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SONA - Silence does little to comfort mining co’s

10 February 2012

President Zuma’s State of the Nation Address has done little to comfort mining companies and potential resource investors in South Africa. This is according to Allan Reid, Director in the Corporate and Commercial practice at Cliffe Dekker Hofmeyr. He says that although no mention was made in his address of nationalisation or the ‘State Intervention in the Minerals Sector’ report (SIMS), commissioned by the ANC to consider the issue of nationalisation, President Zuma affirmed once again this morning that nationalisation was not government policy.

“What is clear from the SIMS report is that a wholesale nationalisation of the minerals sector is not feasible – not for any reasons of policy, but rather in pure economic terms. Is this the nationalisation to which President Zuma was referring? But then, what of the selective nationalisation, or what the SIMS report refers to as “nationalisation of targeted mineral extraction” which, maintains the report, “is always an option, particularly for strategic monopoly-priced mineral feedstocks”. Is selective nationalisation also off the table?”, asks Reid

“And what of the erosive nationalisation which is already taking place within the industry? There has been a slow but steady erosion of the rights of mineral right holders since the promulgation of the Minerals and Petroleum Resources Development Act, 2002 (MPRDA).

“ The concept of mineral rights was abolished on 1 May 2004 and was replaced with a system of state granted licences for prospecting and mining. These licenses are granted on a use it or lose it principle, a far cry from the principles of mineral rights which were not time-bound and could be freely sold or encumbered without government interference.

In addition to the MPRDA, the Mining Charter imposed further burdens on miners with regard to BEE compliance. Although the Charter provided for BEE shareholding to be introduced “for fair market value”, the reality remains that the vast majority of these transactions have posed a significant financial burden on mining companies and their balance sheets. In addition, mining companies now also had to foot the bill for social and labour plans tailored to uplift and develop local communities. No one doubts that the intentions of the Charter are laudable. The problem is that the mining industry is bearing the burden of the government’s socio-economic reforms within this sector,” he notes.

“Then” says Reid, "in 2008 the government resuscitated the state-owned mining company, African Exploration, Mining and Finance Corporation, to compete head-on with mining companies. This was followed shortly thereafter by the introduction of the Mineral and Petroleum Resources Royalty Act, 2008 which imposed royalties on miners with effect from 1 March 2010. The Code of Good Practice and the revised Mining Charter of September 2010 imposed yet further restrictions on the rights of mining companies to operate their businesses to the best advantage of their shareholders. While nobody is suggesting that the mining industry should have no social conscience and should not contribute to socio-economic upliftment, over-regulation, coupled with inconsistent application of frequently ambiguous regulation, does nothing to enhance South Africa’s image as a resource investment destination of choice.”

Reid says that to compound the issue, the SIMS report proposes still further interference. It suggests that this could be achieved, inter alia, through an increased state/BEE shareholding of 30%, through limiting the issue of prospecting rights only over areas where the Council for Geosciences has determined that “there are no biddable mineral assets in the license area” or through the imposition of a windfall tax or a Resource Rent Tax of 50% once a miner has achieved a “normal” return (suggested to be 15%) on its investment.

“Many of the proposals in the SIMS report will be welcomed by the mining industry, particularly the recognition of the need for improved infrastructure, the need for the skills development of our people and the need for social upliftment. However, there remains an air of uncertainty within the industry, an anticipation of “What next?”

“The nationalisation debate was raised by Julius Malema in July 2009 and has raged on since then. Hopefully government has now quelled that debate insofar as the general minerals industry is concerned. It must now move quickly and act decisively so that the industry can move forward with certainty and purpose,” he adds.

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