2003

2002 saw a surprise surge forward in both black economic empowerment and transformation, or what Mbeki has called “deracialisation of the economy”. This was largely driven by the historic transfer of the ownership of the country’s mineral wealth to the state (i.e. nationalisation) – through fiercely contested legislation – followed by the mining charter that laid the foundation for transformation. (SInd 5.1.03)

Major mining houses and trade unions start bargaining in about May towards July’s renewal of the two-year-old (7.5-10% p.a.) wage agreement. Midlevel supervisory union Solidarity plans to demand a 13.5% increase (CPIX inflation is 12.7%). (BD 9.1)

Spoornet’s plan to raise coal transport costs by up to 60% from 1 April will jeopardise many small-scale coal-mining companies which move 2.2mt to Durban, 1.1mt to Maputo. Spoornet claims it is only correcting prices after previous subsidisation – its proposed increases are ‘nothing new’, needed to operate on sound commercial principles and make the General Freight business sustainable, still lower than road hauliers, and not yet finalised. (BD 9.1, BR 10.1)

Draft regulations in terms of the Mineral and Petroleum Resources Development Act, 2002 (Act no 28 of 2002) nationalising mineral and petroleum resources are available at www.dme.gov.za and written comments can be made until 6 February. (BT 12.1)

Draft regulations in terms of the Mineral and Petroleum Resources Development Act, 2002 (Act no 28 of 2002) nationalising mineral and petroleum resources are available at www.dme.gov.za and written comments can be made until 6 February. The 238-page draft includes about 127 regulations and 42 forms and regulates mining, the environment, pollution and waste management control and various aspects of petroleum exploration and production. It also indicates what a social and labour plan might contain to win a mining permit, but not clearly. (BT 12.1, BD 13.1)

Zimbabwe’s 55 000 mineworkers now face unemployment. Government’s exchange rate requirements for remitting proceeds of mining exports have halted wage adjustments, since employers cannot afford to meet union demands or compensate workers for hyperinflation. Mining companies have proposed a devaluation from Z$55 to Z$729 to the US$, but government has not responded. (BR 17.1)

Min-energy minister Mlambo-Ngcuka says the BEE scorecard to chart mining industry transformation (compliance with the mining charter) will be released on 20 January, a simple one-page checklist with no more surprises, and ‘not another empowerment charter’ as some people had come to believe. She believes treasury has already drafted the money bill with its royalty regime for parliament to see in the first quarter of this year. (BR 18.1)

In Avmin’s (but not Implat’s) first BEE transaction, Tiso Capital consortium got the right to buy 25% of the Two Rivers platinum project near Lydenberg. With the empowerment deal finalised, the mining licence should be a formality, says Avmin’s Menell. (ST/BT 19.1)

Anglogold estimates the cost of managing HIV/Aids at the epidemic’s at $4-6 per ounce mined, and failing to manage it would cost around $9 per ounce. About 3000 Anglogold workers qualify for free drugs-treatment after the planned April roll-out, as they have clinically advanced Aids or severely compromised immunity. But few mine-workers currently want to disclose their HIV status. (ST 19.1)

Despite the minister’s promised 20 Jan release of the ‘scorecard’, min-en dept decided to spend more time cobbling together a checklist that will be broadly acceptable to the mining industry, trying to reach ‘consensus’ and not cause negative market reactions and instability. The Sector Partnership Committee of key industry stakeholders needs to rubber-stamp the scorecard, like it did the charter, before release for public comment. Last July the government’s radical BEE starting position – kept secret for the good reason that it was insane – was leaked and in three days about R50bn had been wiped off the boards as investors panicked at supposed signs of nationalisation of a key industry, with repercussions still being felt around the globe. This time perhaps certainty will be restored and the unanticipated costs of transformation minimised. (Sowetan 21.1, BR 21/23.1)

In a matter of weeks all the Act’s elements will fall into place, enabling many ways for inventive people to structure empowerment deals. The need to transfer 26% of the resources industry to black hands provides, if desired, a handy disinvestment tactic for largely foreign-owned firms such as Cluff Mining, BHP Billiton and Anglo American. (BD 24.10)

The five-year window for changing existing mining rights to new rights offers room for innovation. For R250m (R140m plus call options to Harmony of 290000oz of ARV’s future gold production over ten years), African Vanguard Resources has bought 26% of Harmony’s Doornkop South Reef project’s mineral rights, whose ownership will soon be transferred to the state. Min-en dept D-G Andile Nogxina and Harmony CEO Bernie Swanepoel were scathing about emerging comnapies getting into the resources industry for short-term speculation and self-enrichment instead of adding value for the long haul. (BD 24.10, CityPress 26.1)

Min-en dept D-G Sandile Nogxina says industry stakeholders are currently commenting on the social plan (empowerment charter). Chamber of Mines will present the scorecard for approval at its next council meeting. Finance dept is finalising the money bill. Mbeki signed the mining bill on 4 October so the various adjuncts must be completed by 4 April. ‘Most probably’ all will be promulgated by June, so the deadline for SA mining companies to convert their existing mining licences to new mining licences will probably be June 2008. Chief director Jacinto Rocha warns the industry to ‘ensure that you are truly compliant, not just in one element. The only way to survive is to be prepared.’ (BD 29.1)

Union NUM claims Gold Fields will struggle to reach the charter’s 40% quota of HDIs in management. A company spokesman says 30% of management across all levels are already black and Gold Fields’ EE strategy is to meet the requirement. (BD 31.1)

Chamber of Mines chairman Davison says government has to achieve transformation and business has to cooperate to achieve political stability. Last year, after an intense and worthless process, several key players engaged in an often very difficult, confrontational and unpleasant process to reach an entirely sensible and workable compromise. This should ensure the needed huge investments in the mining industry are made. (BR 1.2)

Imminent minerals nationalisation and “use-it-or-lose-it” has prompted the restarting of Project Argonaut, first mooted in 1983. It covers 270 sq.km of south Joburg sitting on R350bn-worth of gold. At least three new deep mines would last a century, extracting gold from 2014 on. (Star 3.2)

The Mining Titles Registration Amendment Bill was tabled in parliament to create a central deeds
and information service and provide for the process to convert mining and prospecting rights to ‘new order rights’. Without it, no proper records can be kept of mineral rights, so the legal consequence of the Mineral and Petroleum Resources Development Act is the unconstitutional wiping away of rights. Min-en dept’s mining rights director Ms Bopape-Dlomo said this ‘legislative lacuna’ has to be closed to implement the Act. (BD 6.2)

European countries recycle 87% of mining waste, SA only 15%, so dump-recycling offers significant growth possibilities, said Vuka’s Matthews Phosa, buying 50% of Ruslyn Mining and Plant Hire for R17.5m. (BD 7.2)

Min-en minister Ngcuka says mining firms must develop labour-sending areas by government-approved programs to end poverty and provide basic infrastructure. (BR 7.2)

Royal Bafokeng Nation consolidates all its R10bn platinum, chrome and other mineral assets under Royal Bafokeng Resources Holdings, with ex-Implats chairman Steve Kearney, aiming to become a significant mining player. (BD 12.2, BR 18.2)

Cyril Ramaphosa’s MCI Resources buys 25% of coal producer Kangra, and (with junior miner Metorex) ETCons gold complex from Avgold for R300m. Mzi Khumalo’s Metallon and Tokyo Sexwale’s Mvelaphanda Resources are also growing. (BD 12.2, BR 18.2)

Angloplats’ Davison worries that min-en dept may lack staff to process appliocations for new order mining permits later this year. (BR 12.2)

NUM union alleges some mining groups lie about their compliance with equity targets in reports to labour dept. (BD 12.2)

ING Financial Markets said in a research report that R173bn, or 23% of the market value of nine large mining stocks with exposure to SA constituting almost 50% of the JSE All Share Index, was destroyed in four months after panic-strcken investors, mostly London funds, baled out last year because of the draft charter. (JSE Reaching Out, Summer 2003)
President Mbeki said the mooted empowerment advisory council will be non-statutory, and a rigid and inflexible approach is not in the best interests of a modern and global competitive economy. The Black Business Council expressed disappointment that it would be ineffective with “no teeth”. The financial sector is now working on a consensus document. The new policy on charters will kill existing initiatives in numerous sectors of the economy. (BD 18.2, BT 23.2)

Minister Ngcuka said the new legislation will transfer mineral rights from the private sector (back) to the state, but ‘it was never our intention to nationalise our mines’. The black empowerment scorecard was released, apparently introducing no extra problems after Ngcuka had hastily corrected her initial indication that mining companies wouldn’t get credit for past empowerment initiatives. DTI minister Erwin said ‘we will carry out empowerment in a pragmatic way’, since ‘BEE goes hand in hand with growth’. Barclays MD Holden predicted BEE will need $8bn for the first five years and another $6bn for the next five years. International investors remained sceptical over outstanding associated legislation and implementation. Long delays in authorising new mining licenses are feared, a great deal of discretion accrues into the hands of the minister, and investors prefer legislative certainty. The money bill will be detailed in the budget speech on Feb 26. (BR/BD 19/20.2, BT 23.2)

A draft precious metals bill, expected from DTI and min-en dept by year-end, will define how beneficiation can be offset against empowerment. Minister Ngcuka said offsetting for past empowerment transactions would need an audit. An overseas investor asked for assurances that the empowerment goalposts will not change – the minister said it’s a matter of trust. (BD 21.2)

Treasury D-G Ramos said late last year that there would be no “crazy numbers” or any “additional taxes”. Minister Ngcuka said royalty payments would have a degree of flexibility. A London-based mining analyst expected the budget’s new mining royalty payments to be set at 2-3% of SA mine turnover, knocking 5-6% off earnings. Even a 1% charge is a whack for developing mining companies, said BEE Khumo Bathong Holdings chairman Ncholo. But Manuel’s budget speech failed to mention the promised money bill, leaving mining companies upset that govt had left them looking silly. Then treasury tax-policy C-D Grote told Bloomberg details will come out within 10 days. Investors are desperate for govt to move along and provide clarity and reassurance by signs of stability. (BD 26.2, BR 27.2)

Harmony CEO Swanepoel criticised the budget’s mere R10bn over 5 years for empowerment, while the mining industry is expected to come up with R100bns of empowerment deals. We get the bad news like the promised royalties bill in various instalments after the budget, like the equity charter last year. Even 2% royalties would make SA one of the most uncompetitive tax and regulatory regimes in the world. Other mining companies expressed disquiet in private. Finance dept’s Donaldson claimed government is generous and doesn’t wish to be punitive with the mining industry. (BT 2.3)

Treasury promised money bill details by month-end. Royalties will undoubtedly affect earnings of mining companies. Skittish international investor who want hard facts saw the budget’s silence as another missed deadline. (BR 5.3)

Werksmans Attorneys addressed mining industry concern about excessive ministerial discretion. The Act will give the minister the right to authorise all mining-right transfers and sales. She has to give consent if the new right-holder can show it can comply with the needed criteria. The scorecard is vague about what will prove acceptable to the department and the minister. Companies may only get a clear idea of what’s acceptable to gain rights-conversion once legal precedents have been set. So – no clarity or certainty yet. (BD 6.3)

Pub-ent minister Radebe’s wife and mining magnate Bridget part-owns Cluss Mining, which bid to platinum-prospect on Hoekfontein farm in NW province. Canada’s Canamafrica Platinum Corp also bid but encountered frustrating delays. Min-en D-G Nogxina has now undertaken to look at both bids. (M&G 7.3)

Mining baroness Bridgette Radebe says 8000 Mmakau community members supported an April 2000 tribal resolution favouring her Mmakau Mining’s Madibeng Joint Venture with Cluff Mining. Tribal council chairman Pat Motsepe says no agreement was reached. Canamafrica says its offer is better. (M&G 14.3)

North-west province roads dept authorised the firm of diamond digger Buks Oosthuizen to explore his mineral rights on the farm Kareepan – in a huge mining operation on a 1km-long stretch of the R504 provincial road between Wolmaransstadt and Schweizer-Reneke. He has posted a R500000 bank guarantee and will rehabilitate the road afterwards. A gravel service road has been built for diverted traffic. (Cit. 18/19.3)

‘Money bill due tomorrow’, followed by a surfer’s comment: “Marxist ZA screwing international shareholders again” Bloomberg reports govt spokesman Joel Netshitenzhe saying cabinet discussed royalties proposals, will make them public today (20 March), and plans to spend the money on developing communities close to the mines. Stakeholders will get four weeks to comment before cabinet finalises the bill for submission to parliament. (Moneyweb, 18.3, BR 20.3)

Finance minister Manuel released money-bill details (available at treasury.gov.za). He insisted the money would go into the national revenue fund and admitted most investors would prefer not to pay any tax at all. Royalties are tax-deductible and set at 1-8% of gross minerals sales value, e.g. coal 1%, iron 2%, gold 3%, platinum 4%, amethysts 5%, diamonds 8%. Local mining shares fell, Anglo and BHP Billiton by 2%. (Star 21.3)

Mining companies already pay more than the standard 30% company tax, and facilitate BEE at extra cost. Despite tax deductibility, they’ll effectively pay more to the state. The money bill talks of government sharing with mining operators what it calls ‘resource rents’ – profits over and above the return rate which just justifies development. Despite the bill’s stated hope, this is bound to significantly reduce the underlying value of companies and seems likely to impact negatively on the economic viability of projects. (BT 23.3)

More royalties will be paid under the proposed scheme than in the past. Manuel claims rates fall within sustainable international norms, but many in the industry see them as an extra tax which will hit values and weaken conpetitiveness. With SA’s marginal tax rate for gold miners of 46% and this 3% on gross revenue, SA becomes the least accommodating gold mining regime in the world. 3% of anticipated revenue won’t now materialise, and this will scare people away from existing projects. Gold and platinum shares fell. (BD/BR 24.3)

JSE platinum counters took another beating as the index plunged over 5.2% because of a stronger rand and negartive sentiment towards local mines because of the bill. Treasury’s Martin Grote claims the mining industry is overdramatising – if in place, royalties would have added R4.2bn (another estimate is R6bn) to state coffers last year, which would not erode mining-industry competitiveness. Anyway, treasury can review the rates if necessary to stay competitive. But the bill has stirred fury much like the leaked empowerment charter did last July, and the industry is bound to fight the extra tax. (BR 26.3)

The royalty bill adds a fixed cost to an already high-cost industry, raising the cost of capital and the risk of projects. It has scared mining firms into almost immediate cost cutting, starting with planned capex projects. Big-name mining companies warn the extra tax will shoot emerging mining companies in the foot before they’ve begun to walk. (BR 27.3)

De Beers MD Gary Rafle says the 8% rate discriminates against diamond miners. Angloplat MD Barry Davison says 4% on platinum is on the high side, and the proposed 50% stabilisation premium (to insure against the levy rising later) has caused grave doubts among some foreign investors and sends a very negative message, not constructive at all. Implats is very concerned abut possibly being hit twice by royalties, which it already pays the Royal Bafokeng Nation. (BD/BR 28.3, BT 30.3)

Anglo ED Michael Spicer says facilitating R100bn of BEE deals may cost the mining industry around R10bn, and royalties may cost a further R30bn. (BR 29.3)

Anglogold ‘entirely endorses the socioeconomic empowerment charter’s focus on human capital development’ as ‘a very good document’ and ‘a test of the social licence’ which CE Godsell thinks ‘is going to make the industry more competitive, not less, and lead to greater wealth creation, not less.’ (BR 31.3)

African Minerals and Energy Forum spokesmen tell parliamentary committee that SA’s commercial banks make it hard for BEE minerals/energy firms to get finance and take excessive profits, and government should ensure all offshore oil/gas exploration licensees have at least a 5% BEE partner. Anglo and govt’s Khula Enterprise start a JV with a R40m fund for black-owned small-scale and junior mining companies.

Following Anglo and De Beers, Gold Fields will begin providing antiretroviral drugs to its HIV-infected workers. That’s an estimated 30% of 48000 and will cost $3.22 per gold ounce produced, rising to $5 by 2009, whereas doing nothing would have added costs of over $10 by 2009. (BD 2.4)

Bloomberg reports that the world’s biggest precious metals company, Anglo American, says the SA government’s plans to charge royalties on mining may cut investment in diamond and platinum mines. (BR 2.4)

Foreign investors should not see BEE as an imposition, suggested Cyril Ramaphosa. Minerals-energy minister Ngcuka labelled the ferrochrome industry ‘slow to embrace empowerment’ and warned it to make the ‘robust but not punitive’ changes ‘with a bit of haste’ and ‘sooner rather than later’. BHP Billiton said there are likely to be problems ahead with the mine charter, ‘a good concept but disappointing in practice, too ambitious, and probably the most complicated piece of legislation ever attempted.’ (BD 2.4)

Private equity fund New Africa Mining Fund already has R460m commitments from Absa, BHP Billiton, Gold Fields, Harmony and DBSA, IDC, UFC, Kumba towards hoped-for R1-2bn. Requiring competitive returns, it will provide risk capital for junior mining ventures in Africa.

Economists say any revenue-based mineral royalty system simply reduces the size of any given ore body. Its impact falls mainly on marginal ore bodies, and in periods of weak product prices. It forces cost-cutting which can reduce mine labour. It reduces project life and acts as barrier to new projects and new entrants. If there must be royalties, they should be profit-based to give automatic marginal mine relief, with a start-up holiday to establish essential cash flow. (BD 4.4)

Following the release of the TRC’s final report, a US$6.1bn class-action claim was filed in US courts on behalf of victims of human rights violations under apartheid, against Ango American for “exploitation of workers tantamount to slavery” and propping up apartheid. Anglo has “strongly rejected” it. Sasol and its subsidiary Fluor International are also charged, for “repressionist” acts against workers in the 1970s and 1980s. Like other big business leaders, Anglo director Michael Spicer said enough “guilt money” had already been paid. (Star 5.4)

Foreign Investors Mining Association represents 18 companies. President Allan Saad says the money bill can delay prospecting by up to three years and drive away international companies, share prices will fall quite dramatically as 4% royalty on gross revenue translates into 12% decline in net profits, and mine lifespans will be shortened. Attributable income and earnings per share are reduced more or less by the same proportion as the royalty rate, so the effect will be pretty dramatic. Wits U. analyst Fred Cawood says royalties have been set too high for international competitiveness, and suggests treasury reconsider basing royalties on gross revenue. (BR 7.4. BD 810/11.4)

Resources company Xstrata’s CE Mick Davis says there was always an issue about SA risk and this has been increased by uncertainty surrounding the implementation of new minerals laws. Xstrata bought Australia’s MIM Holdings rather than an SA company. Xstrata had 43% of its assets as SA ferro-alloy and coal businesses – this has now fallen to 18%. (BD 8.4)

The Mineral Corporation says mining job creation has a 4.2 multiplier in the broader economy. Chamber of Mines puts mining’s direct 2001 contribution to GDP at R66.8bn or 7.5%. (BR 10.4)

No 2 global platinum producer Implats may need to sell 20% or its equity to the Bafokeng tribe to cancel the royalty agreement. Impala faces paying a second royalty of 4% to government, and has protested that one should offset the other. (BD 10.4)

Canada’s Southern Era president Patrick Evans voiced the serious reservations of highly mobile foreign capital about SA’s royalty bill, 30-40% unemployment, 15% HIV infection, unpredictable tax regime, unstable investment climate and political risk. The bill ignores Katz Commission recommendations against sector-specific taxes. At effective 46% marginal tax, mining companies in SA already pay higher taxes than those in Chile and Canada. If anything, SA needs tax relief, not added taxes. (Mineweb 10.4)

London’s Merrill Lynch gold and resources fund managers, handling nearly $1bn of investors’ cash, urge SA government not to impose royalties on the mining industry. All royalties are bad as a method of taxation, an unfair transfer of wealth from the private sector to the state, raising fixed costs and making mining operations less competitive. Merrill Lynch anticipates reducing SA exposure as opportunities arise – no political axe to grind, just economics. Nowhere else do miners have to deal with so many other needs all at the same time – exchange controls, requirements to “Africanise” operations, and the so-called scorecard. Most other governments prefer to increase mining competitiveness, often through subsidies. Already the World Mining Trust has sold its Kumba holding and reduced its Anglogold stake. (Mineweb 14.4)

The scorecard lacks clarity. Nothing at present suggests that min-en department will create clear communication and definitive guidelines and procedures. It appears the charter and scorecard will be implemented on an ad hoc basis. (BD 14.4)

Anglo American and rivals may reduce SA investment as the burden of making amends for apartheid grows. Domestic and foreign investors are very actively comparing total tax, levy, empowerment and litigation costs of doing business in SA with costs in peer countries. Planned investments, estimated by the Chamber of Mines at R80bn, may fall as firms seek best returns for shareholders. Unless royalties are waived, De Beers may shut Koffiefontein and reconsider spending R7bn to extend Premier’s life. Minister Ngcuka says she does not wish to bring undue pressure on the industry – “we need you and you need us”. But maybe mining firms don’t. (BR 15.4)

Representing 90% of the SA mining industry, the Chamber of Mines says a revenue-based 3% royalty that increases costs from R316/ton of ore by R14.30 could bypass some previously-economic gold ore-bodies and cut the recoverable reserve base by 3.7% or 600t (R62.5bn). CEO Mzolisi Diliza listed five problems with the money bill – royalties based on revenue not profit, increased cost of capital raising fixed costs and entry barriers for black miners, worsened international competitiveness in securing exploration investment, lack of offset for social investment activities, and double royalty payments. (BD 17.4)

Parliament’s minerals/energy portfolio committee out of the loop and not informed by Treasury of public comment on the money bill, which may only be passed by August. The submissions deadline was extended to April 30, and Treasury’s Martin Grote says they have to consult with cabinet about any major policy changes. When finalised and tabled, the bill can’t be changed by parliament. Treasury wants the royalties for the national revenue fund. Min-energy dept wants a separate fund for community compensation, beneficiation and other projects. (BR 17.4)

* The good news is there’s not much more new mining legislation, says Harmony’s Bernard Swanepoel. Still awaited is a Bill dealing with beneficiation, which will seek to encourage companies to add greater downstream value to their products and create further jobs. Treasury’s proposed new royalties – “just another tax” – will erode net present value of Doornkop expansion from R872m to R802m, and of Elandskraal shaft deepening from R1.3bn to R1.2bn. (BT 20.4, Cit. 22.4)

* Jubilee Platinum CE Colin Bird says tax should be linked to profitability – government should share the risks – the money bill is now making a ripple in London and is being seen very negatively. Firestone Diamonds CE Philip Kenny says the risk of the rates changing again is the worst possible thing for a market that depperately needs certainty. De Beers MD Gary Ralfe says the proposed level of royalty in diamonds appears to be discriminatory. A City (of London) observer says first government takes away their (Anglo American’s) mineral rights, then it forces them to sell to black empowerment partners, and now it wants to impose a royalty charge – also subject to SA’s restrictive labour laws, Anglo trades at a discount to “its peers”, BHP Billiton and Rio Tinto. (BD 23.4, M&G 25.4)

* New two-year mining & metal sector wage negotiations start in May. In mid-2001, Chamber of Mines and NUM union agreed 8.5% increases and new minimum R2000 wage for about 500 000 workers. Siefsa and NUMWSA settled similarly for their 230 000 employees. Unions may seek more than inflation’s 2002 average 10% inflation rate, well above Reserve Bank’s 3-6% CPIX target. (M&G 25.4)

* Companies will get credit for past empowerment deals. Anglo, Amplats, Anglogold and Harmony have all expressed confidence that they already meet the new empowerment crtieria or are close. Grant Lowman of RMB Resources suggests royalties will hit marginal producers and firms where future cashflows have been committed to finance BEE acquisitions. Harmony’s Swanepoel strongly rejected the belated royalty tax in its long-owned assets and may have to reconsider Nyala shaft and Tshepong South development projects – the bill increases costs and can destroy jobs regardless of the spin government puts on it. DRD’s Wellesley-Wood strongly criticised royalties as an extra cost which will sterilise gold reserves, reduce investment and result in lost jobs. (BD 29/30.4)

* After meetings with unions and the Chamber of Mines, finance minister Manuel said treasury is open to further discussion of any aspect of its mining royalty proposals, charging a royalty is not negotiable, but he doesn’t want to be reckless. After June the reexamined money bill with any technical changes will be submitted to parliament, which cannot amend it. (BD/BR 2.5)

* Patrice Motsepe’s ARMgold merges with Harmony Gold. AngloGold had sold Freegold to their JV; now Anglo sells them its 34.5% of Avmin. (Cit. 3.5)