The Mantashe Mining Charter – continuing the madness

The South African Mining industry is certainly receiving a lot of special attention from the interventionists. The gaze of government has remained firmly fixed on this industry in the latest rendition of the much-reviled Mining Charter III, a version headed up by ANC bigwig Gwede Mantashe.

The new Mantashe Charter, which is now published for comment, is hailed by many to be better than the previous Charter introduced by now infamous Mosebenzi Zwane. Yet the degree to which Mantashe’s “negotiated settlement” it is actually better remains debatable.

Perhaps the wording of the Mantashe Charter is somewhat clearer, perhaps some clauses are more thoughtfully written, and the applicable compliance periods are indeed lengthened, and, after much fanfare, the principle of “once empowered, always empowered” is implemented with some caveats. To many looking into the matter these are improvements. And, compared to the even more draconian rendition of former minister Zwane they are. Yet, in spite of this, the Mantashe Charter also remains draconian and economically harmful.

Broadly speaking, if the MPRDA and Mining Charter III took SA mining ten steps forward on the road towards costly interventionism, Mantashe’s Charter is merely a single step back at best.

The improvements claimed in the Mantashe Charter are small when one compares South Africa to other mining jurisdictions and miniscule if one compares South Africa’s mining jurisdiction to classical notions of how free markets should operate. The present charter is a very clear demonstration of the high degree of desensitization to interventionism existing in our society. Interventionism as a broader political reality is now firmly entrenched.

Fortunately, for those of us who are proponents of free markets and free competition, one can point to South Africa’s mining industry as a posterchild of rampant government interventionism. Whatever the fallout and detrimental effects on mining in the coming years, free markets cannot deserve the blame. If the aim was to firmly avoid the  free market, then the Mantashe Charter also deserves special congratulations indeed.

Mining in general is an industry frequently found on the leading edge of regulatory interventions.  Second only to water, mining saw the introduction of the enfolding disastrous policy of state custodianship, which has the potential to completely undermine private ownership rights in SA.

South Africa is not unique in seeing the regulation of local mining, but, the MPRDA and the proposed Mining Charter represents a doubling down on harmful policy interventions. In SA, mining is not only regulated to prevent pollution and other environmental ills, , but government’s intrusions in local mining goes much much further.

What does the Mantashe Charter mean in a practical sense? Many consequences are thinkable, but, for one it is certain to make SA’s mining jurisdiction much less competitive, capital weakened, and pale in comparison to what it could have been. It’ll likely leave South Africa with fewer mining enterprises, lower productivity and fewer jobs.

One only has to put yourself in the shoes of an executive evaluating investing opportunities in mining.  Say you are an executive considering mining investments in SA. You have R1 billion in capital to invest in a venture with 100 issued shares. You pick up a copy of the mining charter and read what is required of you to qualify for a new mining right.

The present draft of the Mantashe Charter requires of you to place 30 of your 100 shares in the hands of BEE shareholders over time. The 30 shares must include economic interest and voting rights, which means that as an initial investor you would lose a rather sizable chunk of control over your investment.

The 30 shares above are broken down further. Qualifying employees in your intended enterprise and host communities in the region where you plan to commit your capital must be given 16 shares of the 30 shares, or 8 shares respectively. Ten of these 16 shares must be in the form of a “free carried interest”, meaning, the qualifying employees and host communities don’t have to put up any capital for an automatic 10% ownership stake in your intended investment. 10% is equal to R100 million of your initial capital. This dramatically increases the required return of your investment, which inadvertently takes many potential deals off the table.

The remaining 20 of the 30 of shares may be structured in financed empowerment vehicles (e.g. equity loans), but would it would still mean that you, as the initial investor, will receive a smaller payback because of the sharing of dividends with your coerced shareholders.

In addition to the ownership requirements, you are eventually required to pay a “trickle dividend” of 1% on operating profit (EBITDA) in years where dividends aren’t declared. This is sure to constrain your cash flow, which in turn also raises the risk profile of your intended investment – more potential SA mining investments off the table.

Not only is your ownership structure clearly more costly and your required return higher, but the Charter also meddles directly in your day to day mining operations.

The Charter restricts your procurements options, broadly specifying from whom to buy (by stipulating the nationality, race and gender of your suppliers) and how to invest (e.g. stipulating investments in research and personnel). It also specifies the race of people to appoint on various levels of your enterprise.

In considering such an investment in South African mining you may be forgiven for thinking that while mining is indeed regarded as special by politicians, it’s a bit too “special” for your investing tastes. Your gaze may then fall on any of a range of other less intrusive, more competitive mining jurisdictions. You thank the mobility of capital and invest somewhere more welcoming.

Therein lies the tragedy of Mantashe’s charter. It continues a well-established legacy of economically damaging regulations and interventions that moves way past sensible protections of contracts and private property. Even worse, it is a self-inflicted and completely unnecessary wound.  In the stead a much more competitive regulatory regime can attract more investment and inspire a productive sector that contributes to wealth, jobs and much needed economic growth.