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MINING
EVERYTHING MATTERS
will be wholly re-written in due course to be, in fact, a proper code of good practice in accordance with international standards.
There are however a number of aspects to the Revised Charter which we believe may inhibit deal-making within this sector. These aspects include:
The third preliminary issue is: To what extent is the Revised Charter a product of the consensual agreements recorded in the Stakeholders' Declaration on Strategy for the Sustainable Growth and Meaningful Transformation of South Africa's Mining Industry which was signed on 30 June 2010 by the Department of Mineral Resources, National Union of Mine Workers, Solidarity, UASA - The Union, the South African Mineral Development Association and the Chamber of Mines of South Africa (Declaration). In answer to this question, we include in this comparative analysis a summary of the most pertinent aspects of the Declaration. What is apparent from this comparison is the fact that while the Department of Mineral Resources seeks the co-operation of stakeholders, it is not averse to adopting a coercive stance when it comes to empowerment within the mining industry. * BEE beneficiaries are required to have full shareholder rights. This may conflict with the Companies Act in certain deal structures as a company can only issue shares that are fully paid up and this may also limit structuring flexibility. Possibly one of the biggest surprises was the fact that the Revised Charter, despite the consensual nature of the Declaration, seemingly provides that non-compliance with the provisions of the Revised Charter will amount to a breach of the MPRDA that may result in the suspension or cancellation of a holder's prospecting or mining rights under section 47. Added to this is the fact that the Minister will have the power to amend the 2002 Charter without consultation and will therefore have a wide discretion to impose more onerous obligations on the industry in the future. Not only does this perpetuate regulatory uncertainty in the South African mining industry but renders it more likely that the Revised Charter, as delegated legislation, will be challenged as being unconstitutional. However, the wording of the Revised Charter stipulates that "Non compliance with the provisions of the Charter and the MPRDA shall render the mining company in breach of the MPRDA ..." . Therefore, if the holder must be in breach of both the Revised Charter and the MPRDA before the right can be revoked, then this provision would be more acceptable.
Allan Reid, Director
Deal participants will be required to engage with financiers in order to determine the percentage of cash flow to be used to service the funding of the structure and the amount to be paid to BEE beneficiaries (barring any unfavourable market conditions). There is therefore a requirement that a percentage of cash flow must be paid to the BEE Shareholder prior to finance having been repaid, thereby extending the funding term and the financier's risk. This may result in financiers being less enthusiastic to conclude BEE transactions.
We include below a summary of the most important provisions of the Revised Charter and, for comparative purposes, the corresponding provisions of the 2002 Charter, the Declaration and the Code.
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THE REVISED MINING CHARTER How does it affect you? A comparative analysis
THE REVISED CHARTER 2010 THE STAKEHOLDERS DECLARATION THE 2002 CHARTER THE CODE OF GOOD PRACTICE
OBJECTIVES
The Revised Charter
* Dealt with in Item 1 of the Revised Charter. * Seeks to (a) promote equitable access to mineral resources; (b) substantially and meaningfully expand opportunities for HDSA to enter and benefit from the mining and minerals industry; (c) utilise and expand the existing skills base for the empowerment of HDSA and to serve the community; (d) promote employment and advance the social and economic welfare of mine communities and major labour sending areas; (e) promote beneficiation; and (f) promote sustainable development and growth of the mining industry.
The Declaration
* Dealt with in Part 1 of the Declaration. * Objectives include to promote investment, enhance competitiveness, drive transformation, remove barriers to sustainable growth and transformation and commit to effective implementation strategy.
The Code
* Dealt with in the Purpose of the Code. * Includes facilitation of the implementation of broad based socio-economic aspects of the 2002 Charter to give effect to section 100 (1)(b) of the MPRDA.
OWNERSHIP
The Revised Charter
* Dealt with in Item 2.1 of the Revised Charter. While HDSA ownership of 26% remains unchanged and is required to be achieved by March 2015, a new definition of HDSA has been introduced which includes the phrase "..which should be representative of the demographics of the country." Precisely what is meant by this phrase is not clear. Does this entail that a holder's HDSA participation should include all demographically represented groups or, for example, that
The Declaration
* Dealt with in Part 12 of the Declaration. * Minimum target of 26% HDSA ownership by 2014. Meaningful participation includes that BEE transactions will be concluded with clearly identified beneficiaries (BEE entrepreneurs, workers and communities).
The Code
* Dealt with under Item 2.1 of the Code. * Requires 26% HDSA voting rights by 2014 plus 26% HDSA economic interest (on a modified flow through principle) by 2014 plus a net HDSA value of 26% by 2014. Net value defined so as to exclude value of interest still burdened by loans after 2 years.
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The Declaration
* Barring unfavourable market conditions, some cash-flow to service the funding structure, the remaining cash-flow to be paid to the BEE beneficiaries. * Ownership must vest within agreed time-frames of the BEE transactional structure (taking into account the prevailing market conditions). * BEE participant shall have full shareholder rights, eg full participation at annual general meetings and exercise of voting rights, regardless of legal form of instruments used.
The Code
Incudes key attributes such as (a) BEE beneficiaries must be clearly identifiable in the form of BEE entrepreneurs, workers (including ESOPs) and communities, (b) barring unfavourable conditions, a portion of cash flow should be used to service the funding structure and a portion should flow to the BEE partner, (c) BEE partner should have full shareholder rights, full participation at AGMs, exercise of voting rights, regardless of legal form and (d) ownership should vest within time-frames, agreed with the BEE entity, taking into account market conditions.
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The Declaration
* Dealt with in Part 11 of the Declaration. * Promotes adherence to fundamental principles of enterprise development, irrespective of mining companies' turn-over; agrees to develop mechanisms for multi-national suppliers of capital goods to the mining industry to contribute towards social development. * No targets set.
The Code
* Dealt with in Item 2.5 of the Code. * Establishes preferential score-card of purchasers of goods and services from BEE compliant suppliers. * Score-card requires, within a 6 - 10 year target, 30% BEE procurement spend for capital goods; 70% BEE procurement spend on services; 30% procurement spend on consumables; 20% procurement spend from local SMME's and 20% procurement spend from suppliers that are more than 50% black owned or suppliers that are more than 30% black woman owned.
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The Declaration
The Code
BENEFICIATION
The Revised Charter
* Dealt with in Item 2.3 of the Revised Charter. The only off-set allowed against the ownership target is that for beneficiation, to a maximum of 11%. Whilst this is to be welcomed, the entire issue of beneficiation remains somewhat clouded. The Charter refers to the "mineral beneficiation framework". This was not mentioned in the Minister's speech or, as far as we can ascertain, anywhere else. We believe that this may be a framework
The Declaration
* Dealt with in Part 5 of the Declaration. * Records the stakeholder agreement to support local beneficiation, consider establishing a national beneficiation agency, procure the support of international partners to facilitate skills and technology transfer for local beneficiation. * No targets reflected.
The Code
* Set a compliance target of 42% of annual production measured from the refined stage.
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The Declaration
* "Beneficiation" is defined as the transformation of a mineral (or a combination of minerals) to a higher value product, which can either be consumed locally or exported. The term is often used interchangeably with "mineral value-addition" or "downstream beneficiation." Mining companies may offset the value of the level of beneficiation achieved by the company against a portion of its HDSA ownership requirements not exceeding 11%. Compliance target is any additional production volume of local value addition over and above the base-line. Determination is unclear. "Mineral beneficiation framework" is awaited.
The Code
EMPLOYMENT EQUITY
The Revised Charter
* Dealt with in Item 2.4 of the Revised Charter. * By March 2015, achieve a minimum of 40% HDSA demographic representation at each of executive management (board) level and senior management (EXCO) level (Scorecard requires both levels at 20% by March 2011, 25% by March 2012, 30% by March 2013, 35% by March 2014 and 40% by March 2015), middle management level (Scorecard requires 30% by March 2011, 35% by March 2012 and 40% by March 2013), junior management level (40% by March 2011 and beyond) and core and critical skills (Scorecard requires 15% by March
The Declaration
* Dealt with in Part 8 of the Declaration. * Stakeholders undertake to create an environment to promote and encourage diversity to retain an increase of requisite skills. * Minimum target of 40% by 2014 in all of top management (board); senior management (EXCO); core and critical skills; middle management, and junior management.
The Code
* Dealt with in Items 2.2 and 2.3 of the Code. Provides management control score card in respect of board participation and 40% representivity of HDSA's on executive committee. Also provides employment equity score card requiring compliance target of 40% in top management, senior management, middle management, junior management and woman in mining (10%).
* *
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The Declaration
The Code
The Declaration
* Dealt with in Part 7 of the Declaration. * Provides for the conduct of at least two skills audits by 2014 and assessment of institutional and organisational absorptive capacity by December 2010. * Invest an incremental percentage of annual payroll in skills development activities from 3% in 2010 to 5% in 2014. * Ensure effective spend of mandatory skills levy.
The Code
* Dealt with in Item 2.4 of the Code. * Provides for measurement through the score card, through a 100% compliance of skills development expenditure, learning programmes and functionally literate and numerate programmes.
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The Declaration
* Dealt with in Part 9 of the Declaration. * Provides for developing guidelines and adherence to community consultation processes. * Intention to develop a partnership approach towards mine community and major labour-sending areas, development and consider regional (social) developments funds for effective implementation of social and labour plans. * Implement and monitor social labour plan undertakings.
The Code
* Dealt with in Item 2.6 of the Code. Creates target of 1% of net profit after tax to develop mine community and rural development elements.
The Declaration
* Dealt with in Part 10 of the Declaration. * Attain occupancy rate of 1 person per room by 2014. * Upgrade or convert hostels into family units by 2014. * Promote home ownership options and provide balanced nutrition.
The Code
* Dealt with under Item 2.8 of the Code. * Establishes a score card which does not reflect the general principles. * Deals with upgrading housing and equitable and sustainable proper nutrition, food and water. * 100% of all hostels to be upgraded to single accommodation and/or converted into housing units by 2014.
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The Declaration
* Dealt with in Part 4 of the Declaration.
The Code
* Not dealt with in the Code.
* Declares intention to develop * Sustainable development regional approaches to defined as the integration environmental impacts, of social, economic and particularly acid mine environmental factors into drainage. planning, implementation and decision-making to * Research on mine closure and ensure that the mineral mining legacies, establish a resources development serves task team to accelerate present and future generations. prospecting investment, adopt * Mining company must an integrated development implement elements of approach through pooling of resources, work towards a sustainable development "Mining Vision 2030." commitments included in the "Stakeholders' Declaration on Strategy for the sustainable growth and meaningful transformation of South Africa's Mining Industry of 30 June 2010 and in compliance with all relevant legislation", as follows: * Improvement of the industry's environmental management by: implementing environmental management systems that focus on continuous improvement to review, prevent, mitigate adverse environmental impact; undertake continuous rehabilitation on land disturbed or occupied by mining operations in accordance with appropriate regulatory commitments; provide for the safe storage and disposal of residual waste and process residues; design and plan all operations so that adequate resources are available to meet the closure requirements of all operations. (The above being scored by progress achieved against approved EMPs. Weighting 12%).
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The Declaration
The Code
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The Declaration
* Dealt with in Part 13 of the Declaration. * Confirms adherence to effective implementation of agreed strategy. * Comply with annual progress reporting requirements. * Monitor and take into account the impact of constraints beyond the stakeholder's control which may result in not achieving set targets.
The Code
* Monitoring and evaluation of the various items under the Code is done through the Code score-cards.
NON COMPLIANCE
The Revised Charter
* Dealt with in Item 3 of the Revised Charter. * Non-compliance with the provisions of the Charter and the MPRDA shall render the mining company in breach of the MPRDA and subject to the provisions of Section 47 read in conjunction with Sections 98 and 99 of the Act. (This provision could be open to legal challenge as unconstitutional. Also flaunts the consensual nature of the Declaration).
The Declaration
* Dealt with in Part 6 of the Declaration. * Reflects stakeholder agreement to strengthen MPRDA architecture to improve efficiency and effectiveness by 2011. * Strengthen enforcement, monitoring and evaluation. * Streamline administrative processes and eliminate inconsistent application of regulatory frame-work. * Harmonise with other related legislation; finalise 2002 Charter review by August 2010; explore single authority for environmental regulation; transparent compliance; and message the positive regulatory framework to promote South Africa as an investment destination.
The Code
* Not dealt with under the Code.
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INNOVATION
The Revised Charter
* Not dealt with in the Revised Charter except as an adjunct to Human Resource Development.
The Declaration
* Dealt with in Part 3 of the Declaration. * Stakeholder agreement to assess current research and development, resuscitate and research development culture in the mining industry, and strengthen partnerships with research institutions.
The Code
* Not dealt with in the Code.
INFRASTRUCTURE
The Revised Charter
* Not dealt with in the Revised Charter.
The Declaration
* Dealt with in Part 2 of the Declaration. * Provides for the identification, evaluation and engagement with national stakeholders regarding critical infrastructure such as rail, ports, electricity and water supply.
The Code
* Not dealt with in the Code.
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CONTACT US
For further information about our Mining and Minerals services, please contact any of the directors listed below.
Ian Hayes Charles Ancer
Director National Practice Head: Corporate and Commercial T +27 (0)11 290 7121 E ian.hayes@dlacdh.com
Joz Coetzer
Willem Jacobs
Director National Practice Head: Finance, Projects and Banking T +27 (0)11 290 7109 E joz.coetzer@dlacdh.com
Mondo Ntlha
Banzi Malinga
Director National Practice Head: Competition T +27 (0)11 290 7128 E mondo.ntlha@dlacdh.com
Terry Winstanley
Allan Reid
Director National Practice Head: Environmental T +27 (0)21 481 6332 E terry.winstanley@dlacdh.com
Director Corporate and Commercial Sector Head: Mining and Minerals T +27 (0)11 290 7171 E allan.reid@dlacdh.com
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