Canadian Mining Journal

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DOING SOME DIGGING (November 21, 2002)

The South African mining system is undergoing major reform, and everyone in the mining and investment industries wo...


The South African mining system is undergoing major reform, and everyone in the mining and investment industries would be well-advised to keep an eye on what’s going on. The country’s relatively new democratic government, ongoing problems with the strength of its currency, and comments from the world’s sceptical business journalists have not caused its historic mining industry to grind to a halt, by any means. It is still an $11 billion per year business, producing 35% of the country’s exports and employing 400,000 people. It’s safe to say that the country’s economy depends on mining, and its government cannot afford to let this sector founder.

It was with a sense of urgency that a South African delegation made a presentation on the morning of Nov. 19 to a select group of fund and equity managers and bankers in Toronto, regarding South Africa’s new Minerals and Petroleum bill and charter. It was the job of Sandile Nogxina, the director general of the department of Minerals and Energy, to convince those assembled that the country wants foreign investors, and that its mining sector would not be a high-risk investment.

There are a number of important provisions of the new legislation such as improved living conditions for mine workers, more training to improve the skill base, and increasing the number of black people and women in the management of each company up to at least 40% and 10%, respectively, within five years.

The intention of these reforms is to redress the wrongs of a century of operations, and to divert more of the benefits of the country’s mineral resources to the people who need it most.

One of the most controversial aspects of the new legislation is that companies controlled by historically disadvantaged South Africans (i.e., black South Africans) must hold at least 26% interest in companies mining in South Africa within 10 years. Mr. Nogxina said that all transactions will be at fair market value; there will be no government involvement in deciding price of interest in mining companies.

One might assume that many historically disadvantaged people would be hard-pressed to come up with the cash for such major purchases. The director general explained that the current mining companies have agreed to help the black companies secure financing to fund their participation up to a total of 100 billion rands (the value of 15% of the industry today) for a period of five years. In other words, the mining companies will allow black companies to hold an interest, so long as the value of that interest is paid within five years. Presumably the participating company will share in the profits over that period and thus gain enough to pay back the loan. This may work in well-managed companies, in a rising economy with the price of commodities staying strong. In other scenarios, the result may not be successful.

The bottom line is that, without significant reforms, both the mining industry and the current democratic government might well not exist in a decade, because the impoverished citizens of South Africa would not be content to accept the status quo.

It will take lots more compromise and a sincere desire to follow the path laid out, for the South African mining industry to survive the current reform. As well, it will require the courage of the world’s investors to believe that the benefits of investment for South Africa are worth risking their money.

For more information contact Wayne Floreani at the South African Consulate (Trade) in Toronto, wfloreani@tisa-nafta.com


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