THE DRAWN-OUT PROCESS TO REMAKE THE MINING CHARTER IS STILL ONGOING

A year on from the much-maligned revised Mining Charter published last year, by his predecessor, the Minister of Mineral Resources (Minister) published the long-awaited Revised Mining Charter in draft for comment on 15 June 2018. [1] Once finalised, the Revised Mining Charter will repeal and replace the previous versions of the mining charters including the much-maligned version, which was published on 15 June 2017 but never implemented.

The Revised Mining Charter has been widely seen as an improvement on the discredited 2017 Mining Charter. Some of the notable changes found in the Revised Mining Charter include:

• Recognition of the Historical BEE Transactions continuing consequences subject to the limitations set out in the Revised Mining Charter.
• Uniform minimum black ownership target of 30% for all the mining right “types”. The Revised Mining Charter has dropped the requirement that new prospecting right holders should be 50%+1 black owned.
• Alignment of the provisions of the Revised Mining Charter with the provisions of the Broad-Based Black Economic Empowerment Act, 2003 (BBBEE Act) and the Codes of Good Practice on Black Economic Empowerment (BEE) published in terms of the BBBEE Act (BBBEE Codes) albeit with noticeable variances.
• The introduction of reasonable and workable transitional periods to allow the holders of the existing rights to comply with provisions of the Revised Mining Charter and to top up black ownership where required. The Revised Mining Charter allows a five-year period whereas the 2017 version provided for an impossible 12-month period.

However, the Revised Mining Charter contains a few of its own shortcomings, which should be addressed through the ongoing public comment process and further engagements with the key stakeholders such as organised labour and the Minerals Council of South Africa. We briefly highlight below some of the key changes proposed by the Revised Mining Charter, some of its shortcomings and, where possible, some suggestions to address the shortcomings.  Defined terms not specifically defined here are defined in the Revised Mining Charter.

The ownership principles have been significantly revised, but some interpretation difficulties remain - this will complicate the practical implementation of the Revised Mining Charter.

• The minimum black ownership target of 30% retained with some modifications: The Revised Mining Charter requires holders of mining rights to have a minimum of 30% black ownership. Holders of existing mining rights and those whose applications for mining rights are currently pending have five years to supplement their black ownership level to a minimum 30%.
• No ownership requirements for prospecting rights: The Revised Mining Charter is silent on the ownership requirements applicable to holders of prospecting rights. Noticeably, the requirement introduced in the 2017 Mining Charter that all new prospecting rights holders are required to be 50%+1 black owned has not been retained. The non-inclusion of ownership requirements applicable to prospecting rights is consistent with the provisions of section 17(4) of the Mineral and Petroleum Resources Development Act, 2002 (MPRDA) which gives the Minister the discretion to decide whether ownership requirements should be included or not.
• The requirement that ownership includes a “BEE Entrepreneur” is badly phrased: The Revised Mining Charter provides for minimum ownership of new mining rights by “BEE Entrepreneurs”, among others. In this regard, the Revised Mining Charter provides that a minimum of 14% of shares must be held by a BEE Entrepreneur.
  • A “BEE Entrepreneur” is defined as “Black enterprises that are at least 51% owned by black persons in which Black persons hold at least 51% of exercisable voting rights and 51% of economic interest…”
  • In the first place, the capitalisation in the definition makes it unclear whether the defined term “Black Persons” is intended to be inserted into the clause.
  • The definition of “Black Persons” includes a definition of a juristic person. The definition includes Africans, Coloureds and Indians (i) who are citizens of South Africa by birth or descent; or (ii) who became citizens of South Africa by naturalisation before 27 April 1994 (natural black person/s), and (iii) a “juristic person which is managed and controlled by [natural black person/s]…”.
  • Reading the definition of “Black Persons” into the term “BEE Entrepreneur” allows a BEE Entrepreneur to be held 51% by a juristic person in which Black Persons hold 51% . This would result in significant dilution of black ownership, and it is unclear whether this is the intention.
  • In general, when measuring the rights of ownership in a measured entity, particularly under the BBBEE Codes, the general principle is that the “flow-through” principle is used to determine the rights held by natural persons who are black. The MPRDA and the Mining Charter have always allowed a deviation from the flow-through principle in measuring black ownership, allowing the 26% shareholding of a 51% black owned entity to be treated as 26% black ownership (rather than 51% x 26% = 13% as with the flow-through principle). This approach is however not widely accepted within DMR, and many black-owned mining companies experience difficulties explaining their black ownership to DMR officials, who insist on applying the flow-through principle to measure their ownership.
  • Practically, in the context of the Revised Mining Charter, applying the definitions of BEE Entrepreneur and “Black Person” as presently used, the effective shareholding by natural Black Persons in a company holding a mining right could be as low as 3.6% using the flow-through principle. This would be the case where a BEE Entrepreneur has a14% equity in a company that holds a mining right and the BEE Entrepreneur is 51% owned and controlled by a juristic Black Person which in turn is 51% owned and controlled by natural Black Persons (i.e. 51% x 51% x 14%).
  • If this dilution of effective shareholding by Black Persons is the intention, this should be clarified. If not it should also be clarified. 
  • This is a key point for structuring BEE transactions, and the exact manner in which a BEE Entrepreneur’s (or other black shareholder’s) holding is to be measured should be entirely devoid of ambiguity in the Revised Mining Charter.

• The controversial free carry provision: The Revised Mining Charter provides that a new mining right must have a minimum of 30% BEE shareholding.
  • This BEE shareholding is required to be distributed as follows: (i) a minimum of 8% of which 5% is non-transferable free carried interest to qualifying employees; (ii) a minimum of 8% of which 5% is non-transferable free carried interest to host communities and (iii) a minimum of 14% shares to a BEE Entrepreneur.
  • The concept of free carry interest has not been a feature of the South African empowerment regime. It is a fundamental departure to the practice of arm’s length transactions, which has been a feature of the BEE transactions to date.
  • In recognition of difficulties associated with access to funding, the market has developed various innovative funding methods for the BEE transactions as opposed to the free carry interest concept.

• Mechanisms to maintain the minimum black ownership level or prevent ownership losses by Black Persons: The Revised Mining Charter contains a number of rules aimed at ensuring that the minimum ownership level of Black Persons is maintained at 30%. In cases where black ownership drops below this level, there are rules relating to restoration of such ownership.
  • Some of these rules are clearly in response to the recent High Court judgment regarding the so-called “once empowered, always empowered principle”.
  • In respect of the new mining rights, the Revised Mining Charter provides that the prescribed minimum 30% target shall apply for the duration of a mining right.
  • In the event that the BEE Entrepreneur’s shareholding is disposed of, the Revised Mining Charter contains rules relating to the recognition of the exited BEE Entrepreneur’s shareholding for the duration of the right. The ownership points that can be recognised depend inter alia on the length of time the BEE Entrepreneur has held its shares and the effective ownership achieved in that time.
  • In respect of the existing rights, the Revised Mining Charter provides that the holder of an existing mining right who at any stage during the existence of a mining right achieved a minimum of 26% black, and whose black shareholders have since exited shall be recognised as compliant. In this regard, the holder of an existing mining right is required to supplement its black shareholding from 26% to a minimum of 30% within five years of coming into operation of the Revised Mining Charter.

• Qualified recognition of the continuing consequences of the Historical BEE Transactions: The Revised Mining Charter provides for the recognition of the continuing consequences of the Historical BEE Transactions in pre-defined circumstances.
  • The recognition of continuing consequences does not apply to an application for a new mining right by a holder who currently relies on continuing consequences of a previous transaction for compliance with the empowerment requirement.
  • The recognition of the continuing consequences of previous transactions also does not apply to the renewal of a mining right which currently enjoys such recognition. This means a holder who currently relies on recognition of the continuing consequences to satisfy its empowerment obligations will have to enter into a new empowerment transaction to renew a mining right which currently enjoys such recognition.
  • In addition, the recognition of continuing consequences is not transferable. The recognition lapses upon transfer of the right, which currently enjoys the recognition of the continuing consequences of the Historical BEE Transaction.
  • The Revised Mining Charter goes on to say that an existing right holder who never achieved a minimum 26% black ownership shall not enjoy the recognition of continuing consequences of the previous transaction and should be subjected to the MPRDA “corrective processes immediately”. It is not clear what the MPRDA “corrective processes” mean because the MPRDA does not have a rectification procedure. We assume this means a directive in terms of section 47 or 93 of the MPRDA.

• The reinvestment rule: The BEE Entrepreneur is required to re-invest a minimum of 40% of the proceeds from the disposed equity in the mining industry. The Mining Charter does not state how long this reinvestment should endure. Besides the paternalistic nature of this rule, it is difficult to see how it will be enforced in practice. The BEE Entrepreneur is not the holder of a right, and if it fails to reinvest the prescribed minimum 40%, it has no risk of cancellation or suspension of the mining right. It is difficult to see how such a consequence could successfully be visited on the holder of the mining right that the BEE Entrepreneur has exited.

• The possibility of use of “equity equivalence” for meeting the ownership target: The Revised Mining Charter provides for a possibility of claiming “equity equivalent credits” against a portion of the ownership points. This replaces the old beneficiation offset provision. This is a welcome improvement from the old beneficiation-offset provision, which was ambiguous particularly regarding the eligibility criteria for claiming offset credits. More, however, needs to be done to develop the new regime, and the following remains unclear:
  • The decision-making arrangements for approving the equity equivalent plan are not described because the “mining charter implementation guidelines” have not yet been published. It is also not clear whether any consultative process will be required to develop and approve the equity equivalent programme.
  • The link to beneficiation. For example, equity equivalent credits can be claimed in respect of a portion of an integrated producer’s production that is beneficiated. “Beneficiation” is broadly defined as “the transformation, value addition or downstream beneficiation of a mineral… to a higher value product, over baselines to be determined by the Minister…”. This raises the question of whether the smelting operations will qualify as beneficiation.
  • One of the activities that will entitle the right holder to apply for equity equivalent credits is supplying minerals to independent local beneficiation entities at a discount to the mine gate price. The Revised Mining Charter does not define the mine gate price. The definition is contained in the MPRDA bill that was referred back to Parliament for reconsideration and forms part of the controversial provision regarding the ability of the Minister of Mineral Resources to declare certain minerals as strategic minerals.

• The payment of a trickle dividend equal to a minimum of 1% of Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA): The holders of the new mining rights are required to pay a minimum 1% of EBITDA to qualifying employees and host communities. The 1% of EBITDA is payable in two instances; namely (i) from the sixth year of a mining right until dividends are declared, or (ii) at any point within a period of 12 months where dividends are not declared.

The revised approach to procurement and the increased new procurement and supplier targets

• The Revised Mining Charter moves away from the term “BEE entities” (i.e. entities with a minimum of 25% + 1 vote of share capital which is directly owned by black people”) and introduces a similar term “BEE compliant companies”. The BEE compliant company is defined as “a company with a minimum B-BBEE level 4 status in terms of the BBBEE Codes of Good Practice and minimum 26% black ownership.”
• An entity that was structured as a BEE entity is likely to also qualify as a BEE compliant company, but the Revised Mining Charter has significantly reduced targets for procurement from BEE compliant companies. The reduction is most noticeable in respect of the services.
• The Revised Mining Charter puts in place specific targets on the procurement of South African manufactured goods sourced from South African companies which have majority black ownership. The Revised Mining Charter requires that:
  • 21% of the total mining goods procurement budget must be set aside for sourcing South African manufactured goods from BEE Entrepreneurs (which are entities that are 51% black owned); and
  • 5% of the total mining goods procurement budget must be set aside for sourcing South African manufactured goods from BEE women entrepreneurs or 51% youth owned and controlled enterprises.
• Nevertheless, there is still a relatively large budget procurement spend reserved for the BEE compliant companies in respect of the goods. In this regard, the Revised Mining Charter provides that 44% of the total mining goods procurement budget must be spent on South African manufactured goods from BEE compliant companies.
• In respect of the services, even higher percentages are set for procurement from majority black owned suppliers. The Revised Mining Charter provides that a minimum of 60% of the total spend on services must be procured from BEE Entrepreneurs. Only 10% is to be procured from BEE compliant companies.
• The procurement of goods and services targets are required to be complied with within a period of five years. Although these targets must be complied with within five years, a right holder is required within six months from the date of publication of the final Revised Mining Charter to submit a five-year plan indicating progressive implementation of the procurement targets and there are set targets for each year.  

Procurement obligations may be offset against investment in enterprise and supplier development

• The Revised Mining Charter specifically permits the holders of the rights to offset their procurement element obligations against investment in enterprise and supplier development. In this regard, the Revised Mining Charter provides that up to 5% of the total procurement budget on mining goods and up to 10% of the total procurement budget on services may be offset using supplier and enterprise development.
• To qualify for this offset, there are a number of requirements that must be satisfied including a written agreement between a right holder and the recipient supplier or enterprise development and the fact that the contract between a right holder and the recipient supplier must be a minimum of five years.

Contribution by foreign suppliers

• The Revised Mining Charter provides that a foreign supplier must contribute a minimum of 0,5% of its annual turnover generated from local mining companies towards the development of suppliers to be directed to the Mandela Mining Precinct for research purposes.
• The above requirement markedly differs from the 2017 Mining Charter which required a contribution of a minimum of 1% towards a Mining Transformation and Development Agency, which was going to be an agency within the Department of Mineral Resources.

Employment equity

• In the first instance, the proposed change in this element fails to distinguish between management and the board of directors, which is a non-remunerative position. This is an unusual approach.
• In respect of the board of directors, the Revised Mining Charter provides that host communities and qualifying employees should have representation on the board or advisory committee of a right holder. This is a new requirement and difficult to achieve.
• The Revised Mining Charter introduces higher targets for black representation at board and management level when compared to the 2010 Mining Charter targets. For example, the Mining Charter requires a board and executive/ top management to consist of a minimum of 50% Black Persons. At junior management, a minimum of 70% is required to be black employees, 25% of which must be black women. These targets are slightly lower than those contained in the discredited 2017 Mining Charter.

Some concepts, definitions and principles will need to be clarified and/ or developed further

A number of principles and concepts in the current draft of the Revised Mining Charter will need to be clarified or removed in order to make sure that the implementation of the Revised Mining Charter is not caught up in disputes about interpretation. Some of the affected concepts or principles include:

• Clarifying the principles that will apply in measuring black ownership. In particular, the circumstances in which the flow-through principle will be applied and whether 51% of 51% qualifies as black ownership for the purposes of measuring black ownership of a BEE Entrepreneur. The final draft of the Revised Mining Charter will have to clarify this important principle because if it does not, measurement of black ownership in the minerals industry will continue to be subject to interpretation difficulties.
• The BEE shareholding in the holder of a new mining right is required to be distributed as follows (i) a minimum of 8% to qualifying employees; (ii) a minimum of 14% to a BEE Entrepreneur and (iii) a minimum of 8% to host communities (in the form of a community trust as prescribed). However, the Revised Mining Charter does not prescribe the requirements for such trusts. This a big gap that the final draft of the Revised Mining Charter will have to clarify, especially in light of the criticism that the current trusts are nebulously More importantly, it will have to be clarified whether the broad-based ownership schemes (BBOS) will be acceptable vehicles, especially in light of the fact that BBOS structures are currently under scrutiny by the BEE Commission.
• The definition of “Meaningful economic participation” states that one of the key attributes of meaningful economic participation is that BEE shareholders should have full rights entitling them to full participation at annual general meetings, exercising of voting rights in all aspects including “but not limited to trading and marketing of the commodity”. Trading and marketing of the commodity is not an annual general meeting matter and is not voted on. Where the commodity is marketed or traded is an operational matter which is often contained in a company’s business strategy approved by the board of directors and would not be voted on by the shareholders. The ability to vote on trading and marketing of the commodity should be removed as a key attribute of meaningful economic participation.
• The Revised Mining Charter states that in respect of junior miners, a right holder may make representations to the Minister regarding the extent to which the Mining Charter elements shall apply. This exemption provision needs to be clarified further. For example, who qualifies as a junior miner and what is the decision-making process that the Minister will follow in granting the special dispensation envisaged in this clause.

Conclusion

Whilst the Revised Mining Charter contains some improvements from the previous iterations of the mining charter, there is still room for improving the final draft in order to ensure that its principles are implemented smoothly. Recognising the amount of work that remains to be done, the Minister has extended the deadline for making written submissions until end of August

[1]  See the Draft Broad Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018, published in Government Gazette no 41714 of 15 June 2018 (Revised Mining Charter). Members of the public or interested and affected parties had until 14 July 2018 to submit comments. The commenting period has since been extended until the end of August.