in circumstances where a Historical BEE Transaction is recognised.

– The Black Person shareholders must directly and actively control their equity interest in the empowering entity, including the transportation, trading and marketing of their proportionate share of mine production. The obligations imposed by this provision are vague and appear to be contrary to the general principles of company law. The mining company (and not its shareholders) is the owner of the mine production. The shareholders cannot ‘actively control’ a pro rata portion of the assets or decisions of the mining company.

– The recognition of Historical BEE Transactions will not apply to (i) applications for new rights, (ii) renewals of rights or (iii) applications in terms of section 11 of the MPRDA, which suggests that existing Holders will need to comply with the requirements for new mining rights in these circumstances. This would mean that mining companies that may already be “compliant” with the 30 per cent ownership requirement would need to restructure their existing Black Person shareholding completely (in accordance with the structuring requirements for new mining rights), for any renewal of existing rights or to acquire existing rights from other companies.

Beneficiation off-set

A Holder may off-set up to 11 per cent of its Black Person ownership requirement provided that the beneficiation activities are ongoing and that the DMR has approved the proposed activities. There is still no method or manner of calculating the off-set fifteen years after this principle was first introduced in the original Mining Charter.

Sale of Mining Assets

A Holder who sells its mining assets (not defined) must give Black Owned Companies a preferential option to purchase them.

Procurement

Mining Goods: a minimum of 70 per cent of mining goods procurement spend must be spent on South African Manufactured Goods, of which at least:

– 21 per cent must be sourced from Black Owned Companies;[15]

– 5 per cent must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and / or owned by female or youth Black Persons; and

– 44 per cent must be sourced from BEE Compliant Manufacturing Companies.

Services: a minimum of 80 per cent of services spend must be sourced from South African Based Companies, of which at least:

– 65 per cent of services must be sourced from Black Owned Companies;

– 10 per cent of services must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and owned by female Black Persons; and

– 5 per cent of services must be sourced from Black Owned Companies which are a minimum of 50 per cent plus 1 controlled and owned by youth Black Persons.

· In addition, foreign suppliers are from now on required to contribute a minimum of 1 per cent of their annual turnover generated from local mining companies towards the MTDA (discussed below).

The requirements imposed by Mining Charter III in relation to the procurement of goods and services may violate South Africa’s obligations under the General Agreement on Tariffs and Trade (“GATT”) and the General Agreement on Trade in Services (“GATS”).[16]

Under the GATT, South Africa is obliged to afford imported products “treatment no less favourable than that accorded to like products of national origin”, and thus not to apply any regulatory measures that afford preference or protection to domestic products over imported products.^[17] Under Mining Charter III, Holders will be allowed to procure no more than 30 per cent of their mining goods from foreign suppliers, which clearly gives domestic producers a significant advantage over foreign competitors. Similarly, under the GATS, South Africa is obliged to accord foreign service providers “treatment no less favourable than domestic suppliers”.[18] 

Under Mining Charter III, Holders will not be permitted to procure more than 20 per cent of their services from foreign suppliers, who must, in addition, contribute a minimum of 1 per cent of their annual turnover generated from local mining companies towards the MTDA. The imposition of quotas of procurement from domestic suppliers with specific empowerment profiles potentially also violates the GATS’ specific prohibitions on measures that limit foreign capital participation in service sectors,[19] and measures that restrict or require specific types of legal entities or joint ventures through which a supplier may supply a service.[20]

· While a breach of either the GATT or GATS will not directly impact Holders, it could make South Africa vulnerable to challenges by other member states of the World Trade Organisation (“WTO”). If the implementation of Mining Charter III causes South Africa to act in breach of its obligations under the GATT and GATS, it will have to negotiate a modification of its obligations under the GATT and GATS or face the risk of a referral to the WTO’s Dispute Settlement Body (“DSB”).

In the case of the former, South Africa will have to tender necessary “compensatory adjustments” for its failure to extend the necessary protection to investors from other member states which could result in other sectors of the economy being deprived of protections afforded by the GATT and GATS.[21] If the matter is referred to the DSB, some or all of South Africa’s rights under the GATT and GATS could be suspended until the dispute is resolved.[22] Predictably, such a suspension will have a detrimental impact on the entire economy and not simply the mining industry.

Employment equity

Board: a minimum of 50 per cent Black Persons, 25 per cent of which must be female.

Executive Management: a minimum of 50 per cent Black Persons, 25 per cent of which must be female.

Senior Management: a minimum of 60 per cent Black Persons, 30 per cent of which must be female.

Middle Management: a minimum of 75 per cent Black Persons, 38 per cent of which must be female.

Junior Management: a minimum of 88 per cent Black Persons, 44 per cent of which must be female.

Employees with disabilities: a minimum of 3 per cent of all employees.

Establishment of Mining Transformation and Development Agency

The MTDA will replace both the Social Development Fund and the Ministerial Skills Development Fund and be responsible for skills, enterprise and supplier development, and managing community trusts.

Social Contributions

Human Resources

A Holder must invest 5 per cent of the leviable amount (as defined in the Skills Development Levies Act, 1999) on essential skills development as follows:

- 2 per cent on essential skills development activities;

- 1 per cent to South African Historically Black Academic Institutions for research and development initiatives; and

- 2 per cent to the Mining Transformation and Development Agency.

Community Development

A Holder must contribute to Mine Community development by identifying priority projects in accordance with the municipality’s approved Integrated Development Plans, in terms of which:

- the Holder’s contribution must be proportionate to the size of its investment and in accordance with its Social and Labour Plan (“SLP”) which must be published in English and other languages used by the community; and

- all project management and consultation fees incurred shall be capped at 8 per cent of the total budget.

Housing and Living Conditions

A Holder is required to submit a housing and living conditions plan which must be approved by the DMR after consultation with the Department of Housing and Organised Labour and the Department of Human Settlements.[23]

Sustainable Development

Holders must implement elements included in the “Stakeholders Declaration on Strategy for the Sustainable Growth and Meaningful Transformation of South African Mining Industry” of 30 June 2010, including:

- improvement of the industry’s environmental management;

- improvement of the industry health and safety performance; and

- research and development spend.

Applicability of Targets

All targets stipulated in Mining Charter III are applicable throughout the duration of the mining right (including prospecting rights), unless a specific element specifies otherwise.

Non-compliance

If a Holder fails to comply with the ownership, mine community development and human resource development elements and falls within level 5 and 8 of the Scorecard, the Holder will be regarded as non-compliant and in breach of the MPRDA. As mentioned above, this provision attempts to elevate the Mining Charter to the status of legislation.

3. Comparison of Mining Charter II and Mining Charter III

Peter Leon is Partner and Co-Chair of the Africa Group and Patrick Leyden a Director at Herbert Smith Freehills.

Footnotes:

[1] Reviewed Broad-Based Black Economic Empowerment Charter for the South African Mining Industry, 2017 published in the Government Gazette 40923 of 15 June 2017

[2] Address by the Minister of Mineral Resources, Mosebenzi Zwane, MP on the occasion of the release of the Mining Charter 2017 on 15 June 2017; also see Business Day New-look mine charter is a win-win for all available online.

^[3] Chamber of Mines of South Africa Chamber of Mines Rejects unilateral imposition of the DMR’s Charter on the Industry available online..

[4] Ibid.

[5] See specifically clause 2.1 of the Amendment of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry as published in Government Gazette 33573 of 20 September 2010 ("MiningCharter II").

[6] Bloomberg Miners Drop as South Africa Escalates Black Ownership Rules available online.

[7] See note 1 above.

[8] The Broad Based Socio-Economic Empowerment Charter for the South African Mining Industry as published in the Government Gazette 26661 on 13 August 2004.

[9] One of the surveys annually performed by the Fraser Institute is a comprehensive assessment of the attractiveness of mining policies in a jurisdiction, such as South Africa. The results of the survey are reported in the Policy Perception Index, which can serve as a report card to governments on how attractive their policies are from the point of view of an exploration manager. Over the last five years South Africa has slipped from 70^th out of 96 jurisdictions surveyed in 2012 to 84^th out 104 jurisdictions in 2016.

[10] See section 77 of the Constitution.

[11] Section 25(1) of the Constitution provides that "No one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property".

[12] National Credit Regulator v Opperman and Others 2013 (2) BCLR 170 (CC).

[13] Section 1 of the Mineral and Petroleum Resources Development Act, 2002 ("MPRDA") defines "Holder" as "in relation to a prospecting right, mining right, mining permit, retention permit, exploration right, production right, reconnaissance permit or technical co-operation permit, means the person to whom such right or permit has been granted or such person’s successor in title."

[14] In an article by the Minister (Business Times ; New look mine charter is a win win for all; 18 July 2017) he explains that all mining right holders will be required to top up their Back Person shareholding to 30 per cent before 15 June 2018 irrespective of their current shareholding positions.

[15] "Black Owned Company" means "a juristic person having shareholding or similar interest that is controlled by a Black Person/s and in which such Black Person/s enjoy/s a right to economic interest that is at least 50 per cent plus 1 of the total shareholding."

[16] On 1 January 1995 South Africa became a signatory to the Marrakesh Agreement Establishing the World Trade Organisation and by doing so also became a party to the GATT and GATS.

[17] Article III(1) and (4) of the GATT.

[18] Article XVI(1) of the GATS.

[19] Article XVI of the GATS.

[20] Article XVI(2) of the GATS.

[21] Article XXI of the GATS and Article XVIII Section A of the GATT.

[22] Article XXIII of the GATS.

[23] This seems to be an error as the there is no "Department of Housing and Organised Labour".

[24] This seems to be an error as the there is no "Department of Housing and Organised Labour".