Last week’s High Court ruling in favour of Agri SA’s expropriation claim against the Minister of Mineral Resources is a judicial shot across the bows for the advocates of mine nationalisation. The court’s decision that the mere enactment of the Mineral and Petroleum Resources Development Act, 2002 (the MPRDA) in May, 2004 brought about an uncompensated expropriation of Agri SA’s unused old order coal rights is bound to resonate well beyond the corridors of the Pretoria High Court. All the more so when the Department of Mineral Resources (the DMR) claimed in evidence to the court that an affirmative ruling, in this test case, would cost the government ZAR90 billion in compensation, a claim the court rejected as speculative. If this decision is upheld on appeal, however, all holders of unused old order mineral rights who have lodged claims for the compensation with the DMR, will be entitled to ‘just and equitable’ compensation in accordance with s 25(3) of the Constitution for the expropriation of their mineral rights.

The DMR has long argued that the MPRDA did not bring about any expropriation of common law privately owned mineral rights as all it did was regulate the use of mineral rights which the Act placed under state custodianship in accordance with internationally recognised principles (as well as two controversial UN General Assembly resolutions from 1962 and 1974 on a state’s permanent sovereignty over its natural resources and the new international economic order). In a two week hearing before the court this March, the DMR (and the amicus, the Centre for Applied Legal Studies) argued that the MPRDA did not deprive Agri SA of its coal rights, it merely regulated them. The court made short shrift of this argument, finding that the “coal rights….had been legislated out of existence” and that “regulating the use of property pre-supposes that the person whose use is regulated still has the property.”

How did the court come to this conclusion? Agri SA acquired by cession a claim for compensation from the liquidators of a company, Sebenza, which had in turn originally bought coal rights in 2001. Sebenza never used these rights and did not acquire either a prospecting permit or a mining authorisation under the previous Minerals Act, 1991.They were accordingly unused old order rights for the purposes of the MPRDA. Once Sebenza was liquidated, its provisional liquidators tried to sell these rights to a third party in September, 2004 (ie. after the MPRDA had commenced). The sale, for ZAR750 000, had to be cancelled, as the parties received legal advice that it was void owing to the introduction of the MPRDA (which extinguished all privately owned mineral rights). The liquidators accordingly lodged a claim for compensation with the DMR, which was predictably rejected. The facts made it a perfect test case for Agri SA, representing as it does the interests of commercial farmers (many of whom would have unused old order rights).

In making its finding, the court had to examine the nature of mineral rights before and after the MPRDA took effect. Under the previous Minerals Act (and the common law), mineral rights could be severed from the ownership of land and held under separate title. In a celebrated case, the erstwhile Appellate Division described them as “real rights (whose) exercise may conflict with the interests of the landowner. In a case of irreconcilable difference the interests of the latter are subordinated…(W)hen the holder of the right to minerals severs them… they become movables owned by him.”

In Agri SA, the court observed that under the common law, a mineral rights holder could lease its minerals to a third party or grant it a prospecting contract in exchange for royalties. It followed that the holder’s real right to minerals enabled it, once the minerals were severed from the land, to transfer, sell, alienate or hypothecate such minerals without being under any obligation to exploit them. In order to exercise its rights, however, either to prospect or mine, the holder would have to obtain an authorisation from the state: a point of which the DMR would make much.

Under the MPRDA, however, all privately owned common law mineral rights disappeared and were replaced by a system of limited real rights (principally, prospecting and mining rights) granted by the Minister (subject to onerous conditions). In essence, the Act transposed the content of common law mineral rights into statutorily granted rights under the control of the Minister.

The court in Agri SA thus found that under the MPRDA the holder of mineral rights “no longer has an asset that can be sold, otherwise alienated, used as security or kept as an investment. The mineral right holder’s contingent ownership in the minerals, once severed, has similarly disappeared. The right to grant, subject to statutory regulation, the right to others to prospect for and mine has disappeared. In sum the holders of mineral rights have, since the enactment of the MPRDA not one of the competencies that the law conferred upon them..”

Under the transitional provisions to the MPRDA, Sebenza, as the holder of an unused old order right to coal had a one year period of exclusivity to apply for a prospecting or a mining right provided that it complied with all the relevant requirements of the Act. It obviously failed to do so, as it was wound up during this period.

Did this amount to an uncompensated expropriation of property for the purposes of s 25 of the Constitution? Following Constitutional Court jurisprudence on the subject, the court first examined whether this was a ‘deprivation’ of property. In doing so, it had to deal head on with the DMR’s argument that the MPRDA merely regulated the exercise of mineral rights. The court found that as Sebenza’s coal rights had been “legislated out of existence”, the Act could not regulate something which did not exist. Moreover, the state’s custodianship of mineral resources in the objects to the Act was incompatible with privately owned common law mineral rights. Sebenza’s failure to apply for rights during the one year exclusive window could not be visited against it as it was in liquidation and accordingly could not meet the Act’s financial requirements. The court accordingly found that by its very enactment, the MPRDA deprived Sebenza of its coal rights in terms of s 25 (1) of the Constitution.

Did this deprivation amount to an expropriation? The DMR argued that even if the MPRDA extinguished common law mineral rights, these were not acquired by the state (which merely acted as a custodian under a form of public trust). The court found, however, that under the Act, the Minister granted rights which were substantially similar to those held by private mineral rights holders. The state thus acquired the “substance of the property rights of the erstwhile holders. The fact that the state’s competencies are collectively caused custodianship matters not.” The court accordingly awarded Agri SA, as Sebenza’s cessionary, ZAR750 000 compensation.

Although the decision in Agri SA can only apply to holders of unused old order rights who have lodged claims for compensation with the DMR (the window for which, barring exceptional circumstances, closed on April 30), it is bound to have a much wider impact, not least in the light of the ANC Youth League’s ongoing calls for the outright nationalisation of the South African mining industry. The Youth League’s most recent proposal for the uncompensated expropriation of the entire mining industry (with concomitant amendments to the Constitution) must not only be seen in the context of the estimated ZAR850 billion market capitalisation of South Africa’s mining companies (and the likely compensation bill), but in the light of the Agri SA decision itself which is a timely reminder of the supremacy not only of the rule of law, but ultimately of the Constitution in a constitutional state.

Written by Peter Leon Partner, Webber Wentzel Co-Chair, Mining Law Committee, International Bar Association

This article was originally published in Business Day (4 May, 2011).