Ramaphosa and the Mining Charter – a critical challenge in unlocking South Africa’s mineral wealth

Edward Tillet

For good reason, South Africa’s economy has traditionally been rooted in its mineral treasures. The country’s abundant deposits – especially of gold, coal and platinum – have long been seen as the key to its prosperity.

South Africa holds the world’s largest reserves of chrome, manganese ore, platinum, vanadium and vermiculite—and a great deal more besides.

It’s the world’s second largest producer of gold, ilmenite, palladium, rutile and zirconium, and the world's third largest coal exporter. Its diamond industry is ranked the world’s fourth largest, with only Botswana, Canada and Russia producing more diamonds each year.

According to the Council for Scientific and industrial Research (CSIR), South Africa’s mineral reserves amount to some $2.5 trillion, or equivalent to about R29.5 trillion today.

Only two strategic resources—crude oil and bauxite—are not available.

Against this backdrop then, the mining industry, not surprisingly, still carries potent symbolism in South Africa – and for the same reason, has become a target for ideologues for whom mining is an avatar of all that is wrong with our past and present.

Grist to the populist mill, arguments are heard for greater state intervention, for price controls to facilitate local industrialisation, and for nationalisation. And for some, albeit on the fringes, the mining industry is seen as yesterday’s economy, a dirty anachronism that should be retired, best sacrificed for ideological gratification while we refocus on the new-age opportunities of renewables, services and technology.

For all its latent capacity, recent years have not been kind to South Africa’s mining industry. Once the bedrock of the economy, a perfect storm of lower global commodity prices, higher production costs, and regulatory uncertainty has chipped at its bottom line.

Even within the industry, concerns exist about its future viability. Following the global commodities’ boom of 2005-2007 (which South Africa failed to take full advantage of), production has slumped, along with employment – since 1990, the mining workforce has fallen by around 30%.

Yet even though the mining sector no longer dominates the South African economy as it once did‚ mining still provides in excess of 10% of the country’s fixed capital investment and remains an important foreign-exchange earner, with gold accounting for more than one-third of exports.

The country is estimated to have the world’s fifth largest mining sector in terms of GDP value, though in 2017, mining contributed 8% to South Africa’s GDP, down from around 14% in the 1980s.

Yet real fixed investment in mining has been stagnant since 2008. As a result, growth in the volume of production of key commodities, including iron ore, coal, gold and platinum, has underperformed compared to countries such as Chile, China, Canada, Australia and Russia.

And this pattern was mirrored in its mining stats. Mining contributed R219bn to South Africa’s GDP in the first quarter of 2016, not far from the record quarterly low of R214bn in the first quarter of 2009, and well below the quarterly average of R234bn from 1993 until now.

The industry also saw a decline of 4% that year, the largest annual fall in production since the 2009 global recession. Only one mineral managed to keep its head above water: diamond production recorded positive growth of just under 1%. All other minerals found themselves in negative territory in 2016, with copper the worst performer, recording a 16% fall in production.

But the industry fared much better in 2017 on the back of higher mineral prices and increased global demand. Production was up by 4%, bringing some relief to the embattled industry.

Mining’s growth in 2017 was spurred on, in part, by increased production of manganese ore, chrome, and iron ore, according to Stats SA.

But the stats also highlighted the precarious state of the gold mining industry – always seen as South Africa’s star performer – and the extent to which it has lost ground over the past three decades.

Gold continued its production decline, slipping by 3.7% in 2017, its annual production index 46% lower than it was in 2007. Employment has been the obvious victim. Just over two in every three gold mining jobs in 1995 no longer exist, with employment falling from about 380 000 in 1995 to 119 000 in 2014, according to Stats SA.

Mining remains an indispensable player

Nevertheless, mining remains a critical component in the South African economy; a potential flywheel for upstream manufacturing, downstream beneficiation, and horizontal spillovers.

The industry contributes R8 for every R100 produced by the national economy and employs one in every 40 working individuals (or 2.5% of the entire workforce).

These figures might not sound that impressive at first glance, until you consider that mining is more important to some regions than others. Mining is the largest industry in four of South Africa’s nine provinces: North West, Limpopo, Mpumalanga and Northern Cape.

In particular, mining contributed R33 for every R100 produced by North West’s economy in 2015, and the industry employed one in every six working individuals (or 16% of the provincial workforce).

It is also a customer of enormous volumes of goods and services. All of this pumps literally billions into the broader economy – providing downstream opportunities to firms in fields from catering to construction. In so doing, mines provide lifelines to many communities, often rural, with little else to survive on.

Employment remains significant. Mining employed 489 515 people in 2015, according to Stats SA – equivalent to some 5.5% of the country’s non-agricultural employment.

And, imperfect though they may be, the wages the industry pays every month provide livelihoods for hundreds of thousands of workers, and the networks of dependents they support.

Crucially, mining continues to play an outsized role in trade. According to Industrial Development Corporation figures, mining accounts for a third of our exports, making it a major foreign exchange earner.

Ramaphosa presidency ushers in new wave of optimism

Cyril Ramaphosa’s election as ANC president at the party’s elective conference in December 2017 and subsequent installation as the country’s president, along with comments he made at the World Economic Forum in Davos, has seen mining executives adopting a renewed mood of optimism.

Since his election, Ramaphosa has made a concerted effort to lure foreign investors back to South Africa, with a plan to attract R100bn of foreign direct investment to SA over the next five years. In contrast to its statist vision in 2012, the ANC’s 106th anniversary statement, issued in January 2018 under Ramaphosa’s leadership, outlined an economic vision that encourages and welcomes investment, offers policy certainty and addresses barriers that inhibit growth and social inclusion.

And in contrast to its 2012 predecessor, Ramaphosa’s election signalled an apparent recommitment by the ANC to the National Development Plan (NDP), which he had a large part in drafting, as deputy chair of the National Planning Commission.

The NDP pledges a predictable, stable, and competitive regulatory environment for mining and deepened linkages with upstream suppliers of mining services and downstream producers.

Additionally, Ramaphosa has moved quickly to restore good governance at all state departments and state-owned companies, whose services he sees as crucial investment enablers.

Mining industry claws back some lost shine

Recent mining stats seem to bear out this more buoyant mood. Figures released by Statistic South Africa on April 12 2018 show that mining production jumped 3.1% year-on-year in February, boosted by diamond, iron ore, manganese and coal.

Mineral sales increased by 1.8% year-on-year in February 2018, while seasonally adjusted mining production increased by 0.9% in February 2018 compared with January 2018.

Mining remains under pressure

Yet, despite improved performance in 2017 and rising commodity prices, mining remains under pressure due to high operating costs and persistent policy uncertainty, according to the Budget Review.

The main risks relate to the Mining Charter – the latest version of which was released for public comment this month – and the Mineral and Petroleum Resources Development Amendment (MPRDA) Bill, which was sent back to Parliament in January 2015.

Formulated in 2002 and enacted in 2004, the MPRDA has traversed a rocky road. It was amended in 2008, but that set of amendments were only ratified in mid-2013.

The 2013 amendments were returned by the Presidency in early 2015 due to concern that they would not pass constitutional muster and may violate World Trade Organisation rules. They were due to be promulgated by December 2017, but that deadline was missed.

To make matters worse, the latest iteration of the Mining Charter – the blueprint for transformation of the industry – remains a source of contention between the industry and the ministry.

Not surprisingly, then, 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 74th place out of 104 surveyed mining jurisdictions in 2016, down from 57th of 112 in 2013.

Specifically, it shows that South Africa’s perception ranking has declined by more than 14% since the introduction of the MPRDA Bill in 2013, and almost 5% following the publication of 2017’s Mining Charter.

Over the same period, the mining sector’s contribution to GDP decreased from 9% to 6.8% and it shed an estimated 70 000 jobs, underscoring that policy uncertainty has a real-world impact.

According to the Chamber’s own research, net investment in the South African mining industry has declined by 57% since 2008. Bleeding profits and haemorrhaging jobs, the key problem is the troubled state of mining in South Africa, which has been exacerbated by regulatory uncertainty.

Nervous investors, onerous regulatory demands, coupled with antagonistic politics and policy that fails to understand the realities of an industry battling the headwinds of higher production costs and lower global commodity prices mean less business, and an insecure future.

Will the Ramaphosa administration lift mining out of its quagmire?

But do the positive and decisive steps taken in the months since Ramaphosa was elected ANC President inspire more optimism in South Africa’s mining industry’s future?

While Ramaphosa's intervention in the court case between the Chamber of Mines and the Department of Mineral Resources (DMR) earlier this year to break the deadlock around the reviewed Mining Charter was an important first step, South Africa will have to do a lot more to catch up with its African peers.

According to the Fraser Institute’s Mining Investment Attractiveness Index, South Africa ranked 13th in Africa, behind Botswana, Ghana, Namibia, Tanzania and Uganda.

While South Africa’s Index declined from 57% in 2013 to 47% in 2016, Botswana’s Index improved from 89% to 92%, the twelfth highest globally.

If South Africa is to move out of the bottom league of African mining countries, it will have to reset the direction of its mineral regulatory regime.

Moving from a hostile to benign regulatory environment

Ramaphosa has a key role to play in replacing the present hostile environment in mining with benign policies that stimulate the industry.

His appointment of Gwede Mantashe as South Africa’s new mining minister provides an opportunity for Ramaphosa to send the right signals to the local mining industry to renew confidence in the sector.

Mantashe’s close relationship with Ramaphosa and their shared passion for the industry inspire confidence, analysts say. “Mantashe has political currency and is well suited for the position,” said one.

But while his appointment of Mantashe has been hailed as a masterstroke by mining industry experts, navigating differences around the Mining Charter will be critical to reviving the dwindling industry.

Sobering note of realism

Despite these apparently positive portents for the minerals portfolio, recent developments have injected a sobering note of realism into expectations, however.

As the Institute of Race Relations noted in a report, ‘‘Transformation Trumps Sustainability’, last week: “The 2018 draft is better than its predecessor in some material ways. It scraps the 51% ownership requirement for new prospecting rights, gives more recognition to the ‘continuing consequences’ principle, and slightly reduces earlier procurement and employment equity quotas. In addition, it scraps the 100% compliance requirement for skills development and mine community upliftment, instead confining this onerous demand to the ownership element alone.

“However, the draft charter still greatly increases the regulatory burden on mining companies in South Africa. Its adoption of a 30% ownership target contradicts all the assurances earlier provided by the DMR that the 26% target was immutable and would not later be changed. “Now that the DMR has gone back on this pledge, the risk of the ownership target being raised once again – perhaps to 51% next time – looms all the larger.”

To turn its fortunes around, South Africa needs not only to rethink policy – critical though that is – but more so its mindset. If mining is to be a catalyst for broader development, it needs to be freed to grow.

Perhaps more than anything, there is a need to shift thinking from politics to pragmatism. The ‘magic bullet’ for some years has been beneficiation: South Africa must process its minerals locally, to stimulate work opportunities in the manufacturing sector, thus creating the ‘decent jobs’ that are the gold standard in government policy.

However, South Africa has not lived up to its full potential in this regard, with beneficiation proving more challenging in its implementation than in its conception. Receiving less attention is the idea of ‘upstream’ industries – those supplying inputs and services to the mining sector.

Beneficiation has proved alluring because it’s a signifier of something deeply ideological. Upstream industries hold no such value. Rather they are creatures of rational incentives and opportunities.

Yet they are also the best hope for a durable legacy for our mining industry.

Enhancing upstream and downstream value

With recent decades showing a structural shift in output, and economic growth increasingly driven by the tertiary sector, which includes wholesale and retail trade, tourism and communications, South Africa’s industrialisation strategy has to be oriented around the requirements of the Fourth Industrial Revolution.

South Africa is already a world leader of new technologies, such as a ground-breaking process that converts low-grade superfine iron ore into high-quality iron units. It already boasts world-class primary processing facilities for gold, platinum, carbon steel, stainless steel and aluminium.

With innovation coming to define the future of mining, there are opportunities upstream to manufacture technology-driven drones and robots for more efficient, non-invasive mining. Geothermal imagery from drones, for instance, is increasingly replacing the need for geological drilling and sampling.

Downstream, South Africa is well positioned to exploit spinoffs of the energy and transport value chains - for instance, building crucial components of fuel cells, solar panels and wind turbines locally.

Lucrative opportunities exist for downstream value-add processing locally to gold, iron, carbon steel, stainless steel, aluminium, platinum-group metals, and a variety of other semi-precious stones.

Combined, they present a rare opportunity to stimulate South Africa’s manufacturing sector, and place the country on a manufacturing-led growth path.

As South Africa moves towards becoming a knowledge-based economy, with a greater focus on technology, e-commerce and financial and other services, South Africa dares not lose this arguably last opportunity to make its abundant mineral endowments ‘work’ for it.

Moving beyond the current logjam

When the Department of Mineral Resources (DMR) unexpectedly unveiled its draft reviewed mining charter in April 2016, it spoke of seeking to ‘re-imagine the mining industry’.

However, any real attempt to ‘re-imagine the mining industry’ and unleash its vast potential must thus start with a fundamental rethink of flawed policies such as the MPRDA and the draft mining charter.

There are two ways of viewing mining in South Africa: either as a sunset industry plagued by rising costs‚ technical difficulties and political hostility; or as an industry well positioned for a new lease of life despite all its vicissitudes.

According to the Chamber of Mines‚ investment over the next few years could almost double in the absence of threats. However, if South Africa continues on its current self-destructive cycle, its vast R2.5 trillion bounty will remain locked beneath soil and rock, a testament to hubris and blind ideology.

Ramaphosa has an opportunity to unlock the MPRDA impasse and to ensure that the Mining Charter is inclusively re-negotiated in public, with industry concerns genuinely appropriated into the pact.

In the process, he needs to communicate a fundamental commitment to re-establishing trust and the rule of law by doing away with excessive ministerial discretion in policymaking.

South Africa’s mining industry is a key catalyst to the country’s re-industrialisation, but if the new draft mining charter is to rejuvenate the industry, its flawed policies have to go, embedding in its place a clear strategy for building mining’s horizontal and vertical linkages to other sectors for its long-term sustainability.

Whether the industry is not merely to survive but to thrive and grow now rests mainly in the hands of Ramaphosa.

Edward Tillet is a contributor commissioned by the Institute of Race Relations (IRR), a think tank that promotes political and economic freedom. If you agree with what you have just read then click here or SMS your name to 32823.