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Introduction
Overview
Mining is South Africa's largest industry in the primary economic sector.
South Africa has 145 diamond mines, 64 coal, 49 gold and 28 PGM mines and
others, which together produced about 59 different minerals that were exported
to 101 countries in 2005. In the same period, eight-percent of ferrous metals,
33% PGMs, one-percent of industrial minerals, 23% gold, three-percent nonferrous, 21% coal and 11% of other primary minerals that were mined were
exported.
In 2005, South Africa was the world’s largest producer of alumino-silicates,
chrome ore, PGMs and gold. Prior to 2007, South Africa was the world’s largest
gold producer but bow occupies second place having relinquished the number
one position to China. In addition, the country is ranked second in production of
titanium metals and manganese ore, is ranked fifth in worldwide coal production,
seventh in production of iron ore and ninth in aluminium and nickel production.
In addition to being one of the world’s largest commodity producers, South Africa
holds some of the world’s largest reserve bases. In terms of gold, South Africa
produces 14% of the world’s gold and contains 41% of the world’s gold reserves.
About 21 000 t of undeveloped gold resources remain. However, these resources
are increasingly difficult to exploit owing to increased depths and the estimated
low-grade quality of the ore.
South Africa’s contribution to global mineral production in 2006
Commodity
Aluminium
SA global ranking in terms of production
9
Alumino-silicates
Chrome Ore
Coal
Copper
Gold
Iron Ore
Lead
Manganese Ore
Nickel
Phosphate rock
PGMs
Silver
Titanium metals
Uranium
Vanadium
Zinc Metal
1
1
5
16
1
7
13
2
9
10
1
17
2
11
1
22
Mining’s Contribution to the GDP
In January 2008, state-owned power utility Eskom imposed power restrictions on
mines in South Africa, owing to limitations of energy supply. Estimates show that
South Africa's mining industry could lose up to R9,2-billion in revenue and the
country's GDP could decline by R5,6-billion as a result of these restrictions.
Further analysis shows that the mining industry lost about R330-million in
revenues a day as a result of halted operations. Economists assume that owing
to the power crisis, the ultimate loss to the overall economy, owing to decreased
mining production, could amount to a 0,5% decline in the GDP for every week of
lost production in mining. If the shutdown is confined to the gold industry, the loss
would amount to about 0,2% of GDP for every week of lost production.
A number of analyses have been undertaken to understand the economic
impacts of the power supply shortage to the country’s economic growth,
particularly the impacts from the mining industry. Economists predict that GDP
growth for 2008 in South Africa will not be higher than 3,5%. This is two-percent
lower than figures estimated for 2008 by the Department of Minerals and Energy,
and 2,2% lower than figures expected for 2009, according to the same forecasts.
The Ministry of Finance in February forecast that economic growth for 2008 is
expected to decline to four-percent from 4,5% owing to a combination of factors
which include high interest rates and a decline in mining and manufacturing
output. The mining sector directly contributes about seven-percent to the national
GDP, although the indirect effects to the GDP are about 18,4%.
Employment in Mining
The mining industry is one of South Africa's major employers with workers
employed in the sector reaching more than 450 000 by May last year. In 2005,
the mining industry directly employed about 442 911 workers and about 147 673
workers were employed in industries associated with mining. Employment by the
industry can be illustrated graphically as follows:
Mining Sector
PGM
Diamond
Coal
Gold
Other
Total Employment
35%
5%
13%
36%
11%.
The gold sector was the largest employer in the industry by its employment of
36% of employees in the entire mining sector. The gold sector is closely followed
by PGM-producing mines, which employ 35% of workers in mining. Coal-mines
and other miners constitute 13% and 11% of the total number employed in
mining respectively, while diamond mining employs five-percent of workers in the
entire industry.
Mineral and Petroleum Resources Development Act
South Africa’s colonial past was characterised by discrimination by minority white
groups towards the majority black population. This type of discrimination
excluded the black population from full participation in the South African minerals
industry, besides other industries, during this period. South Africa’s democratic
transition from the repressive apartheid regime aimed to rectify this imbalance in
participation, and the government introduced the Minerals and Petroleum
Resources Development Act (MPRDA) in 2002, based on principles of the
Freedom Charter, which enshrines basic human rights. The MPRDA, which was
published in October 2002 and became effective in 2004, aims to transfer the
ownership of the country’s mineral wealth in such a way as to increase
participation of black people in the exploration and exploitation of mineral
resources.
The MPRDA addresses issues which include transformation of the minerals and
mining industry, promotion of equitable access to South Africa's mineral
resources, promotion of investment in exploration, mining and mineral
beneficiation, socio-economic development of South Africa and environmental
sustainability of the mining industry.
In South Africa’s colonial and apartheid non-democratic history, the country’s
mineral rights were owned either by the state or the private sector. This dual
ownership system represented an entry barrier to potential new investors. The
current government's objective, through this Act, is for all mineral rights to be
vested in the state. To this end, the government has set a number of targets for
the mining industry to achieve by 2009 as part of the MPRDA. Some of these
targets include that all mining companies comply with the BEE scorecard and to
convert old order mining rights into new order rights. Old order rights, which are
defined as being rights held by mining companies as at the promulgation date,
will need to be converted to the new form of prospecting right or mining right
introduced by the Mineral Development Act. The holders of such old order rights
will also need to comply with the objectives MPRDA when applying for the
conversion of their rights.
Emphasis in the mining industry today is increasingly being placed on stimulating
and increasing BEE participation, as the industry is still largely white-dominated.
Transformations of this kind to date has involved consolidation of ownership
through minority buy-outs, transfer of primary listings offshore, as well as the
purchase of South African mining assets by foreign companies.
The government, through the MPRDA is acknowledging that mining is vital for
entrepreneurial development, BEE and stimulation of employment and economic
growth and about 52% of privately owned business are expected to change
ownership in the next decade. From inception of empowerment legislation to
date, the total value of BEE deals has exceeded R200-billion, and the 153 BEE
deals in 2007 amounted to R96-billion.
Several black-owned firms are now beginning to play an important role in the
mining industry. The last few years has seen the emergence of several
empowerment companies of substantial size in South Africa's mining and
resources sector. In addition, a number of BEE-compliant mines have been
opened, most of which are located in the Limpopo and North West Provinces in
South Africa. Some notable BEE transactions include a land-settlement
agreement with the Richtersveld community for the return of 84 000 ha of
diamond-bearing land on the Namaqualand coast. This agreement, which
became effective in October 2007, will make the Richtersveld communitiy owners
of Alexkor, the state diamond-mining company. The agreement includes
restoring the land claimed, restoring the mineral rights by transfer of Alexkor’s
land-mining rights, a development grant of R50-million, compensation of R190million over three years as a reparation payment, transfer of agricultural and
mariculture assets as well as establishing a formal township at Alexander Bay
and undertaking environmental rehabilitation.
The Mining Charter
The Mining Charter was developed to redress historical imbalances which
resulted in blacks, mining communities and women largely being excluded from
participating in the mainstream economy, and also to comply with the mining
industry's intention to increase BEE and transformation at ownership,
management, skills development, employment equity, procurement and rural
development levels.
The government’s fundamental role in redressing historical imbalances in the
mining sector will be by facilitating the transformation of ownership. While it is not
the government’s intention to nationalise the mining industry, the MPRDA and
Mining Charter objectives will only be realised when socio-economic inequalities
are dealt with. The Charter provides a number of ways in which ownership in a
mining company to further BEE objectives can be obtained. These include
through a majority shareholding position, JVs or partnerships, and broad based
ownerships. The Charter also requires that all stakeholders create an enabling
environment for broad-based empowerment. This is to be created through
human resource development and employment equity targets. Some of these
targets include 40% BBBEE representation at management level and 10%
representation of women, in five years.
Other methods of securing an enabling environment for broad-based
empowerment in mining include companies’ commitment to non-discrimination
towards foreign migrant workers as well as the incorporation of mine community
and rural development programmes for communities around mines and also
infrastructure development programmes in the same areas. Mines will also be
required to improve housing and living conditions of mine employees, ensuring
procurement from black-empowered and black-owned suppliers. The target date
set for reaching the 26% BBBEE ownership is 2014 and in addition, mining
companies must have also achieved license conversions which promote broad
based socio-economic empowerment at levels of ownership, management,
employment
equity,
human
resources
development,
procurement
and
beneficiation.
Some critics of the MPRDA point out to the situation where, since the
implementation of the Act, South Africa has dropped 30 places in ranking on
the Fraser Institute Mining Survey. Currently, the country was evaluated in
55th place out of 65 countries, from 25th place out of 53 countries in 2004.
Between 2004 and 2006, mineral production in South Africa has decreased by
six-percent, and about 20 000 jobs in the sector were lost during the same
period. The industry has also faced a significant decline in investment since new
legislation was introduced in 2004, and the number of mining deals in South
Africa declined in 2008, accounting for about three-percent of total worldwide
mergers and acquisitions of mining deals, valued at about $6-billion.
In addition, a study based on the MPRDA has found that although companies are
responding to BEE requirements, the approach to these requirements is static,
leaving firms to seek solutions from other networks, rather than developing
vertical connections within their own organisations. Employment trends in mining
show that between 1994 and 2004, employment has decreased by 29% from
1994 figures. This trend could improve owing to a four-percent growth in mining
investment as indicated in the last quarter of 2006.
More recent legislation connected to the MPRDA, the Mineral and Petroleum
Resources Royalty Bill, which will enter into effect from 1 May 2009, is expected
to add about R4-billion to government’s revenue. The first draft of the Royalty Bill
emerged in 2003, the second in 2006 and the third, current draft will govern the
way on which mining companies are taxed on their production. Challenges with
the Bill have included the difficulty for government to find a balance between
ensuring that the local population sees economic and social benefits from mining
without at the same time deterring economic investment in the industry.
Concerns with the first draft hinted at a potential ‘double taxation of mines’, on
the grounds that mines would be taxed on both their commitments to achieving
MPRDA’s empowerment goals, but also on their production, thus rendering
mines less competitive during a period of high global commodity prices, which
could boost local economic growth. The most recently revised version of the Bill
proposes 2,7% taxation on production of PGMs, 2,1% on gold and 3,7% on all
diamond production. The royalty amount for quantities of chrome and base
metals produced would amount to one-percent.
INSERT: (Heading: BEE Scorecard) Source: www.revenuewatch.org
BEE deals and rankings
A survey of BEE transactions between March 2006 to March 2007, indicates that
Trans Hex Group, Gold Fields, Exxaro Resources, Harmony Gold Mining, African
Rainbow Minerals, Merafe Resources, Impala Platinum Holdings, AngloGold
Ashanti, BHP Billiton plc and Sappi, were the top ten mining empowerment
companies at year-end in 2007.
Trans Hex Group had a total BEE score of 63,14%, while Gold Fields, Exxaro
Resources, Harmony Gold and African Rainbow Minerals’ (Arm) total BEE
scores were 55,13%, 54,93%, 53,98% and 52,98% respectively, as the top five
mining empowerment companies.
Calculations for BEE participation in management indicate that in the same
period, management of mining companies by black people was 4,33%, 2,64%,
6,03%, 6,36% and 6,14% for Trans Hex Group, Gold Fields, Exxaro Resources,
Harmony Gold and Arm, respectively.
INSERT TABLE OF EMPOWERDEX RANKING (HEADING: Top ten mining
empowerment
companies
March
2006-March
2007)
Source:
www.
empowerdex.com
Between March 2007 and March 2008, the top three mining empowerment
companies are Merafe Resources, Trans Hex Group and Mvelaphanda
Resources respectively. Merafe Resources, which in March 2008 was ranked in
second place with an overall BEE score of 79,69, surpassed its sixth position
ranking in empowerment in mining from last year, and 49th place in overall BEE
industry ranking.
In addition, Trans Hex Group, which ranked in first position as a BEE miningempowerment company, and in 14th place in overall industry ranking last year,
ranks in second place in mining and ranks in 31 st place in overall industry with an
overall BEE score of 61,64 % in 2008. Although the Mvelaphanda Group did not
score in the top ten mining empowerment companies in 2007, the Group ranked
in 32nd place in 2008 in an overall industry comparison, with an overall BEE
ranking of 61,52%.
The rankings are calculated based on ownership of companies by black people.
This category includes exercisable voting rights in the company that are in the
hands of black people, and exercisable voting rights in the company that are held
by black women. A further category includes levels of economic interest. This
category includes the economic interest of black people in general, and of black
women in a company. Involvement in a company by new black entrants,
ownership involvement by black participants, involvement in employee ownership
schemes, broad0based ownership schemes and cooperatives are other
indicators used to calculate economic interest.
Another category includes management control. This includes involvement by
black people top management and in board participation. The skills development
category includes the amount spent by a company on learning programmes for
their black employees. The procurement category quantifies how much is
purchased from already empowered companies. The last two categories include
enterprise development and socio-economic development, which measures the
extent to which companies carry out initiatives that contribute to enterprise
development and the extent to which companies support socio-economic
development respectively.
South African Mining Preferential Procurement Forum
In addition to the MPRDA and the Mining Charter, the South African Mining
Preferential Procurement Forum (SAMPPF) is a voluntary organisation
established in 2001 to put together a database of historically-disadvantaged
suppliers of goods and services to the mining industry. The forum was
established by Kumba Resources, Impala Platinum and Anglo Platinum to
increase the contribution of historically-disadvantaged South Africans to South
Africa’s mining industry. A preferential procurement plan was drawn up from the
onset of the Forum to ensure uniform requirements for those who provide goods
and services to it. The Forum was initiated and piloted first in the Northern Cape
and Johannesburg and it is currently implemented in the Northern Cape, North
West Province, Mpumalanga and Limpopo.
SAMPPF has been founded with four main objectives for the forum, the first
being to enable effective implementation of preferential procurement policies; the
second to provide reporting facilities to measure the progress of preferential
procurement initiatives; the third to develop a database of suppliers to source
goods and services from the previously-disadvantaged group; and the fourth to
streamline the maintenance of supplier information and improve the currency of
information.
Financing BEE deals
In addition to the vast number of legislation allocated for BEE deals in mining, a
number of financing options for such deals are available, and includes state and
private funding. The Industrial Development Corporation is an example of a
state-financier for a number of BEE deals. The IDC's approach to funding BEE is
similar to private-equity players. This means a relatively constant and active role
of the corporation until repayment. So far, the IDC has financed about R1,3billion for black companies investing in the mining sector. The IDC has been
involved in the funding of SA Chrome, where R250-million was provided for a the
development of a smelter in the Bushveld Complex and in Arm's 50% share of
Anglo Platinum's Modikwa project. The IDC also participated in the Gold FieldsMvelaphanda Resources transaction, and provided R300-million as part of the
R1,1-billion mezzanine financing raised by Mvelaphanda for its 15% stake in the
local operation of Gold Fields.
Meanwhile the impact of increasing interest rates on financing BEE deals could
play a significant role in the success or failure of these deals.
One method of financing of BEE deals, which involves acquiring shares by BEE
partners without cash inputs, which instead are obtained from third parties, could
lead to failure owing to high interest rates. Other financing options for BEE
transactions include special purpose vehicles (SPVs) and debt.
Some examples of financial transactions for BEE in the mining industry that have
been financed through special purpose vehicles (SPVs) since 2005 include
Shanduka Resources’ deal with Assore and Kumba Iron Ore’s separation of its
assets into a new company. SPVs can be negatively affected by rising interest
rates as increased costs of funding these deals could become too costly for
miners to afford.
BEE mining companies financed through debt could also be significantly
negatively affected by high interest rates owing to the higher costs required in
repaying such debt. Higher interest rates also usually result in lower share prices.
However, those BEE companies paying fixed interest rates on loans will not be
as affected as those paying non-fixed interest rates.