JOHANNESBURG (miningweekly.com) – The procurement rules of the new Mining Charter may violate South Africa’s obligations under the General Agreement on Tariffs and Trade (GATT), exposing the country to challenges by other member states of the World Trade Organisation (WTO), Herbert Smith Freehills lawyers Peter Leon and Patrick Leyden warned on Wednesday.

The lawyers point out that, under GATT, South Africa is obliged to afford imported products “treatment no less favourable than that accorded to like products of national origin”, and thus not to apply any regulatory measures that afford preference to domestic products over imported products.

But under Mining Charter Three, which Mineral Resources Minister Mosebenzi Zwane gazetted controversially on June 15, mineral right holders are not allowed to procure more than 30% of their mining goods from foreign suppliers, which clearly gives domestic producers a significant advantage over foreign competitors.

Similarly, under the General Agreement on Trade in Services (GATS) agreement, South Africa is obliged to accord foreign service providers “treatment no less favourable than domestic suppliers”, which Mining Charter Three again obfuscates by not allowing mineral right holders to procure more than 20% of their services from foreign suppliers and imposing race-based quotas.

In addition, these foreign suppliers are forced to pay 1% of turnover to the yet-to-be-established Mining Transformation and Development Agency.

Importantly, however, Leon and Leyden hold the view that the Minister does not even have the power to amend the Mining Charter, let alone make it legally binding.

This is because the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill, 2013, from which the charter is meant to get its legislative status, has not yet been passed.

The Bill, which was referred back to Parliament in January 2015, has been in the correction phase for the last two-and-a-half years, with little chance of it being passed this year.

“The legal position thus remains, in our view, that the Minister can neither amend the charter nor make it binding on the industry,” the lawyers stated in a release to Creamer Media’s Mining Weekly Online.

Section 100(2)(a) of the MPRDA, according to Leon and Leyden, empowers the Minister to develop a policy, rather than a set of binding rules, and to do so only once – within six months of the MPRDA’s promulgation date of May 1, 2004, which, in fact, occurred on August 13, 2004.

While the MPRDA Amendment Bill of 2013 aimed to address this by elevating the charter to the status of legislation, this had still not been done, and the Department of Mineral Resources (DMR) had meanwhile missed an opportunity to create more regulatory certainty, and instead heaped new ownership, procurement, employment equity and quasi tax burdens on an already battered industry.

After months of speculation regarding the nature and content of the new charter, the DMR sparked instant retaliation when they brought it into immediate effect through a gazette notice.

The Chamber of Mines is applying for an interim court interdict to suspend the implementation of the charter, owing to its devastating set of new legal requirements on which there was no consultation.

South Africa’s Deputy President Cyril Ramaphosa this week called for a recrafting of the charter to correct the "clear misalignment" between the chamber and the Minister; the Bench Marks Foundation denounced it as a measure that will worsen the lot of mining communities; and the ruling African National Congress drew attention to its negative impact on jobs.

GATT IMPACT FAR-REACHING

While a breach of either the GATT or GATS would not directly impact on mineral right holders, it could make South Africa vulnerable to challenges by other member States of the WTO, the lawyers warned.

If the implementation of Mining Charter Three causes South Africa to act in breach of its GATT and GATS obligations, it would have to negotiate a modification or face referral to the WTO’s dispute settlement body.

In the case of negotiation of a modification, South Africa would have to tender necessary “compensatory adjustments”, which could result in other sectors of the economy being deprived of protections afforded by the GATT and GATS.

Reference to the dispute settlement body could result in South Africa’s rights under the GATT and GATS being suspended until the dispute is resolved.

Predictably, such a suspension would have a detrimental impact on the entire economy and not simply the mining industry, the lawyers cautioned.

NEW PROSPECTING RIGHTS

Under the new charter, applicants for new prospecting rights must have a minimum of 50% plus one black person shareholding, in a move that places a capital-intensive and high-risk exploration burden on South Africa’s black population as controlling shareholders in prospecting ventures.

NEW MINING RIGHTS

Applicants for new mining rights must have a 30% black shareholding, which must be held in a separate entity from the holder of the right and must be made up of a minimum of 8% of issued shares owned by employee share ownership plans (Esops), 8% of issued shares owned by mine communities; and 14% of issued shares owned by black entrepreneurs.

Community shares must be held in a trust managed by the Mining Transformation and Development Agency and black shareholders in general may only sell their shares to other black persons, which may well result in communities and Esops struggling to find other communities and other Esops to buy their shares.

New right holders must pay a minimum of 1% of yearly turnover to black shareholders over and above any distributions to shareholders; whether this is intended to be a “distribution” under the Companies Act, 2008, or a form of tax or royalty is not yet clear.

If under the Companies Act, it appears contrary to the provisions of the Act, which require the equal treatment of holders of the same class of shares.

If it is a tax or royalty, the lawyers point out that the Minister has no power to impose such a tax.

If, after ten years, vendor loans to black shareholders are not being repaid through dividends the outstanding balance must be written off by the mineral right holder, which arguably violates the prohibition on the arbitrary deprivation of property.

EXISTING RIGHTS

Transactions concluded prior to the charter date with a 26% black shareholding are subject to a 4% top-up to 30% black shareholding, which must happen by June 15 next year.

In addition, black shareholders must directly and actively control their equity interest in the empowering entity, including the transportation, trading and marketing of their proportionate share of mine production.

The obligations imposed by this provision are seen as being vague and contrary to the general principles of company law, which decrees that the mining company is the owner of the mine production, and not its shareholders.

In the view of Leon and Leyden, shareholders cannot ‘actively control’ a pro rata portion of the assets or decisions of the mining company.

The recognition of historical empowerment transactions will not apply to applications for new rights, renewals of rights or applications under Section 11 of the MPRDA, which suggests that existing holders will need to comply with the requirements for new mining rights in these circumstances. This would mean that mining companies that may already be “compliant” with the 30% ownership requirement would need to restructure their existing black shareholding completely, for any renewal of existing rights or to acquire existing rights from other companies.

BENEFICIATION OFFSET

A holder may offset up to 11% of its black person ownership requirement provided that the beneficiation activities are ongoing and that the DMR has approved the proposed activities. There is still no method or manner of calculating the offset fifteen years after this principle was first introduced in the original Mining Charter.

SALE OF MINING ASSETS

A holder who sells its mining assets must give black-owned companies a preferential option to purchase them.

PROCUREMENT RULES

The rule that a minimum of 70% of expenditure on the procurement of mining goods must be for South African manufactured goods, has an additional rider of at least 21% being sourced from black-owned companies.

Moreover, 5% must be sourced from black-owned companies with a minimum of 50% plus one black female or black youth control; and 44% must be sourced from black economically empowered manufacturing companies.

A minimum of 80% of expenditure on mining company services must be from South Africa-based companies, with at least 65% of these services coming from black-owned companies; 10% of services from black-owned companies with a minimum of 50% plus one black female control; and 5% of services from black-owned companies with a minimum of 50% plus one black youth control.

Foreign suppliers must pay 1% of their yearly turnover from local mining companies to the Mining Transformation and Development Agency.

EMPLOYMENT EQUITY

Boards of mining companies must be made up of a minimum of 50% black persons, 25% of whom must be female. Executive management must have a minimum of 50% black persons, 25% of whom must be female.

Senior management must be made up of a minimum of 60% black persons, 30% of whom must be female and middle management must be made up of a minimum of 75% black persons, 38% of whom must be female.

Junior management must be made up of a minimum of 88% black persons, 44% of whom must be female.

Employees with disabilities must make up at least 3% of all employees.

MINING TRANSFORMATION AND DEVELOPMENT AGENCY

The Mining Transformation and Development Agency replaces both the social development fund and the ministerial skills development fund and is to be responsible for skills, enterprise and supplier development, and managing community trusts.

HUMAN RESOURCES

A holder must invest 5% of the leviable amount as defined in the Skills Development Levies Act, 1999, on essential skills development, with 2% on essential skills development activities; 1% to South African historically black academic institutions for research and development initiatives; and 2% to the Mining Transformation and Development Agency.

COMMUNITY DEVELOPMENT

A holder must contribute to mine community development by identifying priority projects in accordance with the municipality’s approved integrated development plans, under which the holder’s contribution must be proportionate to the size of its investment and in accordance with its social and labour plan (SLP), which must be published in English and other languages used by the community; and all project management and consultation fees incurred are capped at 8% of the total budget.

HOUSING CONDITIONS

A holder is required to submit a housing and living conditions plan that is approved by the DMR after consultation with organised labour and the Department of Human Settlements.

SUSTAINABLE DEVELOPMENT

Holders must implement elements that improve environmental management; health and safety performance; and research and development spend.

All targets stipulated in Mining Charter Three are applicable throughout the duration of the mining right, including prospecting rights, unless a specific element specifies otherwise.

NONCOMPLIANCE CONSEQUENCES

If a holder fails to comply with the ownership, mine community development and human resource development elements and falls within level five to eight of the scorecard, the holder will be regarded as noncompliant and in breach of the MPRDA. This provision attempts to elevate the Mining Charter to the status of legislation, which it is not.

BDO Africa desk leader Owen Murphy says the charter contains measures that are extremely difficult to meet and is indicative of a government unwilling to negotiate any form of compromise with leading industry players.

“The Minister has the power to cancel a company’s mineral rights for noncompliance with the charter, so the implications of this could have the effect of threatening the industry’s economic viability,” Murphy commented in a release to Mining Weekly Online.