/ 14 February 2013

Reaping the riches for the people

South Africa is the world's largest producer of platinum group metals. The country accounts for about 80% of the world's platinum reserves, 80% of its manganese reserves and 72% of its chrome reserves. It is Africa's top producer of gold and one of the world's major producers of diamonds. Despite this rich heritage in South Africa's soil, the level of beneficiation (the processing of raw materials in the country to maximise local economic contribution) is low. Only 0.4% of the country's platinum group metals is beneficiated locally; the remainder is processed internationally.

In his state of the nation address of 2011, President Jacob Zuma said one of the government's priorities was to adopt a beneficiation strategy as official policy, so that South Africa can start reaping the full benefits of its rich commodities. Beneficiation means that rather than shipping raw resources out for off-shore benefit, they are processed locally. This provides employment and generates revenue, and keeps the nation's natural wealth within the country's borders, reaping benefits for the country's people.

Then Gold Fields chairperson Dr Mamphela Ramphele told the Mining Indaba conference that it was morally wrong for economic and political elites to think they can continue to benefit exclusively from the country's mineral and natural resources.

She said a different business model was needed for "the mining industry of the 21st century" that would be both a catalyst and an engine of growth in emerging and advanced economies. Enabling beneficiation, however, required a workforce sufficiently skilled to produce goods and services of a quality and at a cost that was competitive on the world market. South Africa simply did not have sufficient skilled labour to achieve this, she said.

Another method identified by the government as a way of ensuring the nation enjoys the benefits of its rich mineral heritage is resource nationalism — the control by government of the country's natural resources, and of the ways of extracting and refining them.

Control Risks's managing director for Southern Africa, David Butler, said resource nationalism could be a major risk for the mining industry.

"What we've seen in other countries is that when commodity prices rise to the top of the cycle, governments are increasingly looking at ways of extracting rent from resource nationalism.

"Often their approach is short-sighted and once the regulations have been put in place, it becomes very difficult for mines to continue operating once the cycle changes. Zambia in the 1970s was the classic case — the mines were nationalised at the top of the cycle. For about six years the government was losing money from the mines and eventually they had to be privatised," said Butler.

Much to the relief of mining companies and the investment community, the government has made it clear that nationalism is not going to happen.

Instead, a form of resource rent tax should be put in place to, as the mining policy document states, "capture an equitable share of mineral resource rents and deploy them in the interests of long-term economic growth, development and transformation".

This "windfall tax" would be on super profits, so in theory it would affect only the mining giants.

Ursula van Eck, head of audit and regional partner for Africa: mining at BDO South Africa, challenged the notion, saying the government needed to provide greater clarity for investors. "The concept of a super tax raises many concerns and creates further uncertainty in an already fragile market.

"What would be the parameters of such a super tax? Would profits be judged according to rand values or off-shore values?"

She said that additional taxes would have an indirect impact on mining companies, adding to the pressures of social labour plans, and requirements to build housing and put in infrastructure and services to mining communities that really should be the responsibility of government.

Although this article has been made possible by the Mail & Guardian's advertisers, content and photographs were sourced independently by the M&G supplements editorial team. It forms part of a larger supplement.