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The future of South Africa’s mining sector has never been so uncertain. The South African Cabinet’s approval of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill, 2012 has caused an outcry from the industry – pleading for sanity to prevail writes Laura Cornish.

Although published in the government gazette in December 2012, the MPRDA Bill, 2012 remains in draft form while the local mine developers and operators, associations, financial institutions, investors, shareholders, service and equipment providers hold their breath, praying for their voices to be heard.

While the Bill proposes to remove ambiguities in the MPRDA, it appears to be doing the exact opposite, placing more power in the hands of the Department of Minerals Resources (DMR) and its minister, Susan Shabangu.

“The principal legislation governing the mining industry in South Africa – the MPRDA Bill 2002 – is [already] characterised by uncertainty, vague and ambiguous provisions, and overly broad discretion, which is accorded to the minister of mineral resources to regulate the licensing process,” asserts Peter Leon, head of Africa mining & energy projects at law firm, Webber Wentzel. “The amendments it proposes seem to distance the MPRDA further from international best practice. The Bill is replete with instances of vague and uncertain language, and amplifies, rather than removes, the uncertainty created by the MPRDA,” he continues.

This regulatory uncertainty has proved to be a deterrent to investment in the South African mining industry, which Leon points out has been recognised by the National Planning Commission, appointed by President Jacob Zuma in May 2010. He adds that this is responsible for developing a vision and strategic plan for South Africa‘s long-term development, in its ‘National Development Plan 2030’.

“Considering this ‘problem’ is not new to South Africa and its government, the Bill amendments are nothing but contradictory to their aim and lack clarity. As bankers, we promote regulation, even onerous if necessary. Financiers and banks welcome regulation and rule and operate within a strict regulatory system. But it can only work successfully if it is not discretionary, and the proposed amendments are overloaded with discretion,” says Henk Deist, head of resources at RMB.

Routledge Modise’s director and head of mining, Warren Beech, agrees undeniably. “The DMR’s tentacles of control are everywhere in the Amendment Bill. Investor confidence continues to slide as a result, painting a very bleak picture for South Africa’s future. Placing mines on care and maintenance is going to gain momentum and rounds of litigation will follow for those who decide to stay.”

While the proposed amendments are too many to discuss, the three mining professionals highlight the most concerning elements and the possible consequences should they materialise.

South Africa’s proposed new mineral regulatory regime

Beneficiation

It is no secret that the minister has been promoting local beneficiation for a while and, thanks to the outlined amendments, will have the sole discretionary power to do so, including percentage per commodity and price as well as designated percentage of raw mineral production supplied to local beneficiators. The minister will also give written consent prior to those seeking to export.

“Not only are the lines between minerals extraction and beneficiation blurred, with four levels starting at the mining extraction level through to final production manufacturing, the simple reality is that it is often uneconomic to beneficiate in South Africa, especially at final product manufacturing stage. Our country is energy constrained and energy costs and costs of employment are escalating, making such beneficiation uneconomical. We need to extract the maximum value from our mines, for the benefit of the stakeholders including the communities and the Bill will deliver the opposite results,” Beech states.

Deist adds that the incoming beneficiation legislation is just one example of the minister’s increasing discretionary power. “Incentives, from a power or tax perspective would possibly encourage local beneficiation, but there is no mention of this. Look at the local diamond beneficiation industry’s failure which will simply be replicated on a larger scale. This is an objective too aspirational for the South African environment at this stage.”

 Time frames for actions

The Bill has deleted many of the time periods currently contained in the MPRDA, and replaced them with reference to a ‘prescribed period’ to be determined by the minister.

“There is no guidance as to when and how the relevant periods will be determined,” says Leon. “Even the order for application processing is open-ended,” Deist adds. South Africa has followed the ‘first in, first assessed’ principle for over 100 years and has served the country well to date (within reason).

“Ministerial consent in terms of Section 11 already takes a minimum of six months, often longer. Who will invest in the development of new mines if no one can predetermine a return on investment as a result of uncertain regulatory approvals?” Beech asks.

 Environmental provisions

Both Deist and Beech believe the proposed changes to the environmental regulatory regime are of major concern.

Leon explains: “Mining and prospecting environmental regulation is proposed to take place under the National Environmental Management Act, 2008 (NEMA), with the minister as the responsible regulator, rather than under the MPRDA. The Bill, however, has not been developed in line with the provisions of either NEMA or the NEMA Amendment Act, 2008, particularly as regards the latter’s transitional provisions. While the NEMA Amendment Act also provides that the environmental regulation of mining and prospecting activities will be brought under the NEMA, it envisions that this will only occur incrementally over a three year transitional period with the Minister of Environmental and Water Affairs ultimately becoming the responsible regulator. Thus, the Bill’s proposed amendments will leave the MPRDA in direct conflict with NEMA.”

Deist believes that while it is in the best interests of the DMR to grant environmental approval for mining (if environmentally compliant), this is not so for NEMA. “If NEMA achieved its environmental objectives, there would be no mining at all,” he says.

“This has a direct bearing on financiers like us.” Banks issue guarantees to the DMR on behalf of mines for closure and rehabilitation costs when a mine closes. The DMR currently gives a closure certificate signifying compliance with liability post closure; the bank takes the guarantee away and is no longer liable. The government is proposing that a mine remain indefinitely liable post closure, directly implicating the financial institution that holds the guarantee. “We cannot take liability responsibility indefinitely. The best solution would be to establish a fund that mining companies contribute towards in case of liabilities post closure.”

Beech explains that the minister is proposing to regulate old mining dumps and stockpiles – which it currently does not. “Placing legislation around this would have massive implications. Remember the De Beers tailings judgment in 2008 – it puts this entirely into context.”

Associated minerals applications

Also of concern is the possibility that the government will have the right to grant associated minerals in the ground to other mining entities. This would mean that platinum miners for example would have to apply to mine and beneficiate associated minerals in the ground, which in the platinum industry typically includes palladium, rhodium, nickel and gold. “This is not physically possible and makes no sense,” says Deist. This has implications for most minerals including gold, uranium, manganese, etc.

[WRB comment: I do not believe that this comment is entirely correct. Prior to the MPRDA coming into force and effect, rights could be granted in respect of minerals and those found in mineralogical association. Under the MPRDA, unless the associated minerals were applied for, the rights to those minerals could be granted to another party. The proposed amendment will remedy this gap]

Transfer of rights

The minister is proposing that shares held by a listed company can no longer be traded without Shabangu’s permission and consent – be it one share or a million. “This is a legal impossibility. The only time such consent would make sense is if there is change in control of a listed company,” Deist points out.

Increase in penalties

Currently, the MPRDA makes provision for prosecution for breaches of the MPRDA.

Shabangu also wants to introduce an administrative fine system. “The proposed fines are 5% or 10% of turnover, which could be financially crippling to mining companies,” according to Beech.

In conclusion

“Politically, the government wants to control its natural resources and is attempting to use the Act to nationalise its mines. This is control, not just government intervention. It grants the DMR massive discretionary powers and creates further uncertainty, which is already so high. This makes a financier reluctant to finance deals,” Deist concludes.

“It should also be noted, however, that the Bill is only in draft form. Hopefully, the DMR will address the shortcomings in the Bill revealed by the public participation process before it is introduced to Parliament this year,” Leon states. “The architecture of a mineral regulatory regime is of vital importance to the success of a mining jurisdiction. If a jurisdiction’s mineral regulatory regime can – by complying with the international best practice principles considered above – create an environment of certainty, predictability and stability, it will promote investment and growth in the industry. The importance of the effective regulation of the exploitation of mineral assets cannot be overstated.”

“I cannot argue with what the government is trying to achieve, but its process in doing so could not be more wrong. The objectives make perfect sense, but that, I’m afraid, is all. Never before has there been such radical changes proposed to mining regulation in South Africa, which could be so detrimental directly and indirectly, to the industry,” Beech ends.

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