The only way to finance empowerment in the mining industry is for big mining houses to guarantee loans made to empowerment players, said David Hall, a senior mining analysts at Merrill Lynch.
Lynch spoke to the Mail & Guardian after the release of the long-awaited Broad-based Socio-economic Empowerment Charter for the Mining Industry.
Negotiated by often conflicting interests — government, labour, foreign investors and representatives of established and emergent mining — the charter is a triumph for ”the South African way” that is likely to be a model for other economic sectors, analysts said.
The charter sparked only mild market jitters on Thursday morning when the financial markets opened. The resources-dominated Top 40 index on the Johanessburg Securities Exchange fell 1,4% in the opening session.
This was in sharp contrast to reactions to an earlier leaked document that proposed black ownership of 51% of new mines and 30% of existing mines in 10 years. Mining stocks crashed immediately in response, based on investor fears that these targets could only be met by huge asset discounts. But doubts persist about how the charter’s black ownership targets are to be financed in an industry valued at R750-billion.
Minister of Minerals and Energy Affairs Phumzile Mlambo-Ngcuka conceded on Wednesday that the Industrial Development Corporation (IDC) would play a minimal role. The government had touted the IDC as a financing agent for the programme.
One feature of the charter is the proposed transfer of 26% of mines to black ownership in 10 years, with 15% transferred in the first five.
The mines must apply for 30-year renewable mining permits in five years. Their empowerment performance will be central in granting the licences. Monitoring is expected to start early next year, when the minerals legislation is gazetted.
Mlambo-Ngcuka suggested that in time black mining entrepreneurs would become sufficiently credible to raise their own finance from lending institutions.
The charter commits the industry ”to assist historically disadvantaged South African companies in securing finance to fund participation in an amount of R100-billion within the next five years”.
Mlambo-Ngcuka said it was expected that mining houses would use their clout in the financial services sector to secure favourable lending for their empowerment partners.
Another option suggested by an industry insider was to structure asset sales so that repayments would come from cash flow and operating profits.
Both options, Hall suggests, would transfer risk to established players. He said if a mining giant recommended an empowerment player, it might still have to guarantee the loan from its balance sheet. This would raise the selling company’s risk profile slightly. In most cases the loan would constitute a small percentage of the asset base.
He said even when a loan was financed from operations some of the money might have to be guaranteed.
Hall said if something went awry and a loan could not be repaid, or cash flows did not meet repayment commitments, this would point to a deeper problem. ”Then we would have more to worry about than just loans.”
Other novel features include:
A focus on broad-based empowerment. The charter recognises employee share ownership as empowerment and commits signatories to ”offer every employee the opportunity to become functionally literate and numerate” in five years.
Communities from which workers are drawn or that host mines, as well as ghost mining towns, will get developmental and infrastructural help.
The industry undertakes to achieve 40% black participation at junior and senior management level in five years, as well as a 10% representation of women.
Mining apprenticeships will be increased from 1 200 to 5 000 by 2005. Companies are expected to increase beneficiation, with achievements able to be offset against black ownership requirements.