A mine of opportunity

A number of developments in South Africa’s mining industry will enhance the suitability of the sector as an attractive investment target. That is according to MG Diliza, chief executive of the Chamber of Mines, who was speaking last week at the Mining Investment Conference in London.

‘South Africa is the world’s richest and most diverse repository of mineral commodities. Globally, it is the largest producer of gold, vermiculite, platinum and chromium. In addition, it has major deposits of antimony, coal, iron ore, manganese, nickel, phosphates, tin, uranium, diamonds, copper and vanadium.”

Diliza says, in South Africa, mining remains a key foundation industry. It accounts for:

  • 15% to 20% of GDP (directly and indirectly);
  • 50% of merchandise exports (primary and beneficiated mineral exports);
  • 12% of fixed investment (directly and indirectly);
  • 30% of the market value of the JSE;
  • 20% of formal-sector employment (directly and indirectly);
  • 50% of volume of the country’s rail and ports;
  • 93% of electricity generation via coal-powered plants; and
  • 16% of electricity demand.

Says Diliza: ‘Prior to our country’s first truly democratic election in 1994, the majority of South Africans — on the basis of racial classification — were excluded from full participation in the mining industry. Clearly, this was a situation that could not be sustained, and since 1994 constructive efforts to normalise South Africa’s mining environment, to lower barriers to entry, to encourage participation in the sector by previously disadvantaged South Africans and to promote investment in the sector have been made. These initiatives reversed the circumstances that prevailed during the apartheid era.

‘The synchronised global commodities boom and the recently more competitive rand exchange rate have resulted in a recovery in mining investment in South Africa in 2006. Factors such as structurally higher demand in terms of the ‘Chindia effect’, the weakening US dollar and consolidation in supply, among other trends, remain positive factors.”

From an industrial and economic perspective, the mining sector has been in the vanguard of the transformation process. It was the first sector — in October 2002 — and without government coercion, to produce its own empowerment charter. The charter came into effect with the introduction of the Mineral and Petroleum Resources Development Act (MPRDA) in 2004.

A primary requirement of the Mining Charter is 15% mining-company ownership by historically disadvantaged South Africans in the first five years (2009) — at 10 years, the ownership target moves to 26% (2014).

‘These criteria are assiduously applied by government in considering applications by companies for mining and prospecting rights. Empowerment provisions, applied also to other industrial and commercial sectors by different legislative enactments, are fundamental to doing business in contemporary South Africa,” says Diliza.

The natural consequence of the empowerment enactments over the past three years resulted in the conclusion of more than $10-billion BEE deals and the emergence of some big mining companies that are managed, run and substantially owned by black South Africans.

‘These deals are concluded on a willing seller-willing buyer basis at market-determined prices and have helped unlock value and have been positive for the mining sector. Empowerment has also created investment opportunities which have led to joint ventures between local empowerment companies and both domestic and foreign-owned organisations,” he says.

Diliza adds that the proposed introduction of a mining industry system of royalties is an important development from an investment perspective.

‘Clearly, the Chamber of Mines of South Africa would prefer to have no state-imposed royalty regime but it does recognise government’s right to impose royalties on the exploitation of non-renewable mineral resources. The mining industry, through the chamber, has submitted detailed comments to government on the new royalty proposals.”

He says, in these comments, the chamber welcomes significant improvements that are contained in the second draft of the Royalties Bill. The proposed royalty on most commodities has been reduced.

‘It stresses the industry’s conviction that a net-based system, rather than a revenue-based regime, will better serve the economic interests of the country.”

Discussion between the mining industry and government on the proposed royalty legislation is ongoing, but there is no positive indication of when it is likely to be promulgated.

‘We believe that the royalty system that will emerge will not be unreasonably punitive. It must attract manufacturing companies to invest in South Africa’s downstream mining sector,” says Diliza.

He remains upbeat about the industry’s prospects and ability to attract investment. ‘The most significant recent event and one that will encourage the critical elements of confidence and stability in South Africa’s mining industry was government’s agreement to a Chamber of Mines request to amend the MPRDA, and accompanying regulations, in a manner that has averted the very real possibility of mining companies lodging claims for compensation for rights that could have been expropriated by operation of the Act.

‘With the introduction of the Act on May 1 2004, all mining rights previously owned by mining companies were transferred into the custodianship of the state. Mining companies are obliged to apply for the conversion of old rights into new-order rights and were given a period of three years, which expired on 30 April 2007, to lodge claims for compensation for expropriated rights.

‘The amendment to the Act will extend to 2011 the deadline for companies to lodge compensation claims, a significantly improved option in the sense that by 2011 there will be far greater clarity for companies to determine whether or not they have incurred losses directly attributable to the introduction of the MPRDA.”

He says government’s decision to amend the Act is welcomed by the chamber, which has consistently held the view that the possible institution of large compensation claims by mining companies would negatively impact on investor confidence in the mining industry.

‘An additional positive step that has been taken includes a R415-billion government investment programme that signifies a commitment to reduce bottlenecks in ports, rail, water, roads and other infrastructure over the three-year medium term.

‘About R210-billion of this expenditure is earmarked for transport and electricity generation and distribution improvements — both critically important areas for the business of mining.”

In cooperation with platinum mining members of the chamber, government will proceed with the construction of the R5,4-billion De Hoop Dam project on the Steelpoort River in the North West Province — a traditionally water-deprived region. When completed, the De Hoop Dam will deliver an essential resource to new platinum-mining ventures along the eastern limb of the world famous Bushveld Igneous Complex.

Diliza says investment and mining production started recovering in the second half of 2006 — investment picked up by more than 7% — and in recent months around 2 500 new prospecting permits have been granted. About 350 mining rights have also been granted.

‘Mining-industry stakeholders in South Africa are acutely aware of the fact that a competitive, stable and predictable mining environment is critical to attracting investment into the business of mining. So too is the existence of a transparent mining-industry taxation regime — a system that South Africa enjoys and which compares favourably with those in other major mineral-producing countries.

‘For foreign companies involved in mining in South Africa, there are no prohibitions or restrictions on the repatriation of profits. Prudent macroeconomic management has improved the ability of the economy to handle exogenous shocks.

‘With our country’s policy reform process substantially concluded and a clear willingness by all interested parties to confront and resolve all of the challenges, the prospects for increased mining-sector investment in South Africa are particularly encouraging.”

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Greg Gordon
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