MINERALS COUNCIL PUBLISHES REPORT ASSESSING TRANSFORMATION PROGRESS OF MEMBERS

Industry met most Mining Charter 2 targets, and is committed to Mining Charter 3

Johannesburg, 04 December 2019: The Minerals Council South Africa is pleased to publish a report assessing the industry’s progress in efforts to transform the industry in terms of the Mining Charter.

The Minerals Council commissioned advisory firm Moshe Capital earlier this year to carry out the task. Their mandate was to assess compliance with the 2010 charter, which applied to the industry until 2018. All Minerals Council members were requested to supply for analysis their latest (2018) annual compliance reports measuring performance against their social and labour plans, which themselves were required to meet the 2010 charter’s final compliance targets.

The 32 members that responded to the request represent 93% of the employee base of members of the Minerals Council. The Minerals Council represents some 90% of the industry by production value. We believe this report is based on a representative sample of members, and of the industry.

Minerals Council CEO, Roger Baxter, notes: “The research shows substantial compliance and significant progress in the industry’s, and South Africa’s, efforts to transform the mining sector and our economy, and the journey continues.”

The assessment focused on five of the charter’s pillars: ownership, employment equity, procurement, human resources development and mine community development.

A summary of the findings can be found below.

In summary, the Minerals Council believes that the findings show, in aggregate, a very good level of compliance with member companies’ transformation obligations.

As will be seen, there are certain areas where average compliance does not meet 2010 charter targets. In particular, while the 26% BEE ownership target is significantly surpassed, the structure of ownership transactions does not, on balance, meet the 2010 charter’s requirements of “effective ownership” and “meaningful economic participation.” This is largely because the 2010 requirements did not apply when most of the largest transactions took place in the 15 or so years prior to that.

Further, it is apparent that in the sphere of mine community development, more needs to be done by some companies regarding community consultation.

Where the research found that a proportion of individual mining rights holders are not fully compliant, it should also be noted that some of those would be companies that acquired their mining rights relatively recently, and would therefore still have some time before their specific obligation in terms of, for example, BEE transactions, need to be concluded. The research did not, however, examine those specific questions.

Roger Baxter concludes: “The Minerals Council and its members remain committed to intensifying and enhancing these transformation efforts in the years ahead, in the first instance by meeting the requirements of the new 2018 charter, notwithstanding the legal challenge to three particular aspects of its contents.”

The transformation report can be found in three formats:

A brief fact sheet, available here.

The presentation here, and the PDF of the full report here.

Charmane Russell

Alan Fine

Text of the full report:

Mining Industry Transformation Progress Report for 2019

NOVEMBER 2019

List of Abbreviations

List of Definitions

1. INTRODUCTION

The South African mining industry remains a critical component of the economy, especially with regards to employment and its contribution to Gross Domestic Product (GDP). In 2018 the sector’s contribution to GDP was 7.3% and directly employed 453 0001 people.

Due to significance of the industry, the Broad-Based Black Socio-Economic Empowerment (B-BBEE) Charter for the South African Mining and Minerals Industry (Mining Charter) was formulated as a blueprint to drive the transformation of the industry.

The Department of Minerals Resources and Energy (DMRE) first introduced the Mining Charter in 2004 and since then, the Charter has been amended twice, in 2010 and 2018. After 15 years since its inception, the level of compliance and transformation remains a point of contention. There is a widely held perception that mining companies are not compliant with the Mining Charter and an anti-transformation sentiment currently exists within the industry.

The Minerals Council commissioned a research project to assess progress made by its member companies in terms of transformation as envisaged in the Charter. The assessment is based on the 2018 compliance report submissions to the DMRE by mining companies and focuses on five key transformation elements, namely Ownership, Procurement, Employment Equity, Human Resource Development and Mine Community Development. This report has four main objectives:

1. To understand how much transformative progress has been made by the mining industry on the five key transformation elements when measured against the Mining Charter 2010;

2. To provide both a consolidated industry view and a commodity-based view of transformation in the mining sector;

3. To review fundamental changes set out in Mining Charter 2018, and to highlight potential implications of those changes; and

4. To recommend a way forward.

The research report is based on Mining Charter 2010 annual compliance reports submitted to the DMRE by members of the Minerals Council. Of the seventy-eight (78) members of the Minerals Council, thirty-two (32) provided their reports for analysis. The 32 members collectively hold ninety-seven (97) mining rights (representing 93% of the employee base of members of the Minerals Council). This means that while a majority of companies did not supply their reports, those that did are generally the larger companies.

The aggregate industry-based and commodity-based analysis results are presented on the following basis:

– Percentage compliance: Calculated as the proportion of the sample companies that met the minimum targets for each element

– Weighted average: Calculated as the achievement score weighted against the employee headcount (Ownership and Employment Equity) or the proportional contribution to the total industry value (Procurement, Human Resource Development and Mine Community Development)

– Simple average: Calculated as the cumulative sum divided by the number of mining rights, without giving weight to the varying sizes

1.1 OWNERSHIP

The analysis of the ownership element was based on ninety-three (93) mining right holders2. The ownership data analysed represents approximately 83% of the mining industry based on total employee numbers (that is, employees from holders of mining rights assessed as a percentage of the total number of employees in the mining industry)3.

The ownership compliance section assessed the following aspects:

– The aggregate percentage of HDSA ownership in the mining industry;

– The proportion of the mining industry that has met the minimum ownership target of 26% as per the Mining Charter 2010;

– The percentage HDSA ownership based on identifiable beneficiaries;

– The weighted average HDSA ownership per commodity;

– The proportion of mining right holders that are creating Meaningful Economic Participation, as defined in the Mining Charter 2010; and

– The aggregate net asset value generated from BEE equity transactions to date.

1.2 PROCUREMENT

The analysis of the procurement element was based on eighty-seven (87) mining right holders4. The procurement data analysed represents approximately 80.3% of the mining industry based on total employee numbers (that is, employees from holders of mining rights assessed as a percentage of the total number of employees in the mining industry).

The procurement compliance report assessed the following aspects:

– The percentage of procurement spend on BEE entities by the mining industry on capital goods, consumables and services;

– The percentage contribution made to the social fund by multinational suppliers; and

– The percentage of procurement spend on BEE entities on capital goods, consumables and services, per commodity.

1.3 EMPLOYMENT EQUITY

The analysis of the employment equity element was based on ninety-two (92) mining right holders5. The employment equity data analysed represents approximately 81.3% of the mining industry based on total employee numbers (that is, employees from holders of mining rights assessed as a percentage of the total number of employees in the mining industry.

The employment equity compliance report assessed the following aspects:

– The percentage of HDSAs represented at all decision-making positions and core occupational categories in the mining industry;

– The percentage of participation of HDSA at all decision-making positions and core occupational categories per commodity; and

– The race and gender representation in the mining industry.

1.4 HUMAN RESOURCES DEVELOPMENT

The analysis of the human resource development (HRD) element was based on eighty-eight

(88) mining right holders6. The HRD data analysed represents approximately 81,6% of the mining industry based on total employee numbers (that is, employees from holders of mining rights assessed as a percentage of the total number of employees in the mining industry. The HRD compliance report assessed the following aspects:

– Expenditure by the mining industry on skills development as a percentage of mining right holders’ annual payroll;

– Expenditure on skills development as a percentage of mining right holders’ annual payroll per commodity; and

– The distribution of HRD spend into constituent skills development initiatives.

1.5 MINE COMMUNITY DEVELOPMENT

The analysis of the mine community development (MCD) element was based on eighty-five

(85) mining right holders7. The MCD data analysed represents approximately 80% of the mining industry based on total employee numbers (that is, employees from holders of mining rights assessed as a percentage of the total number of employees in the mining industry. The MCD compliance report assessed the following aspects:

– The extent of community consultation in the social and labour plan (SLP) formulation process by mining companies;

– Assessments conducted by mining companies to understand local developmental needs and the resultant alignment of funded projects with identified community needs;

– Progress achieved in the implementation of funded projects; and

– The expenditure on community development projects as a percentage of net profit after tax (NPAT).

2. RESULTS AND FINDINGS

2.1 OWNERSHIP

2.1.1 Industry view

Based on a weighted average basis, the industry has achieved 39,2% HDSA ownership which comprises of 22.3% BEE entrepreneurs, 9.4% communities and 7.5% ESOPs (based on the number of employees).

HDSA ownership increased by 3.2% from the 2016 ownership transformation analysis8 results (38.0%).

Further analysis at the level of the individual mining right holder shows that 83% of the sampled mining right holders achieved at least 26% HDSA ownership (80 out of 93) representing 1% of the overall sample based on the number of employees and the remaining thirteen (13) holders did not meet the minimum Mining Charter 2010 ownership target.

23.7 % (22 out of 93) of mining right holders analysed created Meaningful Economic Participation, as defined by the Mining Charter 2010. Meaningful Economic Participation which only came into the 2010 and not the 2004 Charter is achieved when all the following requirements are met:

- a minimum of 26% BEE ownership

- Clearly identifiable BEE shareholders

- trickle cashflow (dividends)

- voting rights

The sampled companies have generated a net value of R132 billion through BEE transactions to date representing a 16.8% decline when compared to the R159 billion generated in 2016. Looking at the overall industry, for the periods commencing in 2002 and to just before the introduction of Mining Charter 2010, a total of 168 BEE transactions were executed with a value of R113 billion. After 2010, however, this number was significantly lower with 67 total BEE transactions valued at R30 billion9.

2.1.2 Commodity view

From a commodity point of view, manganese miners have the highest BEE shareholding followed by the PGMs with 74.8% and 52.2% HDSA ownership respectively (on the industry weighted average basis). “Other resources” are 21.4% HDSA owned, falling below the 26% Mining Charter 2010 ownership target, while all other commodity sectors meet or exceed this target. BEE entrepreneurs own a majority of shareholding compared to mining communities and employees. Only manganese, PGMs and iron ore have significant community shareholding while other commodities have limited community representation as shown in Figure 3.

2.2 PROCUREMENT

2.2.1 Industry view

The overall proportion of procurement from BEE Entities continues to exceed targets in all three reporting categories.

– Capital goods: The analysis of the sampled mining right holders shows that 75.4% of expenditure on capital goods was incurred on BEE entities against the Mining Charter 2010 target of 40%. In monetary terms, the companies spent R16.9 billion on the procurement of capital goods from BEE entities in 2018.

– Services: Similarly, 75.1% of expenditure on services was incurred on BEE entities, compared with the Mining Charter 2010 target of 70%. In 2018, this amounted to total expenditure of R45.5 billion

– Consumable goods: Finally, 79.0% of consumable goods were procured from BEE entities at a cost of R45.3 billion. The Mining Charter 2010 target was 50%.

– With regards to the contribution to the Social Fund, only 32 mining right holders reported amounts incurred from procuring capital goods from multinational suppliers. The resultant weighted average industry percentage contribution to the Social Fund is 1.36% and exceeds the Mining Charter 2010 target of 0,5%.

2.2.2 Commodity view

For the procurement of capital goods, all commodities met the 40% Mining Charter 2010 requirement apart from Clay miners who achieved 5.9%. However, it must be noted that Clay miners only represent 0,2% of the total value of goods and services procured from BEE entities (R108 million)

The top three commodities (Coal, PGMs and Gold) by rand value have a cumulative discretionary procurement spend on capital goods of R16,8 billion, of which R12,6 billion is spent on BEE companies.

For the procurement of services, 9 out of 10 commodities meet the minimum 70% requirement set in Mining Charter 2010. Again, Clay miners did not meet the set target with an achievement score of 50,6% against the Mining Charter target of 70%.

The top 3 commodities (Coal, PGMs and Gold) by rand value have a cumulative discretionary procurement spend on services of R45.6 billion of which R33.9 billion is incurred on BEE companies.

All commodities meet the minimum 50% Mining Charter 2010 requirement for the procurement of consumable goods. Base metals, Iron Ore and PGM miners incur the highest proportion of their procurement expenditure on BEE entities, with 91%, 87% and 83% of their expenditure on consumable goods, respectively. Coal miners spend the highest amount on BEE entities with expenditure of R16,7 billion out of the discretionary procurement spend on consumables of R22,4 billion.

EMPLOYMENT EQUITY

2.2.3 Industry view

The mining industry met the minimum threshold of 40% HDSA target representation across all management levels. There is a significant representation of HDSA in lower management positions. HDSA representation in key decision-making positions is still relatively small.

– Top management (including boards of directors): In 2018, 58.2% of top management were HDSAs (49.3% in 2016).

– Senior management (including executives): In 2018, 52.8% of senior management were HDSAs (48.3% in 2016).

– Middle management: In 2018, HDSAs made up 61.4% of middle management (49.8% in 2016).

– Junior management: In 2018, HDSAs made up 70.5% of junior management (58.0% in 2016).

These findings demonstrate a commitment by mining companies towards transformation. The average rate of women representation is 19.8%, an increase from 13.0% observed in the 2016 analysis of employment equity.

2.4 HUMAN RESOURCE DEVELOPMENT

2.4.1 Industry view

The mining industry relies on the continuous development of the communities surrounding mining operations. It includes provision of support for South African based research and development initiatives intended to develop solutions in exploration, mining, processing, technology and rehabilitation. In addition to the Skills Development Levy (1% of payroll), the Mining Charter 2010 requires mining right holders to spend 5% of their annual payroll on HRD.

In 2018, the sampled mining right holders spent 4.8% of their annual payroll on HRD which is below the minimum Mining Charter 2010 compliance target of 5%. In 2018 HRD expenditure was R3.3 billion, plus a skills levy payment of R0.7 billion. The 2016 analysis showed that mining right holders spent 5.5% of their annual payroll on HRD, therefore there is an 13% reduction in the HRD spend between 2016 and 2018.

Short courses, vacation work programmes, work placement programmes and post-retirement training, collectively called other training initiatives accounted for the most significant share of HRD spend (48.9%). Other major components of the spend were learnerships (17.1%) and artisans & apprentices (11.5%).

2.4.2 Commodity view

Diamond mining companies had the highest percentage HRD expenditure at 7.8%, followed by chrome (7.2%) and other commodities, comprising of silica, vanadium and limestone (6.8%). PGMs, coal and clay failed to meet the minimum requirement of 5% HRD expenditure, with clay miners achieving only 2,1%.

2.5 MINE COMMUNITY DEVELOPMENT

2.5.1 Industry view

One of the prominent features of the Mining Charter relates to mining community development and its regulation through social and labour plans (SLPs). This provides for strategic interventions that require planning (mostly with local authorities) and the implementation of programs that focus on the promotion of socio-economic growth and sustainable development of host communities as well as significant labour-sending areas.

Mining Charter 2010 does not set universal spending targets on mining community development (MCD). However, locally and internationally, a target of 1% NPAT is seen to be a reasonable target for corporate social investment. MCD budgets are set following engagements with the DMRE and local governments.

The assessment of MCD expenditure indicates that 89% of the programmes went through consultation processes with communities (432 out of 488 programmes). 374 out of 482 programmes were aligned with community needs (representing 73% of the total programmes).

The assessment shows that in 2018 mining companies spent R1.32 billion on MCD programmes, representing 7.4% of NPAT (this includes companies with negative NPAT). The MCD spend was above the best practice of 1% of NPAT spend on social development programmes.

The MCD spend, excluding mining right holders with negative NPAT, is R1.16 billion, which represents 2.7% of NPAT.

Mining companies spend mostly on infrastructure programmes, with a total expenditure of R576 million (43.7% of total spend). Job creation, health, environmental, and recreational programmes receive the least spending from mining companies, each representing less than 2% of total spend. MCD spend should prioritise programmes that foster long-term sustainable job opportunities, considering that the majority of community protests are due to lack of jobs and other economic opportunities within the industry value chain.

3. CONCLUSIONS

The mining industry met and exceeded the Mining Charter 2010 ownership target of 26% (the average BEE ownership is at 39.2%). However, a total of 80 out of 93 mining right holders did meet the minimum 26% HDSA ownership requirement (represents 86.0% of the sample). That said, the 13 mining companies that do not meet the target account for 1% of the sample data, based on the number of employees.

BEE entrepreneurs hold the majority of HDSA ownership. Majority of the BEE transactions do not create Meaningful Economic Participation as outlined in the Mining Charter 2010 definition. This is, however, because most of the BEE transactions of the companies analysed were executed prior to the implementation of the Mining Charter 2010. In line with the definition in the Mining Charter 2010, only 22 mining right holders, which represent 23.7% of the sample, created Meaningful Economic Participation.

The proportion of procurement from BEE entities exceeds the targets in all three reporting categories (capital goods, services and consumable goods). The sampled mining right holders reported that 75.4% (R16.9 billion) of expenditure on capital goods was procured from BEE entities against the 40% Mining Charter 2010 requirement. Similarly, for services, 75.1% (R45.5 billion) of the expenditure was incurred with BEE entities against the Charter target of 70%. And 79.0% (R45.3 billion) of the expenditure on consumable goods was procured from BEE entities against the Mining Charter 2010 target of 50%.

The sampled mining right holders meet and exceed the minimum HDSA representation thresholds set out in Mining Charter 2010 across the different management levels. HDSA representation in crucial decision-making positions, top and senior management levels, is still relatively low, and women are still underrepresented across all management levels.

The sampled mining right holders spent 4.8% of their annual payroll on HRD which does not meet the minimum Mining Charter 2010 compliance target of 5%.

Mining companies reported that they consult communities on 89% of their development programmes, which indicates a gap in consultation – the goal is to have 100% of all projects implemented go through the required community consultation processes. 100% meaningful consultation will ensure that all programmes are aligned to community needs. The sampled mining right holders spend 7.4% (2.7% excluding companies with negative NPAT) of their profits on community development programmes, which is above the best practice spend on social development of 1% of NPAT.

Footnotes:

1Statistics South Africa

2 A total of four (4) mining right holders provided insufficient data to be used in the analysis.

3 According to Statistics South Africa, the total number of employees in the industry is approximately 453 500.

4 10 mining right holders provided insufficient data to be used in the analysis.

5 5 mining right holders provided insufficient data to be used in the analysis.

6 9 mining right holders provided insufficient data to conduct the analysis.

7 12 mining right holders provided insufficient data to conduct the analysis.

8 Report can be accessed on the Minerals Council website www.mineralscouncil.org.za

9 Source: Rand Merchant Bank; Albert Nhasengo (Masters research titled: Sustainability of Funding Models Used in Black Economic Empowerment Transactions in the South African Mining Sector)

ENDS

Issued by the Minerals Council of South Africa, 4 December 2019